Increasing in Popularity
There is an increasing demand for Self Managed Superannuation Funds – both from the self employed and an even greater level from people who are employed on a PAYG basis.
There are several reasons for this. A strong level of dissatisfaction with the returns from traditional superannuation funds and the fees charged by some funds along with changes to the SIS Act which enabled people to borrow funds in a Self Managed Superannuation Fund to buy an investment property.
What is a Self Managed Superannuation Fund?
For many Australians, superannuation is one of the biggest investments they will ever have. That’s why most people keep their super money in professionally managed super funds.
However, some people want the hands-on control that comes with a self-managed super fund. Of course, with added control comes added responsibility and workload.
You can set up your own private super fund and manage it yourself, but only under strict rules regulated by the Australian Taxation Office (ATO).
A Self Managed Superannuation Fund can have one to four members.
A Self Managed Superannuation Fund offers many advantages to small business owners and high net worth individuals.
They are usually most cost effective when assets exceed $100,000 and if you are thinking about setting up a fund with assets below this amount, you would need to weigh up the administrative costs in doing this.
Why have a Self Managed Superannuation Fund?
A Self Managed Superannuation Fund would be of interest to you if you prefer to maintain control over your investments rather than leave it in the hands of the institutions and this has a number of advantages.
It provides you with control, flexibility and choice. You get to decide where and when you invest the assets of your Fund – within reason and subject to the relevant legislation and your Trust Deed. It gives you the flexibility to structure the Fund to suit your personal circumstances, e.g. paying a pension.
A Self Managed Superannuation Fund also allows for tax effective savings. Assets you might otherwise hold in your name can be held tax effectively as income and capital gains from a complying superannuation fund. Generally, this income and capital gain is taxed at a maximum rate of 15%, which compares favourably with the alternative of being taxed at the top marginal rate plus the Medicare levy.
A Self Managed Superannuation Fund is ongoing and portable and, regardless of whether you’re employed or self-employed, a self-managed superannuation fund is fully portable and can move from job to job with you.
When can a Self Managed Superannuation Fund borrow funds?
The Trustee of a Self Managed Superannuation Fund is allowed to borrow funds to acquire certain kinds of assets providing that certain conditions are met. These assets include residential property and commercial property.
There are various rules to do with the assets being purchased.
Investments must be for the ‘sole purpose’ of providing retirement benefits for the members of the fund although members, relatives or associates of the trustees must not gain any immediate benefit from the fund’s assets or activities. This prevents any property owned by the fund from being used by the members or their families, even if rented out at a market rental.
Fund investment portfolios can include many of the following investments:
- Cash management accounts
- Term deposits
- Managed funds (Australian and International)
- Listed Australian shares, unit trusts (property, investment) and investment companies
- Overseas listed shares
- Property – residential, commercial and industrial
There are also rules with the loans and Self Managed Superannuation Funds must be set up as “limited recourse” loans where the rights of the lender or any other person against the Trustee of the Self Managed Superannuation Fund trustee is limited to the assets acquired with the borrowed funds.
Self Managed Superannuation Fund Loans
Loans to Trustees of Self Managed Superannuation Funds are usually available as both Variable Rate and Fixed Rate Loans.
These work the same way as “normal” home loans where having a Fixed Rate means that you will know exactly what your interest rate will be for the nominated Fixed Rate period – which is usually for 2 – 5 years but can be as long as 15 years with some lenders! With variable rates, the interest that you have to pay will vary from time to time in line with movements in the variable rate offered by the lender.
Traditionally, rates only varied in line with changes in the Official Cash Rate set by the Reserve Bank but over the last couple of years, lenders have changed variable rates independently of the Reserve Bank.
Some lenders will also allow for a loan to be set up with an Interest Only period where you are only meeting the interest that is due each month and not reducing the principal at all. The repayments on this basis are lower than they would be if they were Principal & Interest repayments.
There are also guidelines on the size of the loan that is available (usually between $100,000 and up to $750,000 0r more), a maximum loan term of 30 years and a maximum value of 80% of the value of the property although these do vary from lender to lender.
