Understanding Self-Managed Super Funds (SMSFs)
A Self-Managed Super Fund (SMSF) gives you greater control over how your retirement savings are invested, but it also comes with added responsibility and complexity. Below, we answer some of the most common questions people ask when considering whether an SMSF is right for them.
How does tax work in an SMSF?
Investments held within an SMSF benefit from the fund’s concessional tax rate. Income is generally taxed at 15%, compared with the typically higher marginal tax rates that apply outside super. Importantly, concessional contributions made to the SMSF are not taxed at 15% upon entry. Instead, these contributions are included in the fund’s assessable income. The funds net income is then taxed 15% at year end. If an investment is sold after being held for more than a year, capital gains tax may be reduced to 10%. In retirement, income may even become entirely tax-free if it is supporting a pension.
However, keep in mind that super funds cannot access negative gearing benefits in the same way individuals can, and all investment expenses must be paid from the SMSF’s own bank account.
Can an SMSF borrow to buy property?
Yes, under what’s called a Limited Recourse Borrowing Arrangement (LRBA). This allows an SMSF to borrow money to purchase a single asset (such as a property) while limiting the lender’s claim to that asset alone. Borrowing through super can be complex and must comply with strict rules, including the requirement for a separate bare trust. It’s vital to seek professional advice before proceeding.
What can an SMSF invest in?
An SMSF can invest in a wide range of assets, including shares, managed funds, property, term deposits and even certain collectibles. The key is that every investment must be made on an arm’s-length basis, align with the fund’s investment strategy and must be valued on annual basis. Personal use assets or investments that provide present-day benefits (like buying a holiday home for personal stays) are not allowed.
How much do you need to start an SMSF?
While there’s no legal minimum balance required, research shows that SMSFs generally can become cost-competitive once the fund reaches around $200,000. This is because administration, audit, accounting and compliance costs are mostly fixed, meaning smaller balances may struggle to justify the additional complexity and expenses involved.
Can you sell your own assets to your SMSF?
In most cases, no. The rules prohibit buying assets from related parties, except for limited situations such as listed shares or business real property (like commercial property used in your own business). Even then, the purchase must occur at market value and be properly documented to meet compliance requirements.
Is an SMSF right for you?
Running an SMSF can provide flexibility, control and potential tax advantages, but it also demands time, expertise and responsibility. It’s important to weigh the costs, risks and administrative duties before deciding. Always seek advice from a licensed financial adviser or accountant experienced in SMSFs to ensure it suits your personal circumstances.
IMPORTANT INFORMATION
This is general advice only and does not take into account your financial circumstances, needs and objectives. Before making any decision based on this document, you should assess your own circumstances or seek advice from your financial adviser and seek tax advice from your MartinCo accountants. Information is current at the date of issue and may change.
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