Setting up and managing your own superannuation sounds like a great idea – a self-managed fund can give you the flexibility to control where your retirement savings are invested.
Although the money is locked away until you retire, the superfund can help you to build wealth – through shares, fixed interest investments or property, for example.
But BEWARE! Self Managed Super Funds (SMSFs) are heavily regulated by the Australian Taxation Office. There are hundreds of rules that you must comply with or risk the wrath of the ATO.
The ATO is worried people are using their SMSFs to invest in real estate without fully understanding their obligations under the law, and that some people are deliberately trying to get around the law.
“[That] can result in the fund’s trustees being disqualified, facing civil penalties or even facing criminal charges,” the ATO says.
Some arrangements, if structured incorrectly, can’t be restructured or rectified, he warns.
“The only option may be to unwind the arrangement, which could involve forced sale of assets at an inconvenient time. This could be very expensive for the fund with potential stamp duty and tax consequences.”
What you should (and shouldn’t) do:
- Make sure your arrangements are legal and always seek professional advice if in doubt.
- If you’re using borrowed money to buy a property through your SMSF, make sure you have established a holding trust by the time the purchasing contracts are signed. A property with debt must be held in a trust inside the fund, even though that might mean incurring extra set-up costs. Also, make sure the property is held in the name of the holding trust’s trustee, not the individual member’s name.
- Don’t borrow money to pay for improvements or renovations to a property held inside the SMSF. The ATO will not allow that. This is an understandably unpopular situation and industry participants are pressuring the ATO to change this rule, but for now, that is how the rules stand.
- Do not purchase residential property or unlisted shares through the SMSF, from someone related to you. That means your spouse, family members or business partners – even if the transaction is supported by a registered valuation. However please note that it may be that you are allowed to buy commercial property or listed shares from a related party.
- Make sure your SMSF has no more than four members – even though that might mean you have to leave family members out of the fund.
- Make sure the fund’s trust deed is up to date.
- Obtain advice if in doubt.