Self Managed Super Funds (SMSFs) are an excellent tool to help you build your personal wealth empire. If you are unsure what an SMSF actually is, check out our previous article that explains it in detail.

The most important thing anyone thinking about setting up an SMSF needs to know is what you can and can’t do with the money & assets inside the SMSF. 

In a nutshell, your SMSF can do anything your Trust Deed allows and or anything within the Superannuation Law. So what does that look like in practice?

What you can do

Accumulate Wealth

Every SMSF has one purpose: to accumulate wealth for your retirement. In accumulating wealth you can:

Contribute to super

Your SMSF receives contributions you or your employer make to your super. You can also rollover any other existing super balances from other  funds.
Once you make those contributions you then decide how you want to invest. Take note here your SMSF has to pay tax if you are making contributions so it’s important you understand you need to set that aside before you think about how you invest the remaining balance.

Pool your balances

You can pool your balances together, i.e., husband & wife can combine super balances and invest that money together (which might mean you can afford to purchase the building your business operates from as an example). This also reduces your ongoing costs as you don’t have multiple accounts and therefore multiple fees.

Invest

You can use your SMSF money to invest in shares ( Australian or international), property (commercial or residential, but not your house), managed funds, term deposits & cash, or a combination of the above. 

The earnings on these investments stay within your SMSF and go back into accumulating more wealth. For example, the rent from your property is deposited into your SMSF bank account along with the interest on your term deposit and dividends from your shares. If deciding where to invest your money isn’t your forte, don’t stress you can hire an expert to help.

Insure

You can also pay your Insurances from your SMSF such as Income Protection, Life Insurance and Trauma Insurance for the members (ie you).

Borrow

You can also now borrow money against your investment assets (ie a property) to help fund the purchase. There are a lot of strict rules on borrowing so you need to consult with us before you think about doing this.

Fund your Retirement

The ultimate aim for your SMSF is to ensure you are funding your retirement. Once you hit retirement age you can:

Pay your Pension

Paying yourself a pension is a brilliant way to fund your retirement. You can setup your pension so it’s just like getting your normal weekly or fortnightly wage you have been used to for the last 45-50 years.

Pay a lump sum

If you are ready to take that holiday of a lifetime or maybe move you can also withdraw a lump sum from your SMSF. This flexibility of how you take your money is great. With your own SMSF you can decide easily when you want to take these lump sums as well.

Direct what happens with your Super when you die

It’s a topic most people hate to talk about. But something very important for your family. What happens to my money when I die? With a SMSF you can easily control where you want your money to go when you die. You can make this nomination binding on the trustee which means your wishes must be followed.

Have tax-free earnings 

Yes you did read that correctly! Super as we have discussed is the best taxed environment we have in Australia. And when you are retired and in pension mode this tax is even better because you don’t pay any! That’s no tax on any pensions you withdraw and also no tax on any income from your investments (ie no tax on your term deposit interest

What can’t you do inside a SMSF?

Buy a house and live in it

Your SMSF is solely for the purpose to provide for you in retirement. The rules are you can’t get a benefit from your super until you are retired. So that means you can’t buy yourself a house to live in. That includes a holiday house as well.

Borrow to do a property development

This is a big no no. You can’t do a property development inside your SMSF with debt. Ie you can’t borrow to buy a block of land and then borrow again to develop it. This is a really indepth area so stay tuned for an entire post next week on what you can do with property inside your SMSF.

Take money out before you reach retirement age

Retirement age is everything for your super. You can’t withdraw your money until you reach retirement age. Note this differs for everyone depending on the year you were born. You can check out the handy guide here.

Give money to your friends

As much as you may like your friends your super can’t be used to make loans or give money to friends. This includes family members as well.

Give money to your business

Similarly with giving money to your friends you can’t loan your business money. This is classed as an in-house asset and put your fund at risk of being non-compliant. That puts you in the naughty bucket with the ATO who will then tax ALL your SMSF money and assets at 47%....ouch.

Invest without a strategy

Every SMSF has to have a strategy. How are you going to build wealth inside your SMSF to fund your retirement? In this investment strategy you need to consider your risk profile and ensure you have a mix of assets.

Contribute more than you are allowed 

There are strict rules about how much money you can contribute to super. These rules change regularly so it’s important you don’t contribute too much. Here’s our latest guide on how to and how much money you can put into super.

Not do your trustee duties

This is your retirement money. There are enormous penalties for non-compliance with the rules of your SMSF. It’s important you lodge all the necessary forms each year to remain compliant as well as keep all the admin paperwork. This is part of our Red Tape service offering, but it’s still important you understand the basic rules

Summary

As you can see there are quite a few things you need to know before you can start making decisions on what you can do with the money and assets inside your SMSF. We always suggest hiring in experts who can assist you in your role as Trustee (ie this is what we do for you). That way when the rules change you have someone ensuring everything is covered for you. These experts can also include Stock Brokers, Financial Planners and Insurance specialists who can assist you with putting together and executing your Investment Strategy.

A SMSF is a fantastic tool allowing you to really take control of your empire now as well as in retirement. You have a lot of flexibility in the investments you choose, how you accumulate your wealth and how you fund your retirement.