Over one million Australians have chosen to self-manage their superannuation funds, believed to be worth over $550 billion. For those first starting out with their SMSF, there are a lot of questions surrounding how they work and what limitations are in place with SMSF investment.

The ATO are firm with Self-Managed Super Funds, insisting that SMSF members and fund administrator adhere to what they term their “Three R’s”, which are:

  • Responsibility
  • Related party transactions
  • Rules

Ultimately the ATO want to ensure that all SMSF financial transactions are being conducted responsibly to serve the best financial interest of the fund and its members, that transactions are not being conducted with fund members relatives, and that all the transactions are meeting the established rules.

What do people most want to know about managing their SMSF?

Can an SMSF borrow money?
While a fund can borrow money, it can only do so in very limited circumstances. The ATO advise that this can only be done when:

  • Borrowing money to meet benefit payments due to members or to meet an outstanding surcharge liability. In this instance, money can only be borrowed for a maximum of 90 days. Any money borrowed cannot eceed 10% of your fund’s total assets)
  • Borrowing money to cover the settlement of security transactions. This is only permitted if it was unlikely that borrowing would be required when entering into the transaction. Money borrowed in this manner can only be done so for a maximum of seven days.
  • Borrowing using instalment warrants or limited recourse borrowing arrangements that meet certain conditions.

Can an SMSF lend money?
The ATO advise that an SMSF is able to lend money, but any money loaned cannot be to a fund member or any other related parties. Any loan made must serve members’ best interests, while complying with your investment strategy. The ATO do warn that a fund that doesn’t comply with their investment restrictions may face penalties that include disqualification from serving as a trustee and possible prosecution.

Can an SMSF buy residential property?
An SMSF is permitted to buy any type of asset cited within the superannuation law. This includes both residential and commercial property. The property must meet the sole-purpose test of providing retirement benefits to fund members, or a benefit to their dependants if a member dies before retirement.

For those looking to buy an off-the-plan property, SMSF investors have been warned that they may be hit hard financially if they borrowed money to invest. Many of these investors are believed to have paid greater than market value in exchange for incentives offered by the seller (such as 12 months guaranteed rental income).

Can I live in my SMSF property?
Short answer: No.

While you are allowed to invest in residential property, you cannot buy the property from a related party of a member. This means that you cannot purchase your family home through your self-managed superannuation fund. You also can’t rent a residential property owned by your SMSF to fund members or to any related parties of those fund members. So, this means that you also can’t rent a property to your kids or common law partners.

You can, however, purchase commercial property that also serve as your business premises through your SMSF. The property must still provide retirement benefits to its members.

Can an SMSF buy land?
An SMSF can buy land, but there are similar restrictions in place as to the purchase of a property for a residential or commercial property. The land being purchased is not allowed to have a mark against it, such as a bank loan.

The purchase of land must remain consistent with the stated investment strategy of the fund and is subject to the rules surrounding the purchase of a commercial or residential property once construction begins on the land. The purchased land must also not be bought from a related party to the SMSF fund member.

It is advisable that the purchase of land is not a regular occurance for a DIY Super fund as that may be seen as violating the ‘sole-purpose’ test.

ARE SMSF formation costs deductable?

Due to the capital nature of SMSF establishment costs,they are not deductible or able to be amortised over a defined life.

Can an SMSF invest in overseas shares?
As long as the SMSF fund is abiding by the “Three R’s”, there are very few areas that an SMSF is not able to invest in. Overseas share investments are allowed, just as an SMSF is able to invest within the local sharemarket. The biggest concern is with foreign currency risk.

Similarly, a SMSF is also able to invest in overseas property. Be aware that this is subject to the laws in that country and how much foreign investment is permitted and whether an SMSF is permitted to hold land in that country.

Can an SMSF register for GST?
If your SMSF is conducting business, you must register for GST if your GST turnover is $75,000 or more. Most SMSF’s, however, do not have to register for GST as they primarily make input taxed sales. Further information on GST credits, financial supplies, and the acquisitions threshold can be found on the ATO website.

Are SMSF’s regulated?
The Australian Taxation Office is the principal regulator of Self Managed Superannuation Funds with the Australian Prudential Regulation Authority (APRA) and Australian Securities and Investments Commission (ASIC) also taking on a regulatory role.

These regulated superannuation funds are subject to prudential supervision under the Superannuation Industry (Supervision) Act 1993 (SISA).

What happens when an SMSF member dies?
Following the death of a SMSF member, a death benefit to a dependant or other beneficiary of the deceased should be made. This payment should be made as soon as possible after the member’s death.

If the beneficiary of the deceased member is a dependant, the death benefit can either be paid as a lump sum or as an ongoing income stream. Beneficiaries who are not dependants of the deceased must have the death benefit paid as a lump sum.* * * *

This guide does not constitute professional advice in any way, please speak to your accountant or advisor for specific SMSF and financial enquires.