Frequently asked questions

What is an SMSF?

A Self-Managed Superannuation Fund (SMSF) is a vehicle designed to provide retirement benefits to Members of that Fund. It may also be an efficient tax structure that offers significant benefits to investors.

All SMSFs operate under the Superannuation Industry (Supervision) Act 1993. The Trustees of the SMSF will operate the Fund to ensure its compliance with the superannuation requirements and ensure the concessional taxation treatment of the SMSF and the benefits it provides.

A SMSF is established by Trustees and operates in accordance with its Trust Deed. The Trust Deed outlines the benefits to be provided to members of the SMSF and the principles that the Trustees will follow to provide those benefits. The Trust Deed also outlines the duties and responsibilities of the Trustees, Members and any employers contributing to the SMSF.

A SMSF is a special type of trust. This trust is created by segregating the legal ownership from equitable ownership. Individuals or a corporation known as the Trustee holds the legal ownership of the Trust property. In a SMSF, the members will be the Trustees. The equitable ownership is held by the beneficiaries, commonly known as the members. The maximum number of members that you can have in a SMSF is four.

Advantages of an SMSF

The main advantages of a SMSF are:

  • You stay in control of your retirement savings. For example, you as Trustee, make the decisions about investments of the Fund. You also decide who will be Fund Administrator and how much you will pay for these services.
  • A SMSF offers greater flexibility of investments. The choice of investments in a SMSF is far greater than what is available in other superannuation arrangements. For example, in a SMSF you can buy a property of your choice (guidelines apply). You could buy your business premises and lease it back to your business.
  • By managing your own investments you can maximise the return on your retirement savings. This can be achieved by utilising the wide range of investment options available to you as Trustee.
  • The administration costs of your fund may be lower than the cost of retail superannuation funds. In a SMSF, you generally pay for the amount of time spent on your Fund. In other funds, the fee is generally charged as a percentage of Fund assets, as your Fund grows you end up paying more for the same level of service.
  • A SMSF is an efficient tax vehicle as it has a lower tax rate on earnings of 15% compared to 30% for companies and up to 46.5% for individuals. Capital gains tax on assets held for more than a year is 10%. In addition once a fund is in pension phase, the tax rate on earnings and capital gains is zero, with franking credits being fully refundable.

When is it worthwhile to set up a SMSF?

You generally need to have a significant amount of superannuation benefits, or be looking to build up your super quite quickly, to warrant starting a SMSF.

Everyone has a different view of ‘how much’ money is enough to start a SMSF – we would suggest that a minimum of $150,000 is needed and on top of this you should be looking to build up your super with significant contributions.

If you are closer to retirement and looking more at what super you have already, then the figure should be close to or over $250,000.

Who is responsible for ensuring the SMSF is properly run?

The Trustees of the SMSFs have the legal responsibility to ensure the SMSF operates at all times within the requirements of superannuation law.

As the law governing superannuation is complex and constantly changing most Trustees engage professionals to assist them with the various duties under the law.

Financial planning professionals assist in areas such as asset allocation, investment selection and performance monitoring. Assistance will also be required to address the issue of insured benefits in the SMSF and the questions on timing and form of benefits to be paid to members.

Others act as professional administrators to ensure the relevant paperwork and record keeping is prepared. This would include preparation of financial accounts and reporting to the Government regulator.

What are the penalties if something goes wrong?

The Government has provided superannuation with a variety of tax incentives on the basis that SMSFs follow the law as specified. If a SMSF does not follow the law then penalties can be imposed by the Government regulator on the Trustee and in certain circumstances the member’s entitlements.

These penalties include fines payable by the Trustee (not from the SMSF’s assets) ranging from amounts of $550 to $11,000, imprisonment for up to two years and taxing all the existing SMSF assets at 46.5% on both income and capital.

How do I set up a SMSF?

The process of starting a SMSF requires a person to decide to establish the SMSF, then Trustees are appointed and these Trustees resolve to operate the SMSF on behalf of members in accordance with the superannuation law and the Trust Deed of the SMSF.

This will require written documentation for each step including minutes of meetings, completion of ATO registration forms and applications and death benefit nominations for each member.

The Trustees will also need to appoint parties to carry out various functions on their behalf. These functions include:

  • maintaining each Member’s information and account balances,
  • provision of insurance for members,
  • dealing with member requests in regards to their benefits,
  • investment of the Fund’s assets,
  • preparation of financial accounts and regulatory reporting, and
  • audit of the financial statements.

To ensure that the proper documentation is prepared, the tax concessions are maintained and the appropriate asset allocation is determined, it is recommended that professional advice and assistance be sought.

Who controls the Fund?

SMSFs can be established as either Member controlled or Employer controlled. This means that on issues where the superannuation law does not require the Trustees to determine matters then the Founding Member (Member controlled) or Employer (Employer controlled) has the ability to recommend the course of action to be undertaken by the Trustees.

As people change employers more frequently and with the introduction of Choice of Fund for superannuation most new SMSFs are established as Member controlled.

Who can be a trustee?

As a general rule, all members must be Trustees or a Director of the Trustee Company and all Trustees must be Members. If any Trustee is an employee of another Trustee they must be related.

There are special rules for one-member funds. If there are individual trustees, there must be two Trustees of which one is the Member. If there is a Company Trustee, it may be either a one or two Director Company, and one Director must be the Member.

Finally all individuals involved in the trusteeship must declare that they not been convicted of a dishonest act, are bankrupt or insolvent or disqualified from acting as a Trustee. A written acknowledgment that trustees are aware of their role and responsibilities is also required.

Who can be a member?

Membership of your SMSF is not restricted to employed persons. If you are not working but have benefits in another superannuation fund it is possible to roll those benefits into your SMSF.

You can include for example spouses and children (including those under age 18) in your SMSF provided you do not have more than 4 Members in total.

If the Trustees wish, it is even permissible to establish membership for an ex-spouse of a member as a consequence of divorce where the superannuation benefits are to be split.

The SMSF may allow Classes of membership to be established by the Trustees. This means the Trustee can provide different benefits, investment strategies and conditions for individual members or groups of members.

Who can contribute to the fund?

You may contribute to the Fund while you are working or at any other time while you are under age 65. If you are over age 65 and under age 75 you must have worked for at least 40 hours in a period of not more than 30 consecutive days during the year, before you can contribute in that financial year. A statement confirming this work status will be required to be provided to the Trustees of the Fund.

If you are employed, your employer may be obliged to make contributions to the Fund. Generally your employer contributions will be tax deductible to your employer. If you have little or no employer support you may be able to claim a tax deduction on contributions you make personally up to the concessional contribution cap.

In some circumstances where your personal contributions do not qualify to receive a tax deduction, you may be eligible to receive the Government co-contribution.

Alternatively your spouse may make contributions for you. This usually can occur if you are under age 65 or you satisfy the above work test if you are over age 65 and under age 70. These contributions do not receive a tax deduction, however depending on your assessable income your spouse may receive a tax offset.

For personal contributions for which you do not claim a tax deduction or contributions made on your behalf by your spouse a separate non-concessional contribution cap will apply.

How much can I contribute

There are two types of contributions that can be made into superannuation, concessional and non-concessional contributions.

Concessional contributions include employer contributions, being the compulsory super guarantee, salary sacrifice contributions and any contributions for which a deduction is claimed in your personal tax return. These contributions are taxed at 15% when received by the fund. The concessional contributions cap is currently $25,000 for members under age 60 and $35,000 for members over age 60.

Non-concessional contributions are personal contributions for which no tax deduction is claimed. These contributions are made from after-tax dollars. The contribution is not taxed when received by the fund. The non-concessional contributions cap is currently $150,000 per annum. Alternatively, up to age 65, you may bring forward the amount for the next three consecutive years to a total of $450,000.

Making contributions in excess of these limits may result in additional tax liability. Any excess non-concessional contribution will be taxed at a rate of 47% and this tax must be paid by the Fund. A different excess contributions tax mechanism applies to concessional contributions. Excess concessional contributions may be refunded to the member at the end of the financial year. The excess contribution will subsequently be assessed at their marginal rate, including an interest penalty charge.

It is important to note that it is not compulsory for the excess contribution amount to be withdrawn from the fund. However only where the excess amount is withdrawn, it won’t count towards the non-concessional contributions cap.

What happens if I can contribute too much?

Different tax penalties apply depending on which contribution cap has been exceeded.

Concessional contributions cap and excess tax
These contributions include personal contributions where a tax deduction is claimed and any employer contribution. If a person‘s total concessional contributions exceeds the annual concessional contribution cap, currently $25,000 for members under age 60 and $35,000 for members over age 60, an additional tax liability arises. Excess concessional contributions may be refunded to the member at the end of the year. The excess contribution will subsequently be assessed at their marginal tax rate, including an interest penalty charge. The process is as follows:

  • The ATO issues an assessment based on the aggregate information provided by all the superannuation fund’s that have received contributions on behalf of the person.
  • The excess concessional contributions amount is taxed at the individuals marginal rate less a 15% tax offset;
  • The 15% tax offset represents the 15% contributions tax that has been withheld by the fund upon receiving the contribution;
  • An interest charge will apply to recognise that the tax on the excess contribution is collected later than normal income tax. This rate is the same as the rate used for shortfall interest charge (SIC) purposes. The rate is based on the 90 day bank accepted bill plus an additional 3%;
  • Irrespective when the contribution was made the interest charge is calculated from the first day of the relevant financial year;
  • On receiving an assessment, the individual may elect to release up to 85% of their excess contributions from the fund. The election must be made and provided to the ATO within 21 days of receiving the assessment;
  • Where the member has chosen to release the excess, the ATO will issue a release authority to the fund, which must pay the amount to the ATO within 7 days;
  • The ATO will reduce the amount with the outstanding tax liability of the individual and refund the remainder to the individual.

It is important to note that it is not compulsory for the excess contribution amount to be withdrawn from the fund. However only where the excess amount is withdrawn, it won’t count towards the non-concessional contributions cap.

Non-concessional contributions cap and excess tax
Non-concessional contributions include personal contributions where no tax deduction is claimed, and spouse contributions, Government co-contributions, and certain amounts resulting from small business Capital Gains Tax concessions.

The non-concessional contribution cap, currently $150,000 on an annual basis or $450,000 over three years, but government co-contributions & the small business CGT amounts do not count towards these caps. Additionally excess concessional contributions which are not refunded to the member will also count towards the non-concessional cap.

After the ATO issues an assessment, then an additional tax at the rate of 47% will be due. This tax amount must be arranged to be deducted from the person’s superannuation balance. Unlike the excess concessional contributions there is no similar mechanism to refund excess non-concessional contributions.

How much is my benefit?

An Individual Account is established for each Member of the Fund. The Member’s Individual Account is the total of all contributions, transfers and rollovers received for that member plus net investment earnings less any benefit payments, fund expenses and taxes.

Your Individual Account will have two components for tax purposes, a Tax-free Component and a Taxable Component. Your Tax-free Component will consist of the total of any non-concessional contributions made to the Fund or rolled into the Fund. Your Taxable Component is the remainder of your Individual Account.

All contributions received by the Fund must be allocated to a Member’s Individual Account within 28 days of the end of the month in which the contribution was received.

You may have a number of Individual Accounts but at any time only one Individual Account can be in accumulation phase, i.e. receiving contributions and rollovers. Multiple Individual Accounts in pension phase are quite common to assist with estate planning strategies.

The Minimum Amount that you could receive after specific events is equal to the amount in your Individual Account. From this amount will be deducted any exit taxes that are applicable.

When can I receive my benefits

Government preservation rules generally require superannuation money to be held within the superannuation system until your retirement on or after Preservation Age (generally age 55 though it may be later if you are born after 1 July 1960), when you attain age 65, or until your earlier death or permanent incapacity. This means that you will not be able to receive your benefits from this Fund prior to one of these events or on meeting any other condition of release specified under the Superannuation Law.

You may transfer your benefits to another superannuation fund at any time. You may incur costs in making such transfers, and should consider the matter carefully before making any transfers.

What type of benefits can I receive?

Upon your retirement on or after Preservation Age, when you attain age 65, or your earlier death or permanent incapacity, your Individual Account can be payable as a Lump Sum Benefit or a variety of different types of Pensions. It is possible to retain your benefit in the Fund beyond age 65 if you wish. You will still be able to withdraw the amount you became entitled to at any future time.

At your retirement you will be entitled to a Retirement Benefit that may be taken as Account-Based Pension. The Account-Based Pension is a flexible, regular series of payments made from your Individual Account in the Fund. The Account-Based Pension is NOT a guaranteed lifetime pension. It ceases when your account balance is nil, which may be before you die.

At any time after attaining your Preservation Age (generally age 55 though it may be later if you are born after 1 July 1960), you may access your preserved benefits in the form of a Transition to Retirement pension even while you are still working. A Transition to Retirement Pension can be rolled back into an accumulation account at anytime.

What is an account based pension?

You choose the amount of pension you draw from your Individual Account each year, provided that the amount is above any minimum limit set by the Government. The Government sets rules for the minimum amount of pension that you must draw from your account during each year. These limits are calculated by multiplying your Individual Account balance at 1 July by factors based on your age. For the 2012/13 financial year the minimum factor is able to be reduced by 25%.

Age at 1 JulyMinimum Factor
Under age 65 4%
65-74 5%
75-79 6%
80-84 7%
85-89 9%
90-94 11%
95 or more 14%

The pension ceases when your account balance is nil, which may occur before you die. At any point in time you may decide to roll part or all of the balance back into accumulation in a separate Individual Account.

You may organise that on your death, your pension reverts to your spouse or Tax Dependant or for the balance of your Individual Account at that time to be paid to your spouse or another Dependant as a lump sum. Should your Dependants die before you, the balance of your account will be payable to your Legal Personal Representative.

What is a transition to retirement?

You choose the amount of pension you draw from your Individual Account each year, provided that the amount is within the maximum and minimum limits set by the Government. The Government sets rules for the minimum amount and the maximum amount of pension that you can draw from your account during each year. These limits are calculated by multiplying your Individual Account at 1 July by factors based on your age. For the 2012/13 financial year the minimum factor is able to be reduced by 25%.

Age at 1 JulyMinimum FactorMaximum Factor
Under age 65 4% 10%
65-74 5% Not applicable
75-79 6% Not applicable
80-84 7% Not applicable
85-89 9% Not applicable
90-94 11% Not applicable
95 or more 14% Not applicable

Upon your Retirement, Death, Permanent Incapacity or attaining age 65, your Transition to Retirement Pension becomes a fully commutable Account-Based Pension.

The pension ceases when your account balance is nil, which may occur before you die. At any point in time you may decide to roll part or all of the balance back into accumulation in a separate Individual Account.

You may organise that on your death, your pension reverts to your spouse or Tax Dependant or for the balance of your Individual Account at that time to be paid to your spouse or another Dependant as a lump sum. Should your Dependants die before you, the balance of your account will be payable to your Legal Personal Representative.<

Who may get my benefits when I die?

The general rule for superannuation is that Trustees must pay death benefits to Dependants or Legal Personal Representatives of the deceased. For superannuation purposes, Dependants means spouses (including de factos), children of any age and people who had an interdependent relationship with the deceased. Same sex partners may be included as spouses depending on their circumstances.

An interdependent relationship means that the person had a close personal relationship, lived together, and provided or received financial support, domestic support and personal care with the deceased.

When paying the benefit to any person other than the Legal Personal Representative, the Trustee must ensure the appropriate tax is deducted from the benefit.

end faq

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