Call us on 1300 794 893

Your Money

What are the rules governing SMSFs?

| More

I am unhappy with the returns out of my retail super fund and so I’m thinking of starting a self-managed super fund so I can load up on property reducing my exposure to stocks. What do you think about that? And I would like to buy a holiday cottage but a friend says that is not possible under the rules of a SMSF. Is that right? Are there many annoying rules with a SMSF?

Let’s start with the rules first and, yes, there are rules but they’re not meant to annoy you. Instead, they’re meant to help you run the SMSF professionally and within the law.

There are many big and small rules but the biggies you really have to understand are:

  • The sole purpose test
  • Understanding the trust deed
  • Record keeping
  • Correct contributions behaviour
  • Investing properly
  • Separating funds
  • Paying benefits properly
  • Borrowing rules
  • Auditing
  • Handling contraventions according to the book.

It sounds like a lot of rules but most SMSF trustees are able to keep the rules without much time consumption, cost and significant administration issues.

The rule that’s relevant for your holiday cottage, which incidentally is buyable inside a SMSF, is the sole purpose test. You, the trustee/s, have to ensure any transactions, let’s call them investments, are made for the sole purpose of providing benefits (money) for retirement once the relevant preservation age occurs, death happens or a work-stopping injury comes about.

Financial hardship can also help you access your super early too. This means if you buy a holiday cottage at a beach to use it when it cannot be let out, then you’re breaching the sole purpose test. If you buy the same cottage to rent it out 52 weeks of the year at the best rent possible and because it will return six to seven per cent or more per annum, then this is a wise investment for the super fund and you have not breached the sole purpose test.

It’s a test to make you stick to the purpose of a super fund, that is, providing retirement benefits. Effectively, if a trustee gets an immediate benefit by using the house when it isn’t being rented, it most undoubtedly is breaking the sole purpose test. I’m sure some people do this but if they got caught it could make their fund non-compliant and the tax office could re-tax the fund at the top tax rate. There also could be penalties.

On whether it’s a good super strategy to go long property, it does depend on the wisdom of your investments. You should keep some liquidity in your super fund and shares are easily convertible to cash but that said, if you can rack up acceptable returns in property it could constitute a good strategy for a minority of trustees. As an adviser I don’t mind if clients have exposure to direct property inside their super funds but I like a nice balance of assets in the portfolio.

For advice you can trust book a complimentary first appointment with Switzer Financial Planning today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Published on: Friday, April 13, 2012

The Switzer Super Report is a newsletter and website for self managed super funds. With exclusive commentary from Peter Switzer, Roger Montgomery, Paul Rickard and Charlie Aitken the Switzer Super Report will help you maximise your after tax investment returns and grow your DIY Super. Click here for a free trial or subscribe today.

Related articles

Super changes in the Budget

Segregation anxiety – how to split assets

Is your business prepared for MySuper come 1 January?

Is it time to fix now?

Can I access my super without retiring?

blog comments powered by Disqus
Pixel_admin_thumb_300x300 Pixel_admin_thumb_300x300 Pixel_admin_thumb_300x300