| SMSF | ATO | ABN | TFN | Allocated Pension | Dividends | Diversification | Trustees Acronyms are often used within the SMSF industry. We set out the most commonly used terms. A ABN Australian Business Number that will be issued to your SMSF as part of the set-up process. Before a bank account is opened, the bank will always ask for the ABN of your Fund as well as the Trust Deed.
Accrued Benefits These are the total amounts saved in your SMSF so far and owed to the Beneficiaries. Every year the accrued benefits would increase as contributions and net income are added to the Members’ Liability.
Accumulation Phase While you continue to contribute into your SMSF towards retirement, this is known as being in accumulation phase. Then once you retire and are ready to draw a pension stream your benefits change from being in accumulation phase to being in pension phase. The benefits do not actually physically move anywhere; they just have a different status and taxation treatment within the SMSF.
Act SMSF must comply with the SISA (Superannuation Industry (Supervision) Act 1993) standards. This is known as the Fund being a complying Superannuation Fund and is taxed concessionally at a maximum rate of 15%. To stay complying, the single most important requirement is that the Fund needs to meet the sole purpose test, i.e. providing benefits to the SMSF's members on or after retirement, paying benefits to members on the member's death, or benefits being passed on to a members' dependants or legal representatives. To stay a complying Superannuation Fund, all trustees/members must be familiar with SISA standards and understand their role in running the Fund.
This is a popular type of pension stream that can be drawn at regular intervals (but at least annually) from your SMSF once you have satisfied a condition of release, usually retirement after age 55 or upon reaching age 65. Amounts allowed to be withdrawn each year must be between minimum and maximum amounts that are calculated (annually) based on your age and of course the amount of Funds that you have in the Fund. There is no guarantee with this form of pension that it will last for your entire life time. Upon your death, the balance may be paid to your spouse or other designated financial dependant, either by way of reversionary pension, a new pension stream or a lump sum.
Asset Class Different assets fall into different categories or classes, with the major ones being cash, shares, fixed interest and property. These can be broken down further into sub categories such as listed or unlisted, Australian or international. As diversity is an important consideration when planning the investment strategy for your Fund, Trustees should give thought to each of these classes in order to arrive at the best investment portfolio for your current stage of life and eventual retirement needs. The asset classes will be set out in the Investment Strategy.
This is the Australian Taxation Office. SMSF’s are regulated by the ATO. Complying Superannuation Funds are entitled to concessional tax rates of 15%, unless the ATO advises the trustees that the Fund has become non-complying (you don’t want this!!). If non-complying, the Fund will be taxed at 46.5%. It is crucial therefore that Trustees ensure that their Fund is complying at all times.
Arm's Length transactions The Trustees must not invest with related or associated parties, and must ensure that investments are made or maintained at commercial terms (be at full market value and return).
Australian Prudential Regulation Authority (APRA) APRA is a Federal Government body, established in 1998 to oversee and regulate the financial services industry, including banks, building societies, life insurance, credit unions and most members of the superannuation industry.
Australian Securities and Investment Commission (ASIC) Another Federal Government body, this one mainly deals with Corporation's Law and the Financial Services Reform Act. If your SMSF has a Corporate Trustee, we liaise with ASIC to ensure that the company is formed and maintained to ASIC requirements. Note that the default way Superannuation Warehouse sets up SMSF’s is with individual Trustees.
B Beneficiary A Member in the SMSF can also be known as a Beneficiary. We usually refer to a Beneficiary and not a member. This is a person who has contributions made for them or who receives benefits from the Fund. In retirement, a member has the option of receiving either lump-sum payment or a pension, or a combination of both.
Benefits The amount of accrued entitlements in a SMSF that is held for the Beneficiary.
C Capital Gains Tax The difference between the cost price of purchasing an asset and the sale price of disposing of the same asset will usually result in either a capital loss or capital gain. Wherever the difference is a gain, capital gains tax is payable in the income year the asset was disposed of. SMSF’s pay capital gains tax at a rate of 15% unless the asset has been held for more than 12 months. Where this is the case a Capital Gains discount is allowed by the ATO reducing the tax rate to 10%. It is therefore crucial that Trustees retain all documentation relating to buying and selling of assets.
Complying Superannuation Funds When a new SMSF is established it must choose to be regulated under the act in order to become a complying Fund. Only a complying Fund is entitled to concessional tax rates.
Concessional Contributions If you are salary sacrificing, self employed, or running your own business you may consider making before tax contributions of up to $25,000 a year into your SMSF.
Contribution A contribution is money paid into the SMSF either by a Beneficiary or employer. All contributions are preserved until a condition of release is satisfied by the member, usually retirement after age 55 or reaching age 65.
Corporate Trustee Most SMSF have individual Trustees and this is the default option Superannuation Warehouse sets up new Funds. Alternatively a company can perform the Trustee function. When a corporate trustee is chosen, all directors of that company must be members of the Fund.
D Dividend This is a common form of income earned in a SMSF. Many superannuation Funds buy shares in companies with the expectation of receiving dividends at regular intervals. The advantage of this kind of income is that most (though not all) dividends have already had the tax paid for by the company that issued the dividend. This kind of dividend is called a franked dividend and tax has been paid at the current company tax rate of 30%. As complying superannuation Funds only pay a tax rate of 15% this means that the remaining 15% can be used towards paying tax on other income e.g. contributions into the SMSF. Unfranked dividends have no tax paid on them by the company and the superannuation Fund must therefore pay tax on this income at 15%.
Diversification One of the considerations Trustees must make when formulating their investment strategy is diversification. This basically means that the trustees should not put all their eggs in one basket (one asset class) when investing. Should the particular asset class suffer a downturn, the Fund will loose more than if the Fund is spread over several asset classes. The Fund should have an Investment Strategy and Superannuation Warehouse will assist with this when setting up a new Fund.
F Franking credits When income is paid by way of a franked dividend, the franking credits represent the amount of tax the issuing company has paid on that income. This means that in effect the amount received is only 70% of the actual amount earned. For example a Fund receives a dividend payment of $70 with franking credits of $30. The actual income earned is $100. Tax payable by the (complying) Fund on $100 income ($70 + $30) is $15. This leaves $15 of excess tax credits that can either be used to pay tax on other income, or if no other tax is payable, it will be refunded.
I Imputation Credits See franking credits (above).
In-house Asset SIS Act 1993, Section 71, describes an in-house asset of a SMSF as an asset of the Fund that is loan to, or an investment in, to the Fund’s related party. Generally, SMSF’s are restricted from lending, investing or leasing more than 5% of the Fund's total assets to a related party of the Fund (for more information about current restrictions in obtaining in-house assets, check SIS Act 1993, Section 73, Section 82, and Section 83).
Self managed superannuation Funds are the perfect choice for people who want to have control over their investments in their Fund. Investment choice means Trustees have complete power to invest the Fund's money however they choose provided it is done in accordance with the investment strategy and also within the rules and regulations in the SIS Act 1993.
M Market Value Assets held in a SMSF must be held at current market value, so the true value of the Fund can be easily calculated on any given day. This is easy to do in relation to shares, units in trusts and managed funds. For property it is advisable to have a valuation done at the end of each income year, but every three years at a minimum. A Fund will not pay tax on unrealised gains due to changes in market values. Tax is only payable on realised gains.
Member A person is considered a member of a SMSF in which he/she holds superannuation benefits. Also called a Beneficiary. Specifically with self managed superannuation, all members of such Funds MUST also be Trustees of that Fund. This is required under superannuation law and ensures that all members have control over the decisions of the Fund. This has the same meaning as a Beneficiary. We usually refer to a Beneficiary and not a member.
N Non-complying Superannuation Fund When a SMSF applies to be regulated within 60 days of establishment, a Fund becomes a complying superannuation fund. Once complying, the Fund is entitled to receive concessional tax rates as an incentive to save for retirement. In order to continue to attract the concessional rates, the Trustees are responsible for ensuring that the Fund is maintained within the rules and regulations set down in the Act. If the trustees do not manage their SMSF in accordance with the Act, then chances are high that the ATO will penalise the Fund, and in severe cases, it will deem the Fund to be non-complying. This will result in the removal of the concessionary tax status, and means the tax rate for the Fund becomes 46.5%. Other penalties can also apply if Trustees do not abide by the rules, so it is imperative that Trustees have a complying Fund.
Non-Concessional Contributions If you have surplus Funds outside of superannuation you may consider making after tax contributions to your superannuation Fund. If you are under age 65 you can make non-concessional contributions to your Fund up to $150,000 per year or bring forward the following two financial periods and make a one of $450,000 contribution ensuring that no further after tax contributions are made for the next two financial years.
P Pension This is a regular periodic payment to a member of a Fund who has met a condition of release, usually retirement after reaching age 55, or upon reaching age 65. SMSF’s can offer various types of pensions depending on what the Trust Deed of the Fund allows.
Pension Payment Obligations Trustees should ensure that any members in pension phase throughout the financial year have met their pension payment obligations for the financial year. Clients with Account Based Pensions must meet their minimum obligation whilst allocated and transition to retirement pensions must fall between their minimum and maximum pension range. Failure to do so is a breach of the SIS Act and may see your Fund being non compliant with the Act.
R Regulated Superannuation Fund Only a self managed superannuation Fund that has elected to comply with Superannuation Industry (Supervision) Act 1993 (SIS) legislation, and has either a corporate trustee or its purpose is to provide age pensions to its members (individual trustees), is a regulated Superannuation Fund. Only a regulated superannuation Fund is entitled to receive concessional taxation rights.
Retirement Currently, anyone who retires from employment after age 55 and never intends to be employed or self employed again for gain or reward, may commence an income stream from their SMSF. However, this retirement age will change depending on when the person is born; gradually increasing to 60 years, as shown in this preservation table below: If the person was born: then he/she can retire at age: Before 1 July 1960 55
Any amounts transferred into a SMSF by way of benefits from another superannuation fund, usually an industry or retail fund.
S Salary Sacrificed Superannuation This is an arrangement between an employer and employee that an agreed amount of the employee's income (for example some or all of their next pay rise or bonus) can be deducted from their pay before it is taxed. The employee pays tax on the remaining salary and does not pay tax on the amount sacrificed. Fringe Benefits Tax (FBT) does not apply as superannuation is specifically exempt from FBT. The agreed amount goes into your superannuation fund as an employer contribution and is taxed at 15%. The result is that more money goes into the Fund than if the contribution went in out of your after tax dollars. This reduces your taxable income, usually resulting in lower income tax overall.
SISA The is the SIS Act – see the Act section
SMSF A Self Managed Superannuation Fund (or SMSF) is what you have if you’re Australian and you’ve chosen to set up a superannuation fund for yourself, or for yourself and up to three other people. Also called a DIY Super Fund. A SMSF is regulated by the ATO. All members of the Fund (maximum of 4) are the Trustees of the Fund. The exception to this rule is, if a member is a minor, or a person is under legal disability. In such cases regulatory provisions state, that a member of a SMSF cannot be the trustee of the Fund, and needs to be represented by some other Trustee of the Fund. Trustees are allowed to appoint an external administrator like Superannuation Warehouse and also advisors to assist in the running of the SMSF.
Sole Purpose Test For a SMSF to qualify as a regulated superannuation Fund and thereby be granted concessional tax status, the Fund must comply with the Sole Purpose Test. The Sole Purpose Test requires that the Fund be maintained in order to provide benefits upon retirement. Broadly, this means that money in the Fund is ONLY to be used for retirement.
Superannuation Called retirement in other countries.
Superannuation Guarantee Employers are required to contribute a minimum percentage of earnings to superannuation on behalf of all qualifying employees. Currently the minimum requirement is 9% of the gross wage and this will increase to 12% over the next 5 years. If employers fail to contribute in accordance with the Superannuation Guarantee Act (1992), then they will incur a non-deductible penalty and may also be charged interest on the outstanding amount.
T TFN Tax File Number that will be issued for the SMSF as part of the set up process by Superannuation Warehouse.
Trust Deed The Trust Deed is a legal document that lays down the rules within which a Trust must operate and describes how benefits will accrue to the Beneficiaries. The Trust Deed covers areas like membership rules, contributions, trustee obligations, pensions and record keeping. It is imperative that the Trust Deed is reviewed regularly and kept up-to-date.
Trustee A Trustee for a SMSF can either be an individual trustee or a corporate trustee. In the case of a corporate trustee, all directors of the company must be members of the Fund. Where there is only one member of a self managed Fund, there must still be either two individual Trustees or a sole director company as Trustee. The Trustee has to ensure the Fund runs within legislative requirements and also within the governing rules of the Trust Deed. Trustees must always act in good faith and in the best interests of the Beneficiaries. For example, Trustees must make investment decisions in accordance with a formulated investment strategy and should monitor the investments to ensure they are performing as expected. Anyone over the age of 18 can be a trustee of a SMSF unless they are a "disqualified person" under SISA. An individual is a "disqualified person" if at any time, the person was convicted of an offence involving dishonesty or at any time, the person has been subject to a civil penalty order under SISA or the person is an insolvent under administration (e.g. an undischarged bankrupt).
U Undeducted Contributions This is the name given to contributions made by members to their Fund that have already had tax paid on them. For example, when you receive your salary, you may wish to make extra payments to build up your superannuation nest egg. As your salary has already been taxed, the contribution you make will not be taxed again when it goes into your Fund. Government co-contributions will also go into your Fund as an undeducted contribution. |
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