Small business owners are showing strong interest in managing their own money in saving for retirement and when no longer working full-time. Often, the management of their own self-managed super fund (SMSF) becomes their new ‘small business’ in retirement.
Many businesspeople have been hesitant to start an SMSF because they have not known what is required of them. The following is a list of what you need to get right and what to avoid in establishing and running a DIY fund. Potential trustees of their own fund must have a clear picture of the main issues when having discussions with their accountants and financial advisers.
This list only seeks to be a good starting point for that discussion with qualified advisers.
IMPORTANT DOs
1. Treat the fund as a separate entity. This means:
• the fund’s money must be kept in its own bank account
• the fund’s bank account must contain the name of the fund
• the fund’s expenses must be paid out of the fund’s bank account
• the fund’s money, such as contributions, interest and dividends, is all paid into the fund’s own bank account
2. Ensure that all records are kept of decisions of the trustees and of any member death benefit nominations.
3. Remember that the fund must be audited each year and that the audit will cover both financial and compliance issues.
4. Ensure that all the fund’s transactions are on commercial terms (i.e. arm’s length terms).
5. Ensure the fund has an investment strategy:
• record the investment strategy in a written format.
• implement the investment strategy.
• regularly review the investment strategy.
6. Ensure that the fund’s investments are recorded in the trustee’s name.
7. Comply with the fund trust deed and governing rules.
8. Obtain and keep all documents relating to the fund’s financial transactions, expenses and payments.
9. Remember that, generally, the fund cannot acquire an asset from a member (or other related party) whether by purchase or as a contribution. However, certain exceptions apply:
• business real estate property can be acquired from a member (or related party) but you should obtain specific advice before acquiring the asset.
• listed securities can be acquired.
10. Ensure that the fund’s earnings are allocated to members’ accounts and that members’ account balances are reconciled to fund’s account balance.
IMPORTANT DON’Ts
1. Don’t let the fund borrow money by:
• letting the fund’s bank account go into overdraft.
• paying fund expenses using your personal bank account.
However, in limited circumstances, it is now possible for a fund to borrow directly for investment purposes.
2. Don’t breach the contribution rules – remember the annual contribution caps and, for members aged 65 or over, the age-based contributions restrictions; for members aged 75 or more, generally no contributions can be accepted.
3. Don’t lend, invest or enter into a lease arrangement in respect of more than five percent of the fund’s asset with a related party such as a fund member or a relative.
Getting good advice is necessary in most financial transactions but essential in all parts of starting and running your own super fund. The price of poor advice, no advice or ignorance about what is involved in the SMSF world could lead to depending on the old age pension if things go badly wrong.
Townsends assists many SMSF owners, via their accountants and financial advisers, with its SuperCentral service. Michael Hallinan is Special Counsel for Townsends Business & Corporate Lawyers.
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Case study ~ Off the rental treadmill
Joanne is 35 and recently started her own boutique, renting a shop in her local suburb. It’s a great corner location providing excellent exposure to passing trade. Her landlord has decided to sell the shop she operates from for $350,000 and Joanne is concerned that moving will adversely impact her young business, but doesn’t think she can afford to buy the property.
She has few other assets, although she and her husband, also 35, receive very good incomes. Like most people their age, they have a large mortgage and little equity in their home. They have $90,000 in a retail master trust super fund and $40,000 in savings.
Discussing the dilemma with their accountant, he suggests acquiring the property using Calliva SuperAccess.
How Calliva SuperAccess can help Joanne
The couple will roll their super into a self-managed super fund (SMSF) and make use of their savings to make deductible super contributions ($18,680 each). Their SMSF invests in the property using Calliva SuperAccess by subscribing $126,000, which covers the deposit and transaction costs including stamp duty.
Calliva pays the vendor $350,000 and the business continues to pay the same tax-deductible market rent as it did before. The rent is now helping fund the retirement.
All future gains in the value of the property are concessionally taxed and Joanne no longer has to worry about being unable to renew her lease.
SMSF Contribution Q&As
Q. How do I make cash contributions into my SMSF?
A. Cash contributions are made to your SMSF by simply depositing cash into your SMSF bank account.
Q. Can I make contributions to my SMSF other than by way of cash?
A. Yes. You can make contributions other than by way of cash by transferring either listed shares, commercial property or managed funds into your SMSF. The amount of the contribution is the market value of the particular asset transferred.
Q. How are the contributions allocated?
A. All contributions made to your SMSF, whether in cash or via a transfer of assets, must be allocated to a fund member. This is a legal requirement. It is also a legal requirement that each member be issued with a Member Statement annually detailing their member balance movements including contributions made.
Q. What’s the difference between an Undeducted Contribution and a Tax Deductible Contribution? strong>
A. Personal Contributions made into Superannuation on which no tax deduction is claimed are known as Undeducted Contributions. Contributions made into Superannuation on which a tax deduction is claimed are known as Tax Deductible Contributions. The contributions made by your employer are Tax Deductible Contributions because your employer has claimed a tax deduction on the contribution claimed.
Q. What Tax is payable on Undeducted Contributions and Tax Deductible Contributions?
A. Undeducted Contributions are not subject to tax. Tax Deductible Contributions are subject to 15 percent tax.
Q. When is the tax payable on Tax Deductible Contributions?
A. Tax is payable on Tax Deductible Contributions when you lodge the Income Tax Return for your SMSF. The Tax Return is lodged annually and is due for lodgement by May the year following the end of the financial year (or February where this is your Fund’s first tax return for lodgement). Tax is not payable at the time the contribution is made.
Joe Bird works for ESuperfund Pty Ltd (www.esuperfund.com.au)
