Many thanks to Christina from the SMSF Investment Strategies Blog for today’s post. Christina will be sharing a series a posts on the timely topic “Is a SMSF right for you?”
With the recent under performance of many public super funds, running your own fund and taking control of your super is becoming an increasingly popular strategy. As a trustee of my own Self Managed Super Fund (SMSF), I am definitely a supporter of having one for those wishing to take more control of their financial destinies. However, I also realise that it may not be the right vehicle for everyone. There are three key questions to ask yourself to help you make the right decision and we will address each one of them in a separate post.
Question 1 – Is your planned investment strategy for your SMSF compliant?
Superannuation in Australia is governed by specific regulation called the Superannuation Industry Supervision Act (SIS Act) and there are a number of restrictions that apply. Failure to comply with these restrictions can make your fund non-compliant and this can have serious financial consequences (see AAT article). Non-compliance does not mean you have done anything bad or illegal. It simply means you have failed to adhere to with one or more of the restrictions. For example, a number of people I know have told me that they would like to set up a SMSF to buy a house. After all, “I will need a house to live in when I retire and I think residential property is a sound investment”. This sounds like a good idea and this investment strategy is fine as long as you
- don’t live in the house or rent it to your relatives, otherwise it becomes an “in-house asset” and may not meet the “sole purpose” test
- have other investments in other asset classes to maintain the diversification required by the Australian Tax Office
- are able to maintain enough liquidity to pay for all your property and other super fund expenses
- are able to buy the house without borrowing, or find a lender who will meet the strict borrowing criteria that has been set out for SMSFs and are prepared to pay the higher cost (compared to normal residential home loans)
However, if you only have $100,000 in your SMSF and you plan use all of it as a deposit to buy a single property that you or your family members plan to live in, your fund will have compliance issues.
This may not make sense to you. In some countries, you are allowed (and even encouraged) to use your super funds to buy your own home as this is seen by the government as a safe investment that will benefit you in your retirement. However, this is not the case in Australia.
Any investment strategy you have in mind that involve borrowing money, lending money to the SMSF members, buying assets from related parties or buying assets that can benefit you before retirement would most likely have compliance issues. There are a number of free publications covering the compliance aspects for SMSF on the ATO website (http://ato.gov.au/super/). Read them and if in doubt, check with your accountant before you proceed with your planned investment strategy.
There are many good reasons for starting your own SMSF but you must make sure you start one for the right reasons. For more good reasons for starting a SMSF, check out “Why have an SMSF?” on my blog.
The SMSF Investment Strategies website is aimed at supporting the Self Managed Super Fund (SMSF) Trustee and Retail Stock Investor community. I’d encourage anyone considering a SMSF to inform themselves fully, visit the site and take advantage of the knowledge and experience Christina has shared.
Stay tuned for part 2 in this series…
Article by Christina
Christina is a Trustee and Chief Investment Officer for SLI Superannuation Fund, a Self Managed Super Fund set up in March 2007. In addition to managing the investments for her SMSF, she also actively trades options in the US market for her family owned investment company.
Christina has written 3 awesome articles for us at Alan Lewis Accountants – BLOG
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Compliance is an important consideration when it comes to SMSFs. The ATO is increasing pressure on trustees and their approved auditors. In the last 12 months they made 60-70 funds non-complying, and more cases are still coming through. Generally, non-complying funds are subject to tax at the highest marginal rate.
As the article states, there are many good reasons for starting a SMSF, particularly if you are prepared to invest the time to take control of your own financial future.
A SMSF, however, is not something to jump into without first being sure you understand your responsibilities as trustee and the compliance issues involved.
Thanks again, Christina. Great post!
Greetings!
I just found this community here and am looking forward to contributing. Really wonderful advice here. Super job by the admin, mods and other community members.
Have a nice Day!
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