A superannuation fund is simply a form of trust designed to provide retirement or death benefits for its members, with those members being the beneficiaries. Provided the trust deed and the operation of the superannuation fund comply with the SIS Act and Regulations, the trustee operating the Fund, and the members, may obtain tax concessions.
All superannuation funds in Australia operate as trusts. The deed establishes the basis of calculating each member’s entitlement. The trustee will usually retain discretion concerning such matters as the fund’s investments and the selection of a death benefit beneficiary. Many business owners use SMSF as an integral part of their wealth creation and asset protection strategies.
While SMSFs are attractive because of the level of control they provide to family members, it has to be remembered that they are still subject to a whole range of legislative requirements. Thus while SMSFs may look superficially like a discretionary trust, they are actually quite different and trustees need to be aware of their special responsibilities.
- The fund only pays 15 per cent tax on the taxable income of the fund and the tax payable is reduced by imputation credits on dividends received by the fund. Capital gains of complying funds are subject to a 33 1/3% discount where the assets have been held for at least 12 months meaning that the tax applicable is effectively 10%.
- The trustees (who are also the members) control the investment decisions and asset mix, and have the flexibility to change investments when they consider that this is appropriate (that is, they are not locked into a fund manager’s mandate or poor returns).
- It encourages self-sufficiency at retirement and interest in one’s own financial affairs.
- It can be used to accumulate superannuation assets and can then be used to pay a superannuation-funded pension to the members when they retire. This offers increased financial security later in life. (Some members may also qualify for part or full government age pensions.)
- Costs of compliance and administration are often less than the fees charged by a public superannuation fund (although this will vary with the size of the investment, cost of advice, number of transactions and amounts and types of investments held).
- The members don’t get charged an entry fee when they contribute to the fund or an exit fee if they withdraw their benefits.
- People who are running a business can own their business premises in a self managed superannuation fund and rent to themselves or to a related party. The fund may also own residential investment property so long as it buys it from or leases it to an unrelated party. (Note that residential property be purchased or acquired from a member or related party of the fund.)
- It can be financially rewarding and fun once you know what you are doing. For example, superannuation fund investments can be selected and where appropriate integrated with the members’ personal investments (within limits) to get overall diversification.
- A properly structured self managed superannuation fund safeguards your assets in the event your superannuation outlives you, so your family and other members benefit – not a large life company!
- The people who do take the time to understand the rules and the constraints and stay within them rarely encounter problems. Also there are specialist firms that can guide you every step of the way from the setup to conversion to pension to paying out benefits when a member dies, and many can also do the administration for you if required.
- You will need to pay ongoing attention to investments, the economy and changes in legislation.
- The potentially higher costs of self managed superannuation funds with low capital may make the fund uneconomic when compared with the net return from an account in a larger superannuation fund.
- The members are also the trustees, which means they have additional responsibilities and the requirement to comply with legal requirements.
- The fund may have a lower investment performance if the trustees’ and members’ management is not closely controlled or if there is too much reliance on commercial advisers, as distinct from the professional advisers not affected by commission income.
- If the fund ever becomes non-complying, for example, if there is a serious breach of investment rules with related parties, it can lose its tax concessions.
- Need for continuing attention.
If you would like more information on trust structures and want to learn more about the most appropriate type of trust or trusts for your situation, please click here to submit an online enquiry form or call us on 1300 QUINNS (1300 784 667) or on +61 2 9223 9166 to arrange an appointment.