SMSFs 101

In October’s news article (SMSFs – Individual or Corporate Trustees?), Damien Monahan, Superannuation Manager – Business and Private Client Advisory at SW Accountants and Advisors, provided an insight into the pros and cons of setting up self-managed super funds (SMSFs). This month, we revisit SMSFs with Damien, and give you some more in-depth information regarding the topic.

According to SuperGuide, as at June 2021, there were nearly 600,000 SMSFs in Australia, with a combined total of 1.1 million members. Although this represented less than 5% of Australia’s population, they accounted for $822 billion in assets, or about 25% of the $3.3 trillion invested in superannuation.

Below is a summary of some key items you need to know in terms of establishing and running your own SMSF, as well as covering off typical establishment and ongoing costs, taxation considerations, trustee obligations and longer-term opportunities for wealth accumulation.

Motivations

Some of the key reasons why you might choose to establish a SMSF include:

• Choice – to access a wide range of investment options.
• Control – to pool family assets, make active decisions to grow wealth for retirement and build a strategy for beneficiaries.
• Flexibility – to change investments and the structure as needed, and to implement effective tax strategies.
• Transparency – to have greater visibility over how investments are tracking.

Establishment Costs

These may vary considerably depending on the chosen provider, however some indicative costs are as follows:

• Unavoidable cost: SMSF establishment documents including trust deed: $1,650;
• Optional cost: establishing a corporate trustee including ASIC fee: $1,100.

Review our October article to see the pros and cons of establishing your SMSF with either individual or corporate trustees, and how these costs may vary.

Annual Compliance Requirements

It’s important to understand the recurring obligations and responsibilities of running a SMSF – they include:

• Annual financial statements – must be prepared annually;
• Audit – all SMSFs must be audited each year;
• Income Tax Return (known as the SMSF Annual Return) – lodged annually, usually around mid-May (although first year returns have a 28 February due date);
• ASIC – annual company statement review if fund has a corporate trustee;
• Investment Strategy – trustees must formulate, give effect to, and regularly review the fund’s Investment Strategy (see further comments below).

Successfully managing a SMSF takes time, commitment and expertise and is therefore not the solution for everyone. Increasingly, the Australian Taxation Office (ATO) are directly contacting prospective SMSF members to gauge if (in their view) they meet the relevant criteria for fund trustees prior to formally allowing the fund to be recorded as an ‘ATO-regulated SMSF’.

Sole Purpose Test & Investment Strategy

One of the overriding principals of the legislation governing SMSFs is that your SMSF needs to meet the ‘sole purpose test’ to be eligible for the tax concessions normally available to super funds. This means a SMSF needs to be maintained for the sole purpose of providing retirement benefits to members, or to their dependants if a member dies before retirement. Contravening the sole purpose test is very serious: in addition to the fund losing its concessional tax treatment, trustees could face civil and criminal penalties.

In relation to the last dot point regarding the fund’s Investment Strategy, the law does not prescribe specific investments that a SMSF can hold, rather it provides broad parameters. Recently there has been a focus on crypto investments which, although NOT prohibited in a SMSF, are nonetheless highly speculative and thus may not strictly meet the sole purpose test.

Rollovers from Current Super Funds:

Anyone with existing superannuation funds can potentially ‘rollover’ these funds to either commence a SMSF, or boost their current SMSF member balance. These rollovers may be taken either partially or in full. As a cautionary note, professional advice should always be obtained before doing so including consideration of any insurance covers that may be held within an existing super fund as new insurers may require a fresh round of ‘underwriting’ before they agree to take on the risk.

Concessional Contributions

Concessional Contributions (CCs) are superannuation contributions for which a tax deduction can be claimed. These are subject to annual caps depending on age, existing superannuation balances and employment working status. The current annual ‘standard’ maximum CC cap is $27,500 inclusive of super guarantee and salary sacrifice payments made by an employer (if applicable) and/or personal concessional (deductible) contributions made.

However, if the full amount of CCs has not been claimed in preceding financial years, there may be an opportunity to claim an amount higher than the standard cap under the ‘unused concessional contributions’ provisions: importantly, the opportunity for a fund member to utilise some or all of their unused CCs is only available when the combined value of all individual superannuation account balances (known as ‘Total Superannuation Balance’) is less than $500,000 at 30 June in the financial year before the year in which ‘catch up’ contributions are made. This information can be obtained either via myGov or a registered tax agent.

Taxation & Division 293 Considerations

Concessional contributions received by a SMSF are taxed at a concessional flat rate of 15%; this provides opportunities for ‘tax arbitrage’ in that a tax deduction is available for personal concessional contributions up to the highest personal marginal tax rate of 47% (including 2% Medicare levy).

For those fund members on high incomes, it’s possible they may be subject to additional tax under what is known as the Division 293 rules: this occurs when your combined taxable income plus super contributions exceeds the ‘Division 293 Threshold’ currently set at $250,000.

In short, Division 293 tax is an additional tax on super contributions of 15% which reduces the tax concession for individuals whose combined income and contributions are greater than the $250k Div. 293 threshold. (Any rental losses would also need to be added back to taxable income to determine if they are subject to Div. 293 tax.)

At worst, making concessional superannuation contributions still delivers a tax advantage of 17% when compared to paying tax at the top marginal rate of 47% but needs to be managed carefully.

Non-Concessional Contributions

Non-concessional contributions (NCCs) are superannuation contributions for which a tax deduction is NOT claimed. The current annual ‘standard’ maximum NCC cap is $110,000 for those under age 75 and with a Total Super Balance of less than $1.7M.

Another avenue for long-term wealth accretion is that individuals aged under 75 are to be able to “bring forward” three years’ worth of non-concessional contributions (i.e., contributions for which no tax deduction is claimed) providing they are not in the middle of an existing bring-forward arrangement or if their total superannuation balance is more than $1.48M at 30 June 2022. The main advantage of this strategy is that income earned on these funds in a SMSF is taxed at only 15% compared to your current personal marginal tax rate of 47%.

Downsizer Contributions

If you have reached the eligible age, you may be able to contribute up to $300,000 from the proceeds of the sale (or part sale) of your home into your superannuation fund. From 1 July 2022 the eligible age is 60 years old or older. Prior to this it is 65 years old or older.

Some of the eligibility criteria which need to be satisfied are:

• The home must be in Australia and must have been owned by you or your spouse for at least 10 years and the disposal must be exempt or partially exempt from capital gains tax (CGT).
• You have not previously made a downsizer contribution to your super from the sale of another home or from the part sale of your home.
• Prior to (or at the same time) as making your contribution you must provide your fund with the ATO’s ‘Downsizer contributions into super form’.

Longer Term Opportunities

Opportunities to make further contributions to your SMSF from the sale of assets used in the course of carrying on a small business may be available under the Capital Gains Tax (CGT) concessions for small businesses, notably where the net value of assets that the business entity and related entities own don’t exceed $6 million. The rules are complex and will require appropriate advice to plan for this event.

Access to Benefits

Benefits accumulated in your SMSF must be preserved until what is known as ‘preservation age’ which varies depending on a person’s date of birth: for those born after 1 July 1964 it is once a member reaches age 60 at which point there are opportunities to begin accessing your benefits. The form in which benefits can be taken can include either pensions and/or lump sums (or a combination of both) depending on age and whether you have permanently retired from the workforce. Taxation implications also vary depending on the tax composition of your benefits, age, retirement status and who ultimately receives your superannuation benefits.

Recent Legislative Changes

Recent changes to legislation now allow for SMSFs to have up to six (6) members and greater flexibility around contributions for those over 67 who are no longer working and for those over 60 who may wish to contribute to their SMS after selling their homes, all of which reinforce the attractiveness of SMSFs to everyday Australians.

Regardless of your situation, there’s a lot to consider before deciding if setting up a SMSF is right for you.

Thanks to Damien for providing the above information to TierONE Capital. Damien is an experienced financial services professional with specialisation in SMSF, advisory, business development and project management. He is a Chartered Accountant with more than 25 years’ experience in financial services.

The information in this article does not constitute, and is not intended to be, general or personal financial services advice and in any case must not be relied upon by you or any other person. The information provided is factual and covers the Legal, Regulatory and Taxation rules that SMSF’s are subject to and is not intended to nor should be interpreted to be a recommendation to establish a SMSF. All information is accurate at the time of publication but is subject to change. Accordingly, SW Australia and each and every member, officer or employee of them accept no responsibility in any way whatsoever to you or any other person in respect of, and disclaim any liability or claim that may arise as a result of, any reliance on, use of or misstatement or omission in such information unless expressly stated otherwise. Liability limited by a scheme approved under Professional Standards Legislation.