Please be aware that there have been a number of recent changes to the superannuation system, announced by the Government in the 2016–17 Budget, which have now been legislated. Most of these changes will commence from 1 July 2017. As a result, the below information is only valid until 30 June 2017. We will be updating the below information in July 2017 to reflect the new information.
In the meantime, if you require more information on these changes, or on the rules which apply from 1 July 2017, we recommend that you read the ATO summary here.
- What are SMSFs
- Trustees of the SMSF
- Payment of benefits
- Planning for the future
What are SMSFs
A SMSF is a superannuation fund with 4 or less members. Each member must be a trustee of the SMSF, or a director of a corporate trustee of the SMSF. The trustees of the SMSF are ultimately responsible for managing the SMSF.
SMSFs are unique superannuation funds as the members, in their capacity as trustees of the SMSF, have direct control over the investment and management decisions of the SMSF. As a result, with a SMSF you can truly take control of your own superannuation.
To qualify as a SMSF, no member can be an employee of another member, unless they are related and no trustee, or director of the corporate trustee, can be paid for their duties or services as a trustee, or director of the corporate trustee, of the SMSF.
In addition, for your SMSF to receive tax concessions, it must be an Australian superannuation fund. Generally your SMSF will meet the Australian residency requirements if it is established in Australia and all of the trustees reside in Australia. If any trustee or member of your SMSF is planning to live or stay overseas for an extended period, we suggest you seek professional advice immediately to determine if your SMSF will remain an Australian superannuation fund.
A SMSF must at all times be maintained solely for the purpose of providing benefits to the:
- SMSF members on or after their retirement;
- SMSF members after their attainment of the prescribed age of 65; or
- member’s dependants or legal personal representative on or after the death of a member.
Trustees of the SMSF
The trustees, or directors of a corporate trustee, are in charge of managing the SMSF and are ultimately responsible for the decisions of an SMSF.
Types of trustees
You can choose either of the following:
- a corporate trustee; or
- up to four individual trustees.
A corporate trustee is a company that acts as a trustee for the SMSF. Generally, all directors of the corporate trustee must be members of your SMSF and all members must be directors of the corporate trustee. If you already have a company, you may choose to use it as the corporate trustee. Otherwise Online Super Fund can incorporate a corporate trustee for your SMSF for a one-off fee of $570 (which includes the company registration fee of $463 payable to ASIC). A corporate trustee is beneficial in that members and directors can be removed and replaced without having to remove the company as trustee or change the trustee name that all of the investments of the SMSF are held under.
If you choose individual trustees, each individual will act as trustee and will be responsible for the decision making of the SMSF. You must have at least 2 individual trustees. Generally all individual trustees must be members of the SMSF and all members must be individual trustees. While it does not cost anything initially to elect individual trustees, it can potentially be more difficult, and more costly, in the future if the individual trustees change – as the SMSF trust deed will need to be varied and all of the investments of the SMSF will need to be transferred to the new trustee.
When making your decision, we recommend you consider the benefits and costs of each type of trustee structure for your specific circumstances.
Single member SMSFs
You can set up your SMSF with only one member.
If you have a corporate trustee for a single member SMSF, the member must be either:
- the sole director of the corporate trustee; or
- one of only two directors, that is either:
- related to the other director; or
- not an employee of the other director.
If you choose not to have a corporate trustee, your SMSF must have two individual trustees. One trustee must be the member and the other trustee must be a person who is either:
- related to the member; or
- not an employer of the member.
In most cases, all members of the SMSF must be trustees, so it’s important to make sure all members are eligible to be a trustee.
Generally, anyone who is 18 years of age or over and is not under a legal disability (such as bankruptcy or mental impairment) or a disqualified person can be a trustee of a SMSF.
A person is disqualified from acting as trustee if any of the following apply, they:
- have been convicted of an offence involving dishonesty;
- have been subject to a civil penalty order under the super laws;
- are considered insolvent under administration;
- are an undischarged bankrupt; or
- have been disqualified by a regulator (for example, by ATO or APRA).
A company cannot be a trustee if any of the following apply:
- the responsible officer of the company (such as a director, secretary or executive officer) is a disqualified person;
- a receiver, official manager or provisional liquidator has been appointed to the company; or
- action has commenced to wind up the company.
While members under 18 years of age cannot be a trustee of a SMSF, a parent or guardian of a minor who does not have a legal personal representative can act as a trustee on the minor’s behalf.
A contribution is a payment made to your SMSF in the form of money or an asset other than money transferred into your SMSF (an ‘in specie’ contribution). Provided the governing rules of your SMSF allow it, your SMSF can generally accept:
- employer contributions;
- personal contributions;
- salary sacrifice contributions;
- super co-contributions; or
- eligible spouse contributions.
Subject to the SMSFs governing rules, your SMSF may only accept contributions as follows:
If the member is under 65:
- any contributions made in respect of the member.
If the member is not under 65, but is under 70:
- mandated employer contributions; or
- where the member has been gainfully employed on at least a part-time basis during the financial year, any member or employer contributions.
If the member is not under 70, but is under 75:
- mandated employer contributions; or
- where the member has been gainfully employed on at least a part-time basis during the financial year, member contributions made by the member or employer contributions.
If the member is not under 75
- mandated employer contributions.
In specie contributions
In specie contributions are contributions to your SMSF in the form of an asset, rather than money or cash.
Generally, you can’t intentionally acquire assets (including in specie contributions) from related parties of your SMSF. However, there are some exceptions to this rule, such as listed securities and business real property acquired at market value.
Contribution caps apply to contributions made for a member in a financial year. Excess contributions tax is generally payable on any contributions in excess of the contribution caps. There are different caps for:
- concessional contributions – such as employer contributions and personal contributions for which an income tax deduction has been claimed; and
- non-concessional contributions – such as personal contributions for which an income tax deduction has not been claimed.
The contribution caps are as follows:
Concessional Contribution Cap
|Up to age 49||$30,000||$30,000|
|Aged 49 and over||$35,000||$35,000|
|Tax on amounts over the cap||30% plus Medicare levy (in addition to the 15% by the SMSF)|
Non-concessional Contribution Cap
|2015-16, 2016-17||‘Bring forward’ available|
|Under age 65||$180,000||Yes, up to 3 years ($540,000)|
|Aged 65 and over||$180,000||No|
|Tax on amounts over the cap||45% plus Medicare levy|
Any contributions in excess of the concessional contributions cap will be applied against the non-concessional contributions cap
People under 65 years old may be able to make non-concessional contributions of up to three times their non-concessional contributions cap over a three-year period. This is known as the ‘bring-forward’ option.
Rollovers and transfers
Once your SMSF is established, a member can rollover or transfer some or all of their existing super benefits into the SMSF.
Online Super Fund will provide a template rollover form which you can use if you wish to roll over your superannuation benefits to your SMSF. You may also need to meet the requirements of the fund you are leaving before the rollover is processed.
Rollovers between superannuation funds are generally not treated as contributions to the SMSF, and so are not subject to the contribution caps.
The trustee must formulate and give effect to one or more investment strategies that have regard to the whole of the circumstances of the SMSF including:
- the risk involved in making, holding and realising, and the likely return from, the SMSF’s investments having regard to the SMSF’s objectives and expected cash flow requirements;
- the composition of the SMSF’s investments as a whole including the extent to which the investments are diverse or involve the SMSF being exposed to risks from inadequate diversification;
- the liquidity of the SMSF’s investments having regard to its expected cash flow requirements;
- the ability of the SMSF to discharge its existing and prospective liabilities; and
- whether the trustees of the SMSF should hold a contract of insurance that provides insurance cover for one or more members of the SMSF.
The trustee must review the investment strategies of the SMSF on a regular basis and may amend those strategies at any time. If an investment strategy is amended, the trustee must provide written notice of the amendments to all members.
Restrictions on investments
Superannuation law places certain restrictions on investments made by a trustee of a superannuation fund, including the following:
- Investments made by the SMSF must be made on an arm’s length terms;
- Acquisitions of assets from related parties of the SMSF (including members of the SMSF, their relatives and the companies they control) are prohibited except in limited circumstances;
- The SMSF must not lend the SMSF’s money, or give any other financial assistance using the resources of the SMSF, to a member or a relative of a member; and
- The borrowing of money is prohibited except in limited circumstances (including the borrowing of money to pay for an instalment warrant and certain limited recourse borrowing arrangements).
A failure to comply with the above restrictions can result in penalties and fines being imposed on the trustee of the SMSF. Accordingly, the trustee of the SMSF should obtain professional advice if there is any uncertainty over whether an investment complies with the applicable superannuation laws.
Payment of benefits
Paying super benefits to members
A member can only access all or part of their super benefits if they satisfy one of the conditions of release specified by superannuation law.
If you have satisfied a condition of release and your SMSF’s governing rules allow it, you can generally pay a super benefit as:
- a lump sum;
- an income stream (pension or annuity); or
- a combination of both.
It’s possible for your SMSF to pay super benefits and still have members contributing to it.
Minimum pension standards
The pensions you pay must satisfy all of the following requirements:
- The pension must be account-based, except in limited circumstances;
- You must pay a minimum amount at least annually;
- You cannot increase the capital supporting the pension using contributions or rollover amounts once the pension has started;
- A pension being paid to a member who dies can only be transferred to a dependant or beneficiary of that member;
- You cannot use the capital value of the pension or the income from it as security for borrowing; and
- Before you can commute a pension, you must pay a minimum amount in certain circumstances.
Minimum annual payment
You must pay a minimum amount each year to a member from that member’s pension account.
The minimum amount is worked out by multiplying the member’s pension account balance by a percentage factor. The amount is rounded to the nearest 10 whole dollars.
The following table shows the relevant percentage factor based on the member’s age.
|Age||Standard minimum withdrawal %|
|65 – 74||5%|
|75 – 79||6%|
|80 – 84||7%|
|85 – 89||9%|
|90 – 94||11%|
|95 or more||14%|
Tax exemption available
The income that a complying SMSF earns from assets which are held to provide pensions is exempt from income tax. This is referred to as exempt current pension income (ECPI). The ECPI exemption can be claimed by all complying SMSFs currently paying super income stream benefits.
If your SMSF pays a pension during a year and also has an accumulation balance, you may need to obtain an actuarial certificate to calculate the ECPI.
Complying superannuation funds receive concessional tax treatment. The following is a general summary of the taxes payable on your superannuation.
Taxation of superannuation can be complex and we recommend that you obtain professional tax advice if you are unsure about how the current taxation regime applies to your own personal circumstances.
Concessional contributions are all contributions for which a tax deduction has been claimed. Generally, concessional contributions are taxed in the SMSF at 15%. However, if you earn income of more than $300,000 tax may be payable at 30% on some or all of your concessional contributions.
If you exceed your concessional contributions cap for a financial year, an additional tax of 30% (plus Medicare levy) may be payable on the excess contributions. See above for the applicable concessional contribution caps.
Any concessional contributions which exceed your concessional contributions cap will be applied to your non-concessional contributions cap, and could potentially incur a further 45% (plus Medicare levy) excess contributions tax if that amount exceeds or causes you to exceed your non-concessional contributions cap.
Non-concessional contributions include all contributions made from your after-tax income. As tax has already been paid on these contributions, non-concessional contributions are not taxed when they are contributed unless you exceed your non-concessional contributions cap.
If you exceed your non-concessional contributions cap for a financial year, an additional tax of 45% (plus Medicare levy) may be payable on the excess contributions. See above for the applicable non-concessional contribution caps.
Members who are under 65 years of age may bring-forward two years’ of non-concessional contributions and may therefore make up to $540,000 in non-concessional contributions over a three year period without being liable for excess contributions tax.
Earnings on investments in the SMSF are taxed at a rate of 15%. The effective tax rate may be less than 15% if there are capital gains tax concessions, tax deductions or tax offsets available to the SMSF. Any non-arm’s length income could be considered special income by the ATO and taxed at 45%.
No tax is payable on the earnings of investments which support a pension.
The tax payable on withdrawals from the SMSF will depend on your age, the type of benefit that is withdrawn, the form in which the benefit is paid (i.e. lump sum or income stream) and the components of your benefit (i.e. tax-free or taxable).
All benefits will have a taxable and/or a tax-free component, which is generally dependent on whether the amount has been taxed within the SMSF. For example concessional contributions are taxed on the way into the SMSF and will form part of the taxable component, while non-concessional contributions are not taxed on the way into the SMSF and therefore form part of the tax-free component.
Generally, no tax is payable on the tax-free component of a benefit while the taxable component of a benefit will be taxed depending on how the benefit is paid (i.e. as a lump sum or income stream).
Below is a summary of how the taxable component of a lump sum benefit is taxed.
Income component derived in the income year
Age at the date payment is received
Amount subject to tax
Maximum rate of tax (excluding Medicare levy)
|Member benefit – taxable component – taxed element||Under preservation age||Whole amount||20%|
|At or above preservation age and under 60||Amount up to the low rate cap amount [$195,000 for the 2017 financial year]||Nil|
|Amount above the low rate cap amount [$195,000 for the 2017 financial year]||15%|
|Aged 60 or above||Nil||Nil|
|Death benefit lump sum benefit paid to non-dependants – taxable component – taxed element||Any||Whole amount||15%|
|Death benefit lump sum benefit paid to dependents – taxable component – taxed element||Any||Nil||Nil|
Below is a summary of the tax payable on the taxable component of a benefit that is paid as an income stream.
Age of recipient
Applicable tax rate
|Age 60 or above||Nil|
|At or above preservation age and under 60||Marginal tax rate of the recipient. Tax offset of 15% is available|
|Under preservation age||Marginal tax rate of the recipient. Generally no tax offset is available unless the benefit is a ‘disability super benefit’.|
Planning for the future
Setting up an SMSF is about more than just organising the paperwork to get started – it’s about planning for the future. We recommend you, and the SMSF’s members, consider things such as death benefit nominations and insurance.
Death benefit nominations
A death benefit is a payment made from a super fund on the death of a member. It’s usually paid to either:
- one or more of the member’s dependants (such as a spouse or child); or
- their estate.
In some cases, it may be paid to a non-dependant.
If the SMSF’s trust deed permits, a member can nominate who they want their death benefit paid to, by way of a death benefit nomination.
A death benefit nomination is a notice given to the trustees setting out who to pay the death benefit to and in what proportion. It is either:
- binding – it directs the trustees to pay the member’s death benefit to a legal personal representative or dependant; or
- non-binding – it notifies the trustees of the member’s preferred beneficiaries, leaving the trustees to make the final decision.
If your SMSF does not have a valid binding nomination for a member, their death benefit is paid according to the SMSF’s trust deed, with the trustees being guided, as appropriate, by any non-binding nomination.
You should also consider arranging insurance to protect your SMSF’s members (or their dependants) against death, injury, ill-health or income loss. Insurance premiums your SMSF pays may be tax deductible. We recommend you seek professional financial advice to help you with this decision.