SMSF top 10 questions
Get the maximum benefit from your nest egg by following our experts’ advice on a range of key questions
Can I transfer investments I already own into my self-managed super fund and if so how?
SMSF members have the valuable flexibility of being able to accept in-specie transfers. While residential property cannot be transferred into an SMSF, listed shares and certain business premises you already own personally can be (subject to contribution limits and capital gains). You may choose to house all your investments in an SMSF to improve admin efficiency or potentially access the favourable tax environment. With a maximum 15% tax rate, 10% on capital gains if held for at least 12 months and no tax on amounts up to $1.6 million in retirement phase, this will allow a part or full refund of franking credits – a very attractive prospect for share investors. If the barrier to moving your shares is the CGT at the point of transfer, check out the little known contribution reserving strategy, which may help to offset the bill. NERIDA COLE
do I borrow money to invest in property via my SMSF and what is the maximum amount?
The purchase of property by an SMSF using borrowed money is called a limited recourse borrowing arrangement (LRBA). Generally, an SMSF is prohibiting from borrowing money unless certain conditions in section 67A of the SIS Act are satisfied. The SMSF will need to set up a custodian (preferably a company) to hold title to the property while there is a loan. It will need to ensure that the relevant documents are prepared to record that the custodian will hold the property on trust for the SMSF.
The SIS Act does not set a limit on the amount an SMSF can borrow for a LRBA. However, banks will generally lend no more than 70% of the purchase price for real property and the tax office’s so-called “safe harbour guidelines” confirm this approach.
If the lender is a related party, while in theory there is no limit on what they can advance to the fund, section 109 of the Act requires related parties to deal with each other as if the parties were unrelated. If related parties do not deal with each other at arm’s length, there is a risk that the income generated by the asset may be considered non-arm’s-length income by the ATO. If this is the case, the SMSF’s income from the asset will be subject to the highest marginal tax rate. NATASHA NG
My wife and I have an SMSF, but if one of us dies it will mean the remaining person will exceed the $1.6 million cap. What would we have to do?
You have a couple of choices. You can keep a combination up to the $1.6 million cap in pension phase and withdraw the rest as a death benefit into the survivor’s own name, or a more likely strategy will be to commute enough of the survivor’s pension back to accumulation so they can accept the death benefit as a pension. This way you keep more of the funds in the superannuation system with its maximum 15% tax rate. A reversionary pension is recommended for those seeking to use this strategy as this gives you 12 months from the date of death to implement the strategy. LIAM SHORTE
Can I lend money to a family member using funds from my SMSF? If yes, what are the rules and how can I do it?
No, under the superannuation investment rules, lending to a member of an SMSF or a relative of a member of an SMSF is prohibited. A “relative” is defined as being a parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child of the member or their spouse (including same sex or de-facto spouses).
However, under the superannuation investment rules, it may be possible for an SMSF to lend up to 5% of the market value of its assets to a “related party” of the SMSF member. The definition of a related party is quite complex but could include a related company or a related trust. The loan would be treated as an “in-house asset” of the SMSF. An SMSF is not permitted to invest more than 5% of the market value of its assets in in-house assets. An in-house asset is generally defined as a loan to or an investment in a related party of the SMSF. ANDREW YEE
At what age can I add my children to my SMSF? Also can I put $1000 for my children into super each year and will they get the $500 co-contribution?
Children under the age of 18 can be added as members of an SMSF. One of the critical requirements of SMSFs is that all members of the fund must be a trustee or a director of the trustee company. If a minor is added as a member, they will need to have an adult appointed as trustee on their behalf (this can be one of the existing members of the SMSF).
The non-concessional contribution of $1000 to qualify for the government co-contribution must come from the member themselves and at least 10% of their income needs to be derived from working. ANDREW ZBIK
Can I renovate a property owned by an SMSF?
If a property is acquired by the SMSF by way of borrowed money, there are a number of restrictions that apply. The SMSF is permitted to carry out “repairs” and “maintenance” and “improve” the asset. However, any improvements cannot change the character of the asset so that it is no longer considered a “single acquirable asset”.
The ATO has provided a ruling that sets out a table of examples on the differences between repairs, maintenance and improvements. Whether or not such a renovation is permitted while the property is subject to a limited recourse borrowing arrangement depends on the facts and nature of the changes to be made.
If in doubt, it is best to obtain a formal advice because if a trustee breaches these rules then an administrative penalty of $10,800 per trustee could potentially apply or the SMSF may be forced to end the arrangement.
If the SMSF owns the property outright
(ie, has never borrowed to purchase it, or once the loan has been repaid and the asset is transferred to the SMSF) any kind of renovations are permitted. NATASHA NG
I am setting up a second SMSF and would like to roll over part of the member balances. Can I do this and will it trigger CGT?
Yes, you may roll over some or all of your balance from one SMSF to another SMSF, similar to transferring superannuation benefits from a public offer fund to an SMSF and vice versa. You may roll over cash and it is also possible to roll over certain assets between SMSFs, such as listed shares or business real property.
Transferring cash between SMSFs will not trigger a capital gains tax liability. However, if the rollover was effected by the transfer of an asset from one SMSF to the other SMSF, then this would constitute a change of ownership of the asset and as such a CGT event would arise. Similarly, if you needed to sell SMSF assets to provide cash for the rollover, then a CGT event would also be triggered. However, there may be no CGT on the sale of the asset. It would depend on whether or not the SMSF was in pension phase at the time of the sale of the asset. ANDREW YEE
Can I use my SMSF to buy a business?
A key principle of an SMSF is that it must always meet the sole purpose test, which requires it is to invest in assets to provide an account-based pension in retirement. Thus an SMSF cannot carry on a business, as this would be contrary to the sole purpose test.
Another scenario is if you own a business outside your SMSF, can your SMSF also own a part of that business? Let the walk through the minefield begin.
First, as a member and trustee of an SMSF, you are considered a “related party” of that SMSF. Thus there are restrictions on what assets it can buy from you. For example, an SMSF cannot buy residential property from a related party but it can buy shares that are listed on the stock exchange from a related party. The SIS Act permits an SMSF to own shares in a private company that you also own.
Now enter the second minefield. As this private company is owned by a related party to the SMSF, it is now called an “in-house” asset. This is because there is a deemed potential conflict in your SMSF owning part of the same asset that you personally may own. (This also includes shares in a private company that may be held through a family trust.)
The SIS Act states that an SMSF cannot have more than 5% of its assets invested in an in-house asset.
Practicably, let’s say you own a private business worth $300,000 and your SMSF has $750,000 in assets. Your SMSF cannot own shares worth more than $37,500 (or 5% of the fund’s value) in your private company. The shares in the private company must be purchased at their true market value.
Fast-forward one year: if the value of your business increases by 10% and this shareholding in the private business is now worth $41,250, what happens if the other assets of the fund remain steady in value? If the $41,250 shareholding in the private company now makes up 5.47% of the fund’s value, you are required to sell some of those shares to get the holding of the “in-house” asset back under 5% of the SMSF’s total assets. Very complicated. Personally, I have not recommended this strategy to a client as I do not think it is worth the risk and hassle of your SMSF being deemed non-complying. Non-complying SMSFs pay tax at the top marginal tax rate based on the assets in the fund. ANDREW ZBIK
How can I move my SMSF to retirement phase?
Super is restricted from access and from converting to the tax-free retirement phase until you reach preservation age (between 56 and 59) and meet the requirements for a condition of release. For those between 56 and 59, you can meet a condition of release by declaring that you have retired from gainful employment and that in the future you do not intend to seek work that is more than 10 hours a week. From 60, you have an additional option to meet a condition of release simply by ceasing an employment arrangement. Otherwise, once you hit age 65 you automatically meet a condition of release, regardless of your work status. At that point, you can move up to $1.6 million from an accumulation or transition to retirement pension account into the tax-free retirement phase. Most SMSF administrators can assist trustees in doing this by providing the required declarations and trustee minutes. Check if fees apply. NERIDA COLE
Can I transfer my existing insurance to my SMSF? And can I claim a tax deduction for income protection in my SMSF?
You cannot transfer the ownership of life insurance policies into your SMSF but many insurers offer “takeover terms” if you choose to replace existing retail or super fund life insurance cover with a policy owned by the SMSF. They will often match the existing cover and underwriting conditions of your life and TPD insurance up to a certain limit, such as $1.5 million and up to $15,000 a month of income protection insurance.
It is essential that you do not cancel existing covers until you have 100% confirmation that the replacement policy has been accepted and is on cover.
Only the SMSF can claim a tax deduction for policies held in its name and, as its maximum tax rate is 15%, the deduction is restricted to this amount as well. As a result, income protection cover is usually more tax effective outside superannuation and more flexible in terms of cover available. LIAM SHORTE