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How does SMSF work?

Discussion in 'Accounting & Tax' started by Sonamic, 29th Jun, 2015.

  1. Sonamic

    Sonamic Well-Known Member

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    Can somebody briefly explain how SMSF works? Please.

    Pros and cons?
     
  2. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    Really. Easier Q is to explain tax law.
     
    marty998 and Terry_w like this.
  3. Sonamic

    Sonamic Well-Known Member

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    I see. Thanks for the input.
     
  4. Redwood

    Redwood Well-Known Member

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    Hi there,

    Trick question? everyday I talk to numerous clients on the risks and benefits of SMSFs to determine if an SMSF is right for you.

    Benefits:
    - Choice & flexibility to invest where YOU WANT
    - Tax advantages with concessional tax rates of 15% in accumulation and potentially no tax in retirement
    - Can invest in direct real estate or choose which investment you would like to buy

    Disadvantages:
    - Highly regulated
    - Admin costs (improving)
    - Compliance requirements

    There are over 500k SMSF and over 1m members, its growing with nearly $600b in investments.

    How it works?

    Well, simple, seek advice or research on the net or shop around, and choose your structure (Corporate trustee is a must), consider your insurance and investment strategy and if SMSF is suitable then proceed. Rollover your super and invest away and watch the retirement nest egg grow.

    Generally Admin providers set up the SMSF quickly and you can have an ABN same day as well as bank account. Rollovers can be processed same day and generally in the bank account within 2 weeks. During this time, you sign your establishment docs, review your strategy and implement your strategy i.e choose a property, obtain a pre-approval for a loan to determine you borrowing power or buy shares etc.

    From there invest and watch your nest egg grow. Remember to use the wonderful strategies such as concessional and non concessional contributions as well as the advantages for small business such as purchasing commercial property and running your business from the property and renting the property to your business....

    Sound good?

    Cheers

    Ivan
     
  5. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    A SMSF may also lack any prudential protection and lead to enhanced risk even total loss of member benefits. A SMSF recommendation MUST come from one of two sources:
    - A member blindly making their own decision; OR
    - Seeking advice from a licensed financial adviser. This opinion must take far more into consideration. eg life insurance, needs, risk assessment etc....

    Beware of those who solely suggest a SMSF is a perfect solution. It may be. It also may not be. There are many spruikers recommending a SMSF for property.

    A good start point is the ATO website under the super tab. They have some terrific introductory info.
     
  6. D.T.

    D.T. Adelaide Property Manager Business Member

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    @Redwood one of the cons missing from your list was age of access. This deters me greatly.
     
  7. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    Also consider that another member of your SMSF (who would be trustee or director also) could take out all the funds (including your balance) and flee to Turkey. Happens sometimes when relationships breakdown.
     
  8. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    But if you know it is coming you could factor it in to retirement plans. e.g. draw down more capital now as you know (??) you will get access to super in x years.

    I guess you won't 'know' because the rules keep changing.
     
  9. MikeLivingTheDream

    MikeLivingTheDream BCOM MCOM MTAX CPA CTA Registered Tax Agent

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    Better to flee to greece at the moment. Goods and services will be very cheap soon.
     
  10. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    That is not a SMSF issue. Its same rules for all funds.
    A SMSF may use strategies to address member difference in age so that the older member accesses a govt pension before time while super is preserved in a tax free manner for the younger member spouse.
     
  11. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    My previous post has me thinking of some of the issues a SMSF can benefit that even some industry funds and public offer funds cant do:

    - Contain pension and accumulation accounts. Most industry funds generally cant do this. They have a accumulation fund and a separate pension fund. If you want to move from one to other they force you to sell down all CGT assets and trigger CGT !!! in the accumulation fund (so you pay tax). A SMSF doesn't need to do this and can avoid the accumulated CGT issue and pay zero tax.

    - My bugbear. The default investment strategy "mandate" problem. You have (say) an industry fund and choose the growth option. Lets just say it has a requirement for 25% Int shares and 50% ASX listed and balance cash. A market crash happens. Market does a GFC and drops 60%...What does the fund manager do ?? They follow the default strategy and HOLD the shares that fell...The strategy mandates 75% shares and they keep holding them. They cant sell down the shares and go to cash. the strategy doesn't allow them to do this. Do they tell members to run to cash ? No. They add to misery.

    - Estate planning nominations in a SMSF don't have to follow the formal rules..ie don't lapse after three years, no witnessing etc. Very functional and flexible tools such as a SMSF will could be used.

    - Buy direct property chosen by members for their specific segregated benefit if they want

    - Borrow to buy specific assets such as property.

    - Member by member specific investment strategy if they choose.

    - Acquire a interest in a non-geared unit trust and co-invest with member/s or other related parties who can neg gear their portion

    - No lies. SMSFs don't pay advertising levies that are paid by present members to bait new members to join. What an abuse of funds by a trustee !! A union ponzi scheme.

    - No lies 2. SMSFs don't pay levies to join a trade union industry fund group (Form little things good things...you know it) and secretly hide from all members how the funds are pooled and spent to buy TV time that has been alleged could subsidise advertising at election times.

    - No lies 3. Industry funds are trade union controlled and trade unions or key union leaders (who may also be a trustee) can be paid FEES that aren't called commissions.

    - No lies 4. The compare the pair lie that took years to be pulled from TV. These comparisons showed commissions paid to advisers in long term projections when the govt had banned such future fees under FOFA reforms.
     
  12. D.T.

    D.T. Adelaide Property Manager Business Member

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    I agree not a SMSF issue specifically. SMSF is a great way of doing Super, it's moreso Super that I have issue with.
     
  13. Beelzebub

    Beelzebub Well-Known Member

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    Just out of curiosity.

    Could you purchase a property using your SMSF and live in that property paying market rent back into your SMSF?
     
  14. Beelzebub

    Beelzebub Well-Known Member

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    A quick Google search has told me that you can't. Which makes sense.
     
  15. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You
    could but you would be breaching a few laws and your SMSF may be taxed at penalty rates.
     
  16. D.T.

    D.T. Adelaide Property Manager Business Member

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    Not really a 'could' then, is it?
     
  17. Paul@PFI

    Paul@PFI Tax Accounting + SMSF Business Member

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    I would go further than Terry and suggest that a potential for gaol time could be the penalty for that one. On a lighter side the fund found non-complying and taxed at 49% of the entire balance. So a worst case and best case penalty both considered.

    The sole purpose test is strictly applied and even a relative paying market rates of rent on a house etc would fail. Its a dangerous area to fiddle with.
     
  18. Terry_w

    Terry_w Solicitor, Finance Broker, CTA Business Member

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    You could say that.
     
  19. Beelzebub

    Beelzebub Well-Known Member

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    Gee, they take this arm's length thing pretty seriously.
     
  20. Sonamic

    Sonamic Well-Known Member

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    Thanks all for trying to spread some light.

    I'm early 40's and have limited Super through PAYG. Weighing up options to see if someone in my position is able to implement SMSF to further my Investing for the long term alongside current personal IP's. We've all heard the horror stories of Market Crash losses. An Industry Super Fund that is reliant on predominantly Shares is susceptible to GFC type scenarios. Property, if bought well, rarely goes backwards.

    An SMSF from my limited understanding, once set up, effectively allows you to use your Super to purchase and control Investments of your choosing. Correct?