Although they were once somewhat exclusively for the wealthy, self-managed super funds (SMSFs) are growing in popularity as they become more accessible to Australians. Data from the ATO reveal that as at September 2016, 1.099 million Australians are members of 582,000 SMSFs. SMSFs are one of Australia’s fastest growing industries, with 30,000 more being established annually.
If you are thinking about setting up your own SMSF, it is important that you are aware of a number of factors. Five of these are the initial costs, administration and legal obligations, sole purpose test, borrowing to invest, and penalties.
1. INITIAL COSTS
The costs of setting up a SMSF can be fairly significant. Many professionals including ourselves recommend SMSFs to those with at least $100,000 in super to make the investment worthwhile. While this may seem like a large sum, a few years ago it would have been recommended to hold approximately $1 million before opting for a SMSF.
2. ADMINISTRATION AND LEGAL OBLIGATIONS
The administrative activities involved in running an SMSF can be quite time consuming, however, this is necessary in order to maintain compliance. As well as this, audits must be conducted annually by a registered independent auditor. All records for the SMSF must be kept for up to 10 years, with minutes for all investment decisions and an annual return being lodged at the end of every financial year.
3. SOLE PURPOSE TEST
The sole purpose of your SMSF must be to fund your retirement. As this is the purpose of the fund, your super cannot be accessed until you reach retirement. If you purchase property through your SMSF, you are not allowed to live in it, and it cannot be rented out to anyone related to you. The same goes for various other assets including art and jewelry, which is cannot be displayed or give any present benefit until after retirement.
4. BORROWING TO INVEST
A common investment for SMSFs is in real estate, however, unless your fund has enough cash to purchase a property outright, you will need to borrow. In order to take out a loan for your SMSF, a personal guarantee is required. This may not be an issue for some people, however it can reduce your own personal borrowing power. As well as this, you will not own the property, nor receive the rent it earns as you are personally only the guarantor.
As well as this, since super contributions are limited to 9.5% it is important to ensure that this loan can be serviced through these contributions as well as any rental income that may be generated. After retirement, you will be able to access the property, as well as any income it has accumulated.
Non-compliance penalties for SMSFs can be tremendous which is why it is crucial to take care with the administration of your fund, especially if you are managing it yourself. Not all penalties in place are financial, with the range being from an educational program, all the way through to fines of up to $340,000 as well as jail terms of up to five years.
More information can be found at: www.ato.gov.au/super/self-managed-super-funds or contact our office on 9687 8763.