There is no other retirement model in the world that allows for individuals to be able to take control of their retirement savings cheque book and make investment decisions for themselves to benefit their own retirement. This level of self-direction and self-interest has been a clear driver in the continuing growth of SMSFs.
Whilst handing over the cheque book appears at first thought ‘fraught with danger’, (see recent News Limited article, http://www.heraldsun.com.au/news/australians-super-shopping-spree/story-e6frf7jo-1225879627156), the reality is that SMSF’s have now grown to more than 420,000 representing more than 800,000 Australians as fund members. Mostly, as the currently Super System Review (Cooper Review) suggests, SMSFs are in “pretty good shape”.
How is a SMSF defined?
Section 17A of the Superannuation Industry (Supervision) Act (“SIS Act”) defines what is a Self Managed Super Fund. The basic conditions include:
- must be no more than 4 members;
- if the trustees are individuals – each individual trustee must be a fund member and all members must be trustees;
- if the trustee is a company – each individual director must be a fund member and all members must be directors;
- No member of the fund is in an employer/employee relationship (unless related)
- No trustee (or director of trustee company) receives remuneration for services in acting in the capacity as fund trustee.
For further details on differences between individual trustees and a corporate trustee, refer to blog on “Which SMSF trustee structure is right for me?”
SMSFs are commonly referred to as “Mum and Dad” funds. Two member funds currently represent about 68% of all SMSFs in existence. There are approximately 23% of funds that have a single (1) member.
Single member funds do have additional requirements (in addition to the above) that need to be considered. These include:
- For Individual Trustees:
- the fund member is one of only 2 trustees, of whom one is the member and the other is a relative of the member; or
- the member is one of only 2 trustees, and the member is not an employee of the other trustee;
- For a Corporate Trustee
- the member is the sole director of the trustee company; or
- the member is one of only 2 directors of the trustee company, and the member and the other director are relatives; or
- the member is one of only 2 directors of the trustee company, and the member is not an employee of the other director;
Where a Corporate Trustee is to act as the Fund Trustee, it is highly recommended that a Special Purpose Trustee Company be established to act as trustee of a SMSF, rather than using a trading company in which a business may operate from. As such, where a trustee company acts solely in the capacity as trustee of the SMSF, it is not required to register for a Tax File Number (TFN) or Australian Business Number (ABN). In addition, the annual fee to ASIC is only $40 per annum. Therefore, it is not a significant impost in the ongoing operation of running a trustee company.
When deciding a fund’s trustee structure, an important consideration that sometimes gets overlooked is whether all trustees are to have equal voting rights regardless of member balances? The SIS definition of a SMSF considers directorship of a trustee company only, not shareholdings. If a particular individual wants to retain control, they could be the sole shareholder of the trustee company. This can’t be achieved with individual trustees.
Note: Some deeds provide for voting right based on votes per $ of account balance, where other provide 1 vote per member. It is important to understand what the circumstances of each individual requires.
What other circumstances exist?
A SMSF can still operate in certain circumstances where an alternative trustee/director may be in place. The most common occurrence is with the use of a Legal Personal Representative (“LPR”), who may step into the shoes of the trustee where:
- a member dies; or
- is under a legal disability (i.e. incapable of acting in capacity as trustee); or
- there is an Enduring Power of Attorney (“EPoA”) in place in respect to the particular member of the fund
- this may be because the individual is temporarily away overseas
Should a Fund Trustee become disqualified in accordance with section 120 of the SIS Act (e.g. bankrupt), an LPR cannot step into the shoes as a replacement trustee.
Can I add my kids into the SMSF?
Yes you can, however where they are minors (under age 18), they cannot act as trustees and the parent or guardian takes on a replacement trustee role for that member current under a legal disability.
There a many variables to how a SMSF can operate… With inevitable changes fund circumstances (including death, divorce, new members), it is important to ensure that the definition of a SMSF continues to be met to allow the members to continue to enjoy the tax concessions and benefits that a SMSF provide.