Think of a super fund like a piggy bank.
What is a Super Fund
The coins inside are your super. The piggy bank is your super fund. That is what it basically is. Except that a super fund is not limited to cash. And is a separate entity – a fund – rather than porcelain on your window sill, but the concept is the same.
Putting your super into a separate entity – a fund – is to keep it safe – mainly from you.
Imagine your rent is overdue, but you are broke. Would you use your super to pay the landlord if you could? Of course you would. At least most of us would. You take the money – not forever of course – you will pay it back next week. A week passes and you are still broke. A month. Three months – still broke. Your super is gone.
To prevent this from happening, your super sits in a separate fund.
The fund holding your super could be an industry or retail fund. In these funds others manage and invest your super.
Officially, there are also government and corporate funds, but these tend to be a thing of the past. Too much of a headache for the companies and governments involved.
So industry and retail funds it is. These funds give you a few investment choices and then send you a statement every six months. The fee they charge for these services – a percentage of your super balance – will have already been taken from your super.
But there is one more option you have. You could set up your own fund and manage your own super. This is called a self managed superannuation fund or SMSF for short.
Whatever type of super fund you choose, a super fund is always a trust. This means five things. Just like a ‘normal’ trust your SMSF is
1 – Not a separate legal entity;
2 – Only a fiduciary relationship;
3 – Between trustee and at least one name beneficiary (‘member’);
4 – With respect to clearly defined trust property;
5 – Governed by a deed and law.
And like any other trust the SMSF trustee can be one or more individuals or companies. The later is referred to as corporate trustee.
Different to a Trust
But an SMSF is also quite different to a ‘normal’ trust in seven distinctive ways. An SMSF
1 – Pays income tax;
2 – Requires a condition of release to distribute;
3 – Distinguishes between accumulation and pension mode;
4 – For a pension must distribute a fraction of net assets, irrespective of income;
5 – Must follow investment rules;
6 – Requires an investment strategy;
7 – Has contribution caps.
A ‘normal’ trust doesn’t have or do any of these. And a ‘normal’ trust doesn’t refer to its beneficiaries as members.
Like any ‘normal’ trust, a super fund has a trustee – at least one trustee, but it could be more than one. And like any other trust, this trustee can be an individual or company. If the trustee is a company – preferably a special purpose company – it is referred to as a corporate trustee.
The trustee is the entity who actually owns the asset – legally. So the trustee is the one whose name is on the bank statement, share certificate, land register and so on.
The trustee is also the one who acts, manages and decides. The trustee receives your contributions and pays your pension. It is the trustee you write to when you want to start or commute a pension or cash it all out.
If you have a SMSF, you are the trustee. In an SMSF each member must be a trustee – by law – either an individual trustee or the director of a corporate trustee.
A non-member can’t be a trustee – with two exceptions. If you lose capacity, your LPR will step into your shoes as trustee. And if your SMSF only has you as individual trustee, then another individual has to join you as trustee.
In a super fund beneficiaries are referred to as members. As a member you hold the beneficial ownership of the assets without being the legal owner. This means the assets have to benefit you as the member.
If you have an SMSF, you are a trustee as well as a member. This means that you will often write as a member to yourself as trustee.
A super fund has to follow many rules, but these three are crucial:
Superannuation Industry (Supervision) Act 1993 (‘SIS Act’)
Superannuation Industry (Supervision) Regulation 1994 (‘SIS Regs’)
Income Tax Assessment Act 1997 (‘ITAA97’).
The SIS act sets out the road map. The SIS regulations fill out the details. And the ITAA97 stipulates how all this is taxed.
All super funds have a regulator. The regulator is like an umpire making sure everybody plays by the rules. Handing out yellow and red cards when they don’t.
The regulator for SMSFs is the Australian Taxation Office (ATO). For all other funds it is the Australian Prudential Regulation Authority (APRA).
Regulated Superannuation Funds
Being a regulated super fund just means that the trustee has decided to play by the rules. The trustee has declared that the SIS Act and SIS Regulations are to apply to the fund. This is all it takes to become a regulated superannuation fund.
But being a regulated super fund doesn’t really mean anything. It just says that you want to comply.
Complying Superannuation Funds
What does mean something is being a complying superannuation fund. That will make a difference. Now you don’t just say that you want to comply. You actually do comply.
A complying super fund is a fund per ss42 and 42A SIS Act that complies with all relevant rules of the SIS Act and SIS Regulations. A fund is also a complying fund if the regulator has told them so in a compliance notice.
Once your super fund qualifies as a complying fund, two things happen. Your super fund:
1 – Can receive super guarantee (SG) contributions. Super guarantee is the 9.5% super your employer pays for you into a super fund of your choice.
2 – Qualifies for concessional tax treatment.
A non-complying fund on the other hand can’t receive SG contributions and doesn’t qualify for lower tax rates.
Being a complying fund is not forever. If a fund breaks the rules, it can lose that status again.
Your super – officially called ‘an interest in a superannuation fund’ in the Financial Services Reform Act 2001 – is a financial product. This means that only somebody with an AFS licence – Australian Financial Services Licence – is allowed to tell you what to do with it.
Only somebody with an AFSL is allowed to tell you whether to make a contribution, split contributions with your spouse, take benefits as a lump sum or pension, make a binding death benefit nomination and so on.
But there is a difference between telling you what to do and just giving you the facts. Telling you what to do requires an AFS licence. Just giving you the facts – explaining the rules of the game – doesn’t.
And by the way – since 1 July 2016 – accountants no longer have a so-called accountants exemption.
So this is a short summary of what your super fund is about. If you get stuck, please email or call us. There might be s simple answer to your query.
Disclaimer: numba does not provide specific financial or tax advice in this article. All information on this website is of a general nature only. It might no longer be up to date or correct. You should contact us directly or seek other accredited tax advice when considering whether the information is suitable to your circumstances.
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Last Updated on 02 September 2021
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We look after the tax and accounting of your business, wealth and SMSF. We are Chartered Accountants and Registered Tax Agents in Australia and IRS-registered CPAs in the US.