Self-Managed Superannuation Funds (SMSFs) have gained immense popularity as a powerful vehicle for managing retirement savings in Australia. With the ability to make investment decisions tailored to individual preferences, SMSFs offer the potential for significant control and flexibility of your superannuation investments.
There is much that goes into running a self-managed super fund — this comprehensive guide introduces you to SMSF investment and SMSF lending.
What is a self-managed super fund?
A self-managed super fund is a superannuation fund that you, well, manage yourself! With an SMSF, the members of the super fund also act as the trustees of the fund, which means that the administration, investment and compliance of the funds falls on their shoulders.
The term ‘self-managed’ doesn’t mean that everything is left up to you as an SMSF trustee to manage. In fact, many different professionals may be able to help run an SMSF, such as accountants, lawyers and financial planners. However, the responsibility of ensuring that an SMSF fund is compliant and meets all of its requirements ultimately lies with the SMSF trustees.
What’s the difference between a regular super fund and an SMSF?
Most superannuation funds in Australia fall into one of two categories, APRA-regulated funds, or ATO-regulated funds. APRA-regulated super funds are regulated by the Australian Prudential Regulation Authority (APRA) and include many different categories of super funds, including retail funds, industry funds, corporate or public sector funds.
ATO-regulated funds (you may have guessed it) are not regulated by APRA, but rather the Australian Taxation Office (ATO). Self-managed super funds are ATO-regulated funds, however they must also comply with superannuation laws and legislation.
People are attracted to running their own super fund for a number of reasons, however, one of the most common is that they have a better level of transparency, control and flexibility over where their retirement savings are invested rather than with other funds. One of the standout features of an SMSF that makes it different to APRA-regulated funds is its ability to invest in direct property. So, think of it this way, you can’t take an APRA-regulated super fund and purchase the property next door with it — but with an SMSF, you have the opportunity to do exactly that!
Setting up a self-managed super fund
There is no denying that the setup and management of a self-managed super fund does come with more administrative work (and cost) than a regular super fund. However, for superannuation savers who crave the ability to hold their or their family’s financial future more firmly in their grasp, often they turn to an SMSF.
Self-managed super funds in Australia can have up to six members and there is no statutory minimum balance required to start an SMSF (though, there are fees associated with different facets of the setup process).
To begin setting up an SMSF, some of the steps involve:
- Accessing personal financial advice to determine if an SMSF is in your best interest.
- Choosing between individual or corporate trustees.
- Creating the trust and the trust deed (this is where legal professionals can assist).
- Register your fund and apply for an Australian Business Number (ABN) for the fund.
- Set up a bank account for the fund (contributions, fees and withdrawals all need to be processed through an SMSF’s bank account).
- Devise an investment strategy, including your asset allocation, in line with the trust deed.
The rules around SMSFs
While we couldn’t possibly outline every last rule and regulation involved with owning and managing a self-managed super fund, we can outline some of the main ones:
The sole purpose test
In order for your SMSF to qualify for the usual tax advantages granted to super funds, it must adhere to the sole purpose test. This entails running your fund with the primary intention of furnishing retirement benefits to your members, or to the dependents of members in case of a member’s demise before retirement. Certain decisions and actions that you take as an SMSF trustee may be seen as a contravention of the sole purpose test, so it’s important to seek advice if you are unsure.
Ownership and protection of the fund assets
When you purchase assets for your self-managed super fund, you can’t simply go and buy stocks, bonds, or property with your own funds and say it’s for your SMSF. All assets held by the super fund must be entirely separate from your personal and business investments (and separate to those of all the fund members).
This clear distinction in ownership of the funds also helps protect your super fund assets if ever you’re in the unenviable position of a creditor dispute or legal action is taken against you or your business.
While more flexibility and greater control of your superannuation investments are often the key attractor for people to utilise a self-managed super fund, there are still some investment restrictions that must be adhered to when running an SMSF.
All investments made through your SMSF need to adhere to the principle of being conducted on a commercial ‘arm’s length’ basis that maintains an independent and fair relationship. The prices at which fund assets are bought and sold must consistently mirror the actual market value, and the earnings generated from these assets should consistently align with genuine market return rates.
Using Limited Recourse Borrowing Arrangements
If the fund is leveraging it’s opportunity to purchase a direct residential or commercial property, then chances are that it will need to borrow money to do so. A limited recourse borrowing arrangement (LRBA), put simply, is a loan used for the purchase of SMSF assets, including property. To ensure key superannuation laws are followed, the LRBA (or SMSF loan) is set up so the property is held in a trust separate from the SMSF itself, for the duration of the mortgage. This ensures the lender has no recourse against the SMSF assets in the event that the SMSF members default on the LRBA. Essentially, a limited recourse borrowing arangement satisfies relevant legal requirements so an SMSF is able to invest in property with borrowed funds, while protecting the other assets in the SMSF.
Setting up your investment portfolio
Once everything is set up and you have either begun contributing or have rolled over your superannuation balance from an existing super fund, comes the fun part — investing! SMSFs can invest across a wide range of asset classes and investment options. The cash in your SMSF bank account forms part of your SMSF investment portfolio, and can even be held in an offset account to reduce the amount of interest you pay on your SMSF loan!
You have the choice of whether to hold direct investments, or invest via a platform or broker. If you’re looking to purchase a direct property, then, as we mentioned above, your fund may need to establish an LRBA.
What is SMSF lending for property investment?
SMSF lending is a specialised form of lending, due to the additional regulations that are imposed in the superannuation environment. A self-managed super fund is able to borrow money for the purpose of investing in real estate property, managed funds or shares, as long as it’s via a limited recourse borrowing arrangement (LRBA).
A limited recourse borrowing arrangement is as it sounds, a borrowing arrangement that creates limited recourse for the lender. How this is done is: the LRBA is set up under a separate trust structure which effectively protects the super fund’s remaining assets in the event that a default occurs on the SMSF loan. This way, the lender can only seize the assets in that trust, meaning they can only come after the property purchased and not the other assets in the fund nor the members, to recoup their funds.
Is lending within a super fund worth it?
There’s no denying that SMSF lending is more complex than a run-of-the-mill mortgage, but just as is the case with home mortgages, generally, you employ the assistance and guidance of specialists when borrowing through your self-managed super fund.
As an asset class, property offers the opportunity for strong rental yield and capital growth potential. Particularly when it forms part of a diversified investment portfolio in line with the SMSF’s investment strategy, property may help boost retirement savings over the long term.
Like any large-scale financial decision though, it’s prudent to seek the necessary financial advice or professional assistance before going ahead.
How do I know if an SMSF or SMSF loan is right for me?
Before you can understand whether an SMSF is the right superannuation vehicle for you, you must assess and analyse your investment objectives, retirement planning, current financial situation and weigh up the costs and benefits. A qualified financial planner is typically best placed to provide holistic financial advice that takes into account your personal financial situation.
Similarly, specialist SMSF loan brokers are qualified to assist you in setting up and structuring a limited recourse borrowing arrangement for your self-managed super fund property investment.
The experienced professionals at Own Financial Planning and Own Home Loans can assist you in discussing your superannuation, retirement planning, wealth accumulation, wealth protection and SMSF borrowing needs. We’d be happy to chat with you — start the conversation today!