Self-Managed Super Funds (SMSFs)

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What is a Self-Managed Super Fund (SMSF)?

A Self-Managed Super Fund is a type of trust (link to article about trusts generally). The members of the fund contribute their superannuation directly into the SMSF, which invests the super. The primary purpose of an SMSF is to provide retirement benefits to its members.

Unlike other superannuation funds, SMSFs allow members to have direct control over their investment choices and strategies. An SMSF can have up to four members, and all members must be trustees, or directors of the corporate trustee.

What Assets Can a Self-Managed Super Fund Own?

An Self-Managed Super Fund can invest in many assets, including:

• Residential Property: SMSFs can invest in residential property, but members or related parties cannot live in it.
• Commercial Property: SMSFs can invest in commercial property. A business owned by a member can lease the property from the SMSF if the lease is on commercial terms.
• Shares and Securities: SMSFs can invest in shares listed on the Australian Securities Exchange (ASX) and other approved exchanges.
• Cash: SMSFs can hold cash and invest in term deposits.
• Personal Items: These include items like artwork, jewellery, and antiques, but there are strict rules about their use and storage.

Why use an SMSF?

Some of the main reasons people choose to use an Self-Managed Super Fund are:

1. Control: Members have direct control over their investment decisions.
2. Tax Benefits: SMSFs can offer tax advantages, like lower tax rates on rental income and capital gains.
3. Diversification: Investing in property can diversify an SMSF’s investment portfolio.
4. Retirement Planning: Property investments can provide a steady income stream in retirement through rental income.
5. Asset Protection: Assets in an SMSF are not available to creditors in the event of bankruptcy.

SMSF Loans

SMSFs can use loans to buy assets, usually property, through a Limited Recourse Borrowing Arrangement (LRBA). In an LRBA, the SMSF borrows money to buy an asset, but the asset owned by a separate trust (called a bare trust) until the SMSF repays the loan. This arrangement limits the ability of the lender to access the rest of your superannuation.

For more information about SMSF borrowing, bare trusts, and limited recourse borrowing arrangements, see our article about buying and borrowing through your SMSF linked in the Further Reading section below.

How to set up an SMSF?

Setting up an SMSF involves:

1. Creating the trust deed and appointing trustees. The trust deed outlines the rules for operating the SMSF.
2. Register the SMSF with the Australian Taxation Office (ATO) and get an ABN and TFN.
3. Open a bank account in the name of the SMSF to manage contributions, income, and expenses.
4. Transfer existing superannuation balances into the SMSF.
5. Ensure ongoing compliance with superannuation laws and regulations, including annual audits and financial reporting.

To set up a compliant Self-Managed Super Fund you must seek the advice of both your accountant and lawyers. Our team of SMSF lawyers and property lawyers can assist you in setting up and managing your SMSF affairs.