Nuts and bolts of DIY super
This is the first in our series of articles on using a self-managed super fund to set yourself up for retirement. John Kavanagh looks at moving assets into your own fund to maximise benefits.
This is the first in our series of articles on using a self-managed super fund to set yourself up for retirement. John Kavanagh looks at moving assets into your own fund to maximise benefits. Self-managed superannuation becomes an increasingly attractive option in the years before retirement. The flexibility a DIY fund gives its members is a great advantage when setting up their affairs to take full advantage of the tax breaks available to retirees.Members of self-managed funds (SMSFs) are well placed to make use of three strategies that enhance retirement benefits - in-specie and in-house transfers and pension commutations.Last year's super system review (the Cooper review) found that people aged 50 or over make up 67 per cent of the membership of SMSFs. The over 50s represent only 22 per cent of the membership of all super funds.By the time they reach 50, people are more likely to have accumulated enough in their super accounts to make SMSF a cost-effective proposition. The Cooper review found that the average account balance in an SMSF was more than $450,000. The average account balance for all super funds was $25,000.By 50, people start to think about the sort of financial planning they need to be doing to set themselves up properly for their retirement years.IN SPECIE TRANSFERSThe director of superannuation at HLB Mann Judd, Andrew Yee, says one of the advantages of SMSFs is the ability to make "in-specie transfers".When you start a new super fund (of any type) you can transfer all existing super benefits into the new fund.Generally, a fund trustee can't acquire non-cash assets from related parties, such as fund members, but there are a couple of exceptions to this rule the trustee can acquire listed shares and business real property from a member. These are called in-specie transfers.Trustees of industry or retail funds will not do deals like that but the trustees of SMSFs do it all the time.Yee says: "If you hold shares in your own name, you pay higher rates of tax on the income and capital gains. When you set up an SMSF, you can make an in-specie transfer and reduce the tax rates."Once you turn 60 and convert the fund to an account-based pension there is no income or capital gains within the fund and no income tax on pension income payments."PROPERTYYee says moving business premises into the fund has other advantages. "In a typical scenario, the property is used to run the family business. The trustees of the SMSF make an in-specie transfer of the property."The result is that the family business pays rent to the super fund, which means that more money is going into super and the business gets a tax deduction on the rent it pays."The in-specie transfer rules allow any commercial property to be sold into the super fund (it does not have to be one in which the SMSF trustees' business is being conducted). The benefit is not restricted to business owners - anyone with commercial property is eligible.Yee says that because the in-specie transfer rules apply only to "business real property", residential investment properties have to remain outside the super fund. One approach people take when they set up their SMSFs is to sell any existing residential investment property, put the proceeds of the sale into the fund and then use those funds to buy a property within the SMSF.The national technical manager of OnePath, Graeme Colley, agrees that residential investment property cannot be transferred into a super fund. He says people have tried various approaches, such as selling a property to a relative and then selling it to the fund but these are usually disallowed.PENSION COMMUTATIONAnother strategy that works very well with the flexibility of SMSF is pension commutation.Transition-to-retirement rules introduced a few years ago allow people over age 55 to convert their existing super to an account-based pension and, if still working, accumulate more super in a new fund.Yee says one strategy that uses the transition rules is to set up a pension and a new accumulation account and then commute the pension each year."You then start a new pension with all the additional contributions included," he says. "The idea is to keep moving all your super into a pension account, where it receives the most tax-effective tax treatment."Yee says members of industry and retail funds can do the same thing but it can be done much more easily in an SMSF because there is no fund bureaucracy to deal with.Colley says investments that are classified as in-house assets can be transferred into SMSFs."Typically, these are shares in private companies or units in a family trust," he says. "The benefit is that dividends paid by a private company or distributions paid by the family trusts will be treated as income of the SMSF and will receive favourable tax treatment. An important restriction is that in-house assets can only make up 5 per cent of the total assets of the fund."The Australian Taxation Office guide to setting up an SMSF says: "Investment restrictions are some of the most important rules you need to comply with under the superannuation laws."Trustees cannot:- Lend the fund's money or provide financial assistance to members and their relatives.- Acquire assets from related parties (fund members, their family members or related companies). Exceptions include listed shares and securities and business real property.- Lend to, invest in or lease to a related party more than 5 per cent of the fund's total assets.- Enter into investments on the fund's behalf that are not made or maintained on an arm's length a commercial basis.