SMSF FAQ

SMSF Frequently Asked Questions (FAQ) and Glossary section is a good place to start learning about DIY Superannuation. Another good reference site for any SMSF question is the Australian Taxation Office website www.ato.gov.au/super, where one can find a wealth of useful information.

Please find below the frequently asked questions and answers collected over the years from our clients:

What is a SMSF or Do-It-Yourself (DIY) superannuation fund? DIY superannuation fund is an informal name for a Self-Managed Superannuation Fund (SMSF). Self Managed Super Fund is a superannuation fund that is regulated by the Australian Taxation Office (ATO) and all members of the fund must be trustees of the fund. There are exceptions to this rule, such as, a member who is a minor, or, one who is under legal disability. In such cases, regulatory provisions state that a member of the SMSF cannot be the trustee of the fund.

What is the definition of a SMSF Member? A member is a person who has contributions made for them or who receives benefits from the fund. In retirement, a member has the option of receiving either lump-sum payment or a pension, or a combination of both.

What is the definition of a SMSF Trustee? A trustee is a person or a legal entity (corporate trustee) responsible for ensuring the fund is properly managed as set out under the Superannuation Industry Supervision Act 1993 (SIS) and all other relevant laws are observed. A SMSF can also have a company as a trustee if each director of the company is a member of the fund. Note: anyone over the age of 18 can be a trustee of a superannuation fund unless they are a "disqualified person" under SISA. An individual is a "disqualified person" if: at any time, the person was convicted of an offense involving dishonesty; or at any time, the person has been subject to a civil penalty order under SISA; or the person is an insolvent under administration (e.g. an undischarged bankrupt). Please notify your service provider before you establish your fund if any applicant for the membership of the fund is a "disqualified person"!

How many different types of SMSF are there? There are two types of regulated SMSFs. The most common type is usually called "More Than One Member Fund" or "Multiple Member Fund", with a corporate or non-corporate trustee; the other being a "Single Member Fund", again with a corporate or non-corporate trustee.

What is the definition of "More Than One Member Fund" or "Multiple Member Fund"? This fund type has more than one, and up to four, members. Each individual trustee of the fund is a fund member and each member of the fund is a trustee, unless the fund has a corporate trustee and members are directors. Members of the fund cannot be employees of other members, unless they are related. Trustees of the fund cannot receive remuneration for their services as trustees.

What is the definition of "Single Member Fund"? This fund type has only one member. The member must be the trustee of the fund and the fund must have another individual or a legal entity as a second trustee. That second trustee cannot be a member of the fund. If the second trustee is an individual (rather than a company), that person must be a relative of the member, or, alternatively, can be any other person provided the member is not an employee of that person. If the second trustee is a company, the member must:

  • be the sole director of that company, or;
  • be related to the other director of the trustee company and that they be the only two directors of that company, or;
  • not be an employee of the other director of the trustee company and there are only two directors of that company.

Should we have a Corporate Trustee for our SMSF? Some of the benefits of having a Corporate Trustee for the fund are:

  • Majority of financial institutions will require fund to have a Corporate Trustee to allow limited recourse borrowing arrangements or will lend more money to SMSFs with a Corporate Trustee. Please note taht some lenders will not accept a trading company as a valid structure for a SMSF Corporate Trustee!
  • SMSF with a Corporate Trustee will not require the name change for the assets held in bank, share trading or similar accounts in case of the membership/trusteeship changes.
  • SMSFs with a Corporate Trustee only pay one penalty to the ATO in case of SIS Act breaches, in comparison with the individual trustees SMSFs, where each individual trustee is liable for the penalty and pays the full amount. For example: SMSF with 4 individual trustees penalized by the ATO with the maximum penalty of $10,200 means that all 4 trustees will individually have to pay $10,200 amounting to in total to $40,800 for the 4 trustees. SMSFs with a Corporate Trustee, is required to pay the maximum penalty of $10,200 in total, irrespective of the number of directors in the fund.

My wife and me are planning to start our own SMSF. Are we able to have a joint superannuation fund together? Yes, you can have a joint superannuation fund, i.e. Multiple Member Fund.

What are the advantages of a SMSF?

  • SMSF gives members unique control of their investments within the legal framework
  • Maximum tax payable on earnings is 15 percent
  • The tax is payable in the year a gain is realised
  • SMSFs allow control of the timing for asset disposal, meaning that realisation of gains can be deferred until such time that assets are supporting an Account Based Pension, when the income is taxed at 0%
  • SMSF is a prerequisite for an Account Based Pension
  • SMSFs can invest up to 100% of the fund's total assets in "Business Real Property"

Is establishment of a SMSF a tax-deductible expense (payable by the superannuation fund)? No, establishment of a SMSF is an expense of a capital nature!

Is administration, including audit and tax return of a SMSF a tax-deductible expense (payable by the superannuation fund)? Yes.

Can I add members after the fund is already setup? Or do they have to be named when you setup the fund? You can add members after the fund is setup, however, the fund must have less than five members in total.

Does a SMSF operate like a regular super fund except that I have more control? SMSF operates exactly as any other super fund, but you have 100% control over it, i.e. you as the Trustee are responsible for how the fund operates, how the money invested, types of investments etc.

Do I have to operate a company or small business before I can setup my SMSF? No.

Does SMSF have to be resident in Australia? Resident SMSF receives concessional tax treatment (maximum tax payable on earning is 15%). A non-resident fund is subject to 47% tax on the fund assets.

What can my SMSF invest in? The legislation does not state exact types of investment in which a SMSF can invest. Some investment practices are restricted, the aim being to protect the assets against overexposure to undue risk. The main purpose of the investment is to generate and grow retirement benefits for the members.
Please note restrictions on investments:

  • lending to members and their relatives
  • acquiring assets from 'related parties' of the fund
  • borrowing
  • investing in 'in-house' assets
  • all the investments need to follow the two main rules: "sole purpose test" and "arms length"
  • It is the duty of the SMSF trustees to separate the SMSF assets from their own personal assets, or assets belonging to their business
  • SMSF assets cannot be used for personal or business purposes, this representing the "sole purpose test" i.e. the funds in the fund is aimed for the retirement purposes only, and cannot generally be accessed until retirement

Trustees of SMSFs must keep money and other assets of the superannuation fund separate from their own personal assets. Similarly, the assets of the superannuation fund must also be kept separate from those belonging to a business (e.g. a business run by two partners who decide to setup an SMSF).

Money belonging to the fund must not, under any circumstance, be used for personal or business purposes. This money is for retirement purposes and generally cannot be accessed until retirement. The fund's assets must not be viewed as a form of credit or emergency reserve when faced with a sudden need.

What is the "sole purpose test"? The sole purpose test means that a super fund must be maintained solely for at least one of the core purposes such as:

  • retirement benefits for the members, or
  • death benefits for the members' benefits or estate, or
  • at least one of the core purposes and one or more approved ancillary benefits, such as resignation benefits or disability benefits.

A breach of the sole purpose test may results in the fund becoming a non-complying super fund for taxation and Superannuation Guarantee purposes and could lead to significant penalties being applied to the person who contravenes it.

What are Trustees' Administrative Obligations? Trustees are responsible for:

  • Annual Income Tax Returns & Other Lodgement Requirements
  • Prepare and implement an Investment Strategy for the management of investments
  • Superannuation Surcharge. All SMSFs are required to report member contributions information to the ATO
  • Reasonable Benefit Limits (RBL). All SMSFs are required to report payments of benefits made to members to the ATO
  • Annual Audit. All SMSFs are required to have the financial accounts and statements of the fund audited each year by an approved auditor. Auditors must provide a certificate to the trustees stating that the fund has been audited
  • Supervisory Levy. SMSFs must pay the annual superannuation supervisory levy to the ATO
  • Record Keeping Requirements
  • Keep accurate and accessible accounting records that explain the transactions and financial position of the fund
  • Prepare an annual operating statement and an annual statement of the funds financial position and keep these records
  • Prepare minutes of trustee meetings and decisions, records of all changes of trustees and members and keep these records for a minimum of 10 years
  • Keep copies of all annual returns lodged for a minimum of 10 years
  • Keep copies of all reports given to members for a minimum of 10 years

How can SuperEasy® help with Trustees' Administrative Obligations? SuperEasy® can assist the SMSF in meeting Annual administration requirements set forth by the ATO and specifically includes Special Purpose Financial Statements, including:

  • Operating Statement
  • Statement of Financial Position
  • Notes to Accounts
  • Members Statements
  • Minutes of Trustee's meeting
  • Audit Report
  • Income Tax Return
  • Covering Letter outlining work done, results and fund tax position. You will then need to sign and return certain tax forms to us for electronic lodgement to the ATO.

Please note that all work is carried out by experienced, superannuation specialists in Australia and is fully covered by the appropriate Australia professional indemnity insurance.

What is included in your offer of $345 to establish a SMSF? $345, including GST, is the cost of the Trust Deed. You will also get complimentary (free of charge) The Establishment Kit that includes everything that you will need to setup and establish your Self Managed Super Fund (Trust Deed, Notice of Consent to Act as a Trustee Form, the ATO forms, instructions on how to fill in forms, checklist), plus an additional set of documentation produced by SuperEasy® to assist you with some of the daily tasks associated with running the fund, eg. Sample Generic Investment Strategy form, Binding Death Benefit Beneficiary Kit, etc.

What is the benefit in selecting your offer of $1,645 for the Establishment and first end of year administration of a SMSF? An up front saving of $195, off the combined cost for the fund setup and administration when they are purchased separately. $1,645 is the cost of setting up the fund and the first end of year administration of the fund. This includes everything as explained in the $345 fund establishment product, plus a fixed fee cost for the end of year administration of the fund (based on up to 15 different investments with an unlimited number of transactions for the period). The end of year administration includes: Tax Return and Audit of the Fund, preparation of the Operating Statements, Statement of Financial Position, Notes to Accounts, Member's Statements, Minutes to Trustee's Meetings, Superannuation Contributions Surcharge Forms.

Can I start the process of establishing my super fund in this financial year, and execute my deed with the Commencement Date of the Deed in the next financial year, but transfer or rollover the money into the fund in this financial year? No.

If I establish my super fund in this financial year and if my fund does not have any transaction in this financial year, do I still have to organise end of year administration, including an audit and tax return? Yes.

Can my SMSF borrow and use the borrowed money to acquire investment assets? Yes, via Limited Recourse Borrowing Arrangements.

What is Limited Recourse Borrowing Arrangement (LRBA)? Generally, subject to limited exceptions allowed under the Superannuation Industry (Supervision) Act 1993 (SISA) Self Managed Superannuation Funds (SMSFs) are prohibited from borrowing money. In September 2007 SISA was changed to allow SMSFs to invest in certain limited recourse borrowing arrangements via borrowing money to acquire a permitted single asset, or a collection of identical assets, having the same market value (that are together treated as a single asset), which the fund is not otherwise prohibited from acquiring .

Can I have my superannuation monies in more than one fund such as a SMSF, in some other types of a fund? Yes. You can spread your superannuation between funds of your choosing.

Can SMSF invest in share market and derivatives? Yes, subject to certain conditions.

Can SMSF invest in real estate? Yes, subject to certain conditions.

Can my SMSF pay an Account Based Pension? Yes.

Can SMSF buy shares on the NASDAQ in the USA or any other overseas market? If so are there any additional fees for international trading? Yes, SMSF can buy shares on the NASDAQ in the USA or any other overseas market. Because of the additional complexities involved in calculation of tax in Australia in AUS dollars or any other currencies, and additional audit required of your super fund for such trading, SuperEasy® charges an additional fee on its base cost.

Does SMSF have to have an Investment Strategy? Yes. The SIS legislation requires funds to have an investment strategy. There is no prescribed format for an investment strategy, and strategy will vary from fund to fund based on, but not limited, the following:

  • The composition of the fund's investments
  • Future contributions to the fund
  • Risk of investments
  • Cash flow needs
  • Liquidity
  • Age of members

The investment strategy must be in writing and should be reviewed at least annually, or when investment opportunities available to the fund are inconsistent to the fund's investment strategy.

How long does it take to setup an SMSF? Using our online process we can deliver a Trust Deed within a few hours and you can execute the deed within one business day. After you fill out the application for the setup of your SMSF on our site www.supereasy.com.au, and, once we receive confirmation for your payment, you will receive an e-mail from us with the attached soft copies of documents:

  • Trust Deed
  • The ATO form called "Application to register for Superannuation Entities" populated with the trustees' details as supplied by the founder of the fund during the application setup process
  • The ATO Trustee Declaration Form
  • Product Disclosure Statement (PDS) (this document is supplied on request)
  • Generic Investment Strategy (sample)
  • Binding Death Benefit Beneficiary Nomination Fact Sheet
  • Sample Binding Death Benefit Beneficiary Nomination Form
  • Tax Invoice confirming your payment details
  • Check List - the check list contains all the steps involved in establishing a new Self Managed Superannuation Fund

You can print the electronic copies and execute the trust deed that same day. Confirmation of payment takes only a few hours if you submit your payment using our Secure Internet Payment System. If you choose the offline payment methods, it can take up to five working days for the confirmation of payment. SuperEasy® will subsequently supply all the required hardcopy documents for the application via Australia Post "Express POST" Next Day Delivery; these include:

  • Trust Deed
  • The ATO form with the Instructions about how to fill out the "Application to register for Superannuation Entities" document (this is for the clients who wish to fill out the form themselves)
  • The ATO Trustee Declaration Form
  • Generic Investment Strategy (sample)
  • Binding Death Benefit Beneficiary Nomination Fact Sheet
  • Sample Binding Death Benefit Beneficiary Nomination Form
  • Check List - the check list contains all the steps involved in establishing a new Self Managed Superannuation Fund
  • Tax Invoice confirming your payment details

After you receive these documents, you will have to fill in the ATO application to get the Tax file number for the fund, and an ABN number. It may take between 3-4 weeks for the ATO to process your application. Please note that you have to send this application to the ATO within 60 days after the establishment of the fund!

This depends entirely on how actively you wish to trade your investments.

What kind of contributions can be made to the SMSF?

  • Voluntary contributions from you
  • Rollovers or transfers of your benefit from another superannuation fund
  • Employer contributions made to you
  • Spouse contributions
  • Co-contributions

When opening a bank account for my SMSF, does it have to be with a bank or can it be a building society? You can open an account with any Australian registered financial institution, providing you can receive/transfer payments to and from the account. A cheque account is the most common account type for this purpose, but with the advent of full electronic funds transfer facilities, even a cheque book may not be required. If this is the case, just make sure that you can access your super fund account electronically. Please note, that the nominated account has to be in the name of your superannuation fund.

Who is SuperEasy®, are they backed by anyone e.g. NAB? I'm worried if they are another company like HIH, One Tel etc. This is my life savings. Please tell me. SuperEasy® is an independent non-advisory company owned by its founders. The advantage of Self Managed Super Funds as opposed to other funds, is that the control of your assets remains with you. SuperEasy® is involved only with the setup of the fund and the end of year administration, which includes the preparation of the accounts and end of year tax return and all other requirements set forth by the ATO.
Running a SMSF means full flexibility, control and ownership of your fund, but as a consequence brings full accountability and responsibility for the fund.

What is salary sacrifice? Salary sacrifice is when your super contribution is taken out of your salary before income tax is deducted at your marginal tax rate. This reduces your taxable income, usually resulting in lower income tax overall.

Is there any organisation or association that represents the interests of Self Managed Superannuation Funds and its trustees? SMSF Owners’ Alliance Limited (SMSFOA) is a not-for-profit public company established to represent the interests of Self Managed Superannuation funds. Its membership is strictly limited to the trustees of SMSFs. The company is not aligned or associated with any commercial entities, making it unique and giving it a specialty profile. SMSFOA seeks to ensure the Government policy towards SMSFs, including taxation, does not discriminate against SMSFs but rather recognises and encourages their important role, with the emphasis on the creation of economic wealth and development of a sustainable retirement system in Australia. The SMSFOA research and advocacy is provided by its directors, and is on a pro-bono basis. This ethical approach makes an excellent platform for achieving the main goal for all Australians, in becoming self-sufficient in retirement and also assuming the full responsibility for the cost of their retirement. To find out more about the SMSFOA visit their web site: http://www.smsfoa.org.au/

For further detailed information on Regulated Self managed Superannuation Funds, please CLICK HERE to visit the Australian Taxation Office Website.


Glossary

A
Adviser - a person who provides financial product advice to retail clients and is a representative of an AFSL licensee.

Administrator - a person or company responsible for the day-to-day operation of the superannuation fund and for the preparation of member statements, benefit payments, income tax returns, audits, lodgement of forms and daily operations.

AFSL - an Australian Financial Services Licence granted by ASIC under s913B of the Corporations Act 2001 that authorises a person who carries out a financial services business to provide financial services.

All-Ordinaries Index - the barometer of the Australian Stock Exchange, this measures the share-price movements of more than 300 Australian companies. The index is calculated continuously and published daily.

Account Based Pension (also known as an allocated pension) - is a type of pension where the amount of money is set aside and invested to provide an income to its members on retirement when they reach preservation age.

Annual Audit - all SMSFs are required to have the financial accounts and statements of the fund audited each year by an approved auditor.

Approved Deposit Fund - a fund carrying specific tax advantages, designed to accommodate sums of money, which would otherwise be taxed at higher rates, such as accumulated superannuation benefits paid to someone leaving a job. Approved deposit funds (ADF) can only accept eligible termination payments. Their purpose is to encourage people to preserve their savings to provide income for retirement.

At call - funds that can be withdrawn on demand.

Australian Business Number - the Australian Business Number (ABN) is a new single identifier for all business dealings with the Australian Taxation Office (ATO) and for future dealings with other government departments and agencies. Businesses will need an ABN to register for the goods and services tax and other elements of the Tax System. They can register for all of these on the same form.

B
Balanced Fund - a fund or portfolio that invests in all major asset classes, ie. cash, fixed interest, real estate property and shares, local and overseas, to provide long-term capital growth and a reasonable level of return.

Business Real Property - is land and buildings used wholly and exclusively in a business.

C
Capital Gains Tax (CGT) - a tax on the income resulting from increases in the market value of an asset.

Capital Guaranteed Fund - an investment fund, offered by life offices, which promises the investor will be repaid the full capital value of his or her investment.

Capital Stable Fund - a pooled investment fund with most of its assets in fixed interest and cash and the rest in growth assets such as shares and real estate property. The objective is to achieve a moderate level of income and some capital growth.

Cash Management Fund/Trust - a type of fund or trust that pools investors' money into high-yielding money market instruments otherwise available only to professional investors with hundreds of thousands of dollars.

Company - a company acting as trustee is referred to as a "corporate trustee". If a company acts as trustee, the fund can pay a lump sum benefit to beneficiaries. The directors of the trustee company, should have a family relationship with each other, and not be related by purely being employees.

Company Name - the company may have any name that is currently not being used by another company or business. The chosen name is registered with the company regulators, and, two more alternative names should be provided in the event that the first choice is not available.

Complying Pension - is a pension that provides that the pension is paid for life or a fixed term and meets specified conditions under regulations.

Consumer Price Index (CPI) - compiled by the Australian Bureau of Statistics, this measures movements in a list of goods and services to provide a widely used indicator of the rate of change in prices (inflation).

D
Directors - a company must have one or more persons to act as a director. Directors are responsible for the operations of the company. The directors of a trustee company are treated similarly to individuals who act as trustees. The directors should be members or have a business or family relationship with members. They should give their consent to act as directors.



Dividend Imputation - a tax-accounting treatment which removes the "double" taxation of company dividends in Australia. Dividends distributed by a company that has paid full Australian company tax carry a tax credit which may be offset against the shareholder's tax liability on the dividend or, if the shareholder's marginal tax rate is less than the company tax rate, the excess credit can be offset against tax payable on other income.

E
Earnings Per Share (EPS) - calculated by dividing a company's earnings by the number of its shares on issue to show the profit earned in terms of each share; this is one of several measures of a company's performance.

Employee - a person is classified as being employed if he/she works for more than 10 hours a week under a direction of another person in return for a wage or salary.

F
Fiscal Policy - an arm of government policy that influences the economy through the budget by changes in tax and welfare payments and government spending.

Full Vesting - full vesting is the most common option for the fund members, meaning that the member is entitled to the full benefit of superannuation funds in his/her name. The superannuation guarantee legislation requires that full vesting occur for superannuation guarantee contributions.

Fund Name - you may choose whatever name you prefer for your self-managed superannuation fund as long as it's not a registred brand name.

L
Legal Representative - or Legal Personal Representative, is a trustee in place of a member who is under a legal disability.

Loan to Value Ratio (LVR) - refers to the maximum amount lenders will approve against the value of any property taken as security for your home loan. For example if you wish to purchase a property worth $300,000 the lender may approve a loan for 70% of the property value. It will then be up to you to provide the remaining 30% plus costs (mortgage registration and stamp duty etc).

Lump Sum Fund - this fund provides for the benefits to be payable to a member, to be taken as a single lump sum payment. This option is only normally available if the trustee is a company or corporate trustee.

M
Member - a person who has contributions made for them or who receives benefits from the fund. In retirement, a member has the option of receiving either lump-sum payment or a pension, or a combination of both.

P
Password - the password is a chosen word by you and should be kept secret. It should be treated the same as your PIN number.

Pension Fund - a pension fund provides retirement benefits in the form of pensions or regular payments rather than a single payment.

Principal place of business - this is the place where the business will be conducted. This can be either a home or office address.

R
Rollover - a benefit transferred or rolled over from one superannuation fund to another.

S
Shares - part of the ownership of the company. An investor buying a portion of a company's capital becomes a shareholder in that company and receives a share of the company's profits in the form of an annual dividend.

SIS Act - Superannuation Industry (Supervision) Act 1993 is the legislation governing the operations of SMSF trustees.

Sole Purpose Test - the object of the Sole Purpose Test is to ensure that SMSFs are complying with their purpose of providing benefits to fund members upon their retirement.

Statement of Advice (SoA) - a Statement of Advice must be provided when personal advice is given to retail clients. It must state the advice that is given and be provided as soon as possible. This must be done before any service in relation to the advice is provided.

Supervisory Levy - SMSFs must pay the annual levy to the ATO with lodgement of the annual return.

T
Trust Deed - a document that lays down the rules within which a trust must operate, dictates its investment guidelines and describes how benefits will accrue to the beneficiaries under the trust.

Trustee - a person or company that has legal responsibility for financial aspects (receipts, disbursements and investment) of funds.

U
Unit Trust - an investment facility that enables small investor's to pool their funds and earn a greater return than if each had acted individually. The investors buy units that may fluctuate in value in line with the market performance of the underlying assets. Common types of unit trusts are cash management, equity, real estate property and fixed interest trusts.


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