An SMSF offers greater control over
investments, and a wider choice of assets to choose from. But the sole purpose
of an SMSF must be to provide funds for retirement.
According to the Australian Taxation
Office, there are four key steps to setting up an SMSF.
- Establish the trust
- Elect to be a regulated fund, obtain a
tax file number and an Australian business number
- Prepare an investment strategy
- Open a bank account
SMSFs are popular with investors who want
greater control over their super investments. There are many more investment
strategies and products available through an SMSF than a public offer fund.
No two SMSFs are ever the same in the way
It is critical that SMSF trustees ensure
that the nature of the fund assets are complying according to Australian
Taxation Office (ATO) rules. For example, it is a complying transaction for a
SMSF to purchase a residential investment property though the local estate
agent that is up for sale, but it is completely non-complying to purchase a
residential property from your uncle. Nor can you rent out an investment
property owned by the SMSF to your kids, or use fund cash to finance a property
And while more unusual investments, such as valuable artwork, vintage cars and
crates of Hermitage aren't on the banned list, these types of assets must meet
the ATO's sole purpose test. This states that members of the fund cannot enjoy
a direct or indirect benefit from the investment. So hanging that Van Gogh on
your wall isn't going to pass muster.
It is also important to remember that trustees have defined legal
responsibilities. These include:
- Lodging an annual income tax return and superannuation fund annual return
- Lodging member contribution statements
- Reporting payments of member benefits for reasonable benefit limit (RBL)
- Appointing an approved auditor to complete the annual audit
- Maintaining records for up to ten years, and
- Complying with investment restrictions.
SMSFs can be time consuming; selecting, managing and maintaining an investment
portfolio takes time. While some people may have the confidence and experience
to invest directly, others pay for expert advice from financial planners,
accountants and stock brokers.
According to IFSA, almost 90 per cent of
SMSFs hold shares, with an average share portfolio of around $180,000. Sixty
per cent of SMSFs hold property of some kind (residential, commercial or listed
property trust), and 58 per cent have managed fund investments.
But ultimately, being your own super boss can be as complex or as simply as you
like. It depends on how you, as trustee, want to run the fund, and how you wish
to invest. Obviously, a buy and hold approach requires very little effort on a
day-to-day basis; a more active portfolio may take a couple of hours a day. For
some trustees, running a SMSF is a retirement job.
Transition to Retirement Pension
What does it mean?
A transition to retirement pension is a
flexible way to move from work to retirement. On reaching your preservation age
(generally 55, but is increasing over time and may be 60 if you were born after
30 June 1964), you can start accessing super (including the preserved portion)
via a super pension while maintaining or reducing work hours.
Many individuals nearing retirement are
looking for ways to boost their super savings. With the introduction of
government's simpler super reforms in July 2006, it is now possible to do
exactly this by making the most of transition to retirement (TTR) rules.
You can take advantage of the transition
to retirement rules by salary sacrificing part or all of your employment income
into super, while at the same time beginning an allocated pension from your
existing super funds. The pension provides an income while you continue
working, and is tax free for individuals over 60, and carries a 15% tax rebate
if you're aged between 55 and 60.
At the same time you're getting
considerable tax benefits from salary sacrificing your income into super,
paying only 15% contributions tax, as opposed to PAYE income tax rates of up to
So at what age is this strategy of most
benefit? Most advisers agree that it best suits someone aged 60 or more, or at
the very least age 55. Between now and 30 June 2012 an individual can take a
pension income stream tax-free and make contributions (both salary sacrifice
and employer contributions) up to $100,000 per annum.
To begin a TTR strategy, you must have
reached ‘preservation age', in order to access super benefits. This is age 55
if you were born before 1 July 1960, phasing to age 60 for those born after 30
Due to the reduced cash flow, anyone
thinking about the TTR strategy should have no debt.
Not all super fund providers offer TTR
The fees of setting up a TTR arrangement
should be minimal - and if you are able to set up the scheme yourself, no costs
should be incurred at all. Once you reach retirement age, the commutation of
the TTR pension back to accumulation phase is also allowed and should be at a
Before deciding on whether to set up at
TTR strategy, you firstly have to find out what your pension is worth, then
check the numbers on your living costs and see if the after-tax income of the
pension will cover your needs. Then you need to make an application to the
super fund for the pension to commence, and notify your payroll office of your
decision to salary sacrifice to superannuation.
The TTR strategy has the Australian
Taxation Office stamp of approval, which has stated that it will not apply anti-avoidance
provisions where this strategy is employed. The ATO notes: "We would only
be concerned where accessing the pension or undertaking the salary sacrifice
may be artificial or contrived."
This information is of a general nature
only and doesn't constitute personal investment advice.
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