STARTING AN SMSF

Pros

Cons

How to set up an SMSF — and the professionals that can help

• Choosing a Structure – single member fund or multiple members?
• Choosing and appointing trustee type – individual or corporate trustee?
• Create an SMSF Trust Deed
• Ownership of assets within the SMSF
• Registering the SMSF with an ABN, TFN and GST (if applicable)
• Setting up bank and investment accounts
• Rolling in existing super fund into SMSF
• Establishing an Investment Strategy
• Estate Planning within the SMSF

• Financial advisers – prepare investment strategy, recommend investments, choosing personal insurance, coordinating with other professionals and reviewing your SMSF on an ongoing basis.
• Legal practitioners – to prepare SMSF trust deed and update regularly if required.
• Accountants and tax agents – to offer tax advice, arrange annual financial statements and lodge tax returns.
• Fund administrators – to assist with daily record-keeping, performing administrative tasks such as preparing paperwork (e.g., trustee minutes) and meeting obligatory reporting requirements.
• SMSF auditors – before an SMSF tax return is lodged, it needs to be approved by an auditor.

Case Study 1 – Borrowing to invest in property via an SMSF

• Tim and Rose are in their late 30s and have two kids, living in NSW.
• They both are members of their SMSF called T & R Super Fund with a corporate trustee called TR Investments Pty Ltd. They both are directors of the corporate trustee company.
• The SMSF balance is $400,000.
• They each earn an employment income of $150,000 p.a. plus 10% super.

• Tim and Rose want to purchase a residential investment property in Perth for $500,000. Their financial adviser asks them to consider investing via their SMSF rather than personally.
• Usually, a higher deposit amount is required by banks that lend to an SMSF. So, Tim and Rose can pay $150,000 towards the deposit from the SMSF and borrow the remaining $350,000 under the Limited Recourse Borrowing Agreement (LRBA). Their financial adviser can work with the solicitor to help set up a Bare Trust to hold the investment property in.

Potential Tax Savings for buying within the SMSF as compared to buying outside SMSF

• The SMSF is required to pay only 15% tax on rental income from the property whereas if they bought it personally, it would be taxed at their top marginal tax rate which would be 37% plus Medicare levy for Tim & Rose.
• On properties held for longer than 12 months, the fund receives a one-third discount on any capital gain it makes upon sale, bringing any capital gains tax liability down to 10%. If the property was held personally, they would receive a 50% discount but would be taxed at 37% plus Medicare levy.
• If the property expenses exceed rental income, the taxable loss can be carried forward and offset any future taxable income.
• The loan repayments will be made from Tim & Rose’s super contributions of approximately $15,000 p.a. each, which are again taxed at 15%. If investing outside super, their loan repayments would be from their after-tax dollars, which would impact their personal cash flow.
• At retirement, once Tim and Rose commence an account-based pension, rental income or any capital gains will be fully tax-free. Whereas outside super, the rental income or capital gains will be taxed on their marginal tax rate at that time.

Other important Considerations

• isn’t breaching any non-arm’s length income and LRBA rules,
• is investing as per the investment strategy and whether it needs to be updated,
• isn’t concentrated towards property,
• recommend other asset classes for the remaining $350,000 to diversify their risk,
• ensure there is adequate insurance in place for unfortunate events where a partner is unable to work or passes away,
• meets all the compliance requirements,
• execute appropriate paperwork,
• review the strategy on an ongoing basis.

Case Study 2 – Transfer of wealth within an SMSF

• John and Mary are in their 60’s and are about to retire.
• Their son Richard and daughter in law Eliza are in their early 30’s.
• All 4 of them are members of their SMSF called Evans Family Super Fund.
• John and Mary’s combined member balance is about $2,000,000 and Richard and Eliza’s combined member balance is about $300,000.
• John and Mary want to ensure that upon their passing, their balances are passed on to Richard and Eliza smoothly.
• They are contemplating whether they should wind up the Evans Family Super Fund and set up two individual SMSFs for each couple.

Succession Planning

• The Evans Family Super Fund currently has all 4 of them as individual trustees. They can set up a corporate trustee with all of them as directors. This way, when John and Mary pass away, they can appoint Richard and Eliza as successors to the company who can replace them as directors. A corporate trustee structure is both flexible and strict, in terms of succession, whereas an individual trustee structure is not.
• Once John and Mary reach a stage where they do not need all of their superannuation (due to old age or illness) they can take a pension out of the SMSF and gift it to Richard and Eliza. Richard and Eliza can then recontinue these funds into the SMSF in their own name (subject to contribution limits).
• If they had a family business property or a real asset within the SMSF, this strategy could help them retain it within the SMSF. This is because, within an SMSF, John and Mary’s assets could be in-specie transferred (transfer of ownership on paper without actual selling and buying of assets) to Richard and Eliza. It also works for listed shares or other liquid assets. However, transaction costs and tax may still apply.
• If they set up individual SMSFs, the costs of running two SMSFs would increase. It also won’t allow a smooth transfer of assets as they would have to physically buy and sell assets and wind-up John and Mary’s SMSF which would increase the paperwork and other administrative hurdles.