SMSF Glossary: Key Terms Every Trustee Should Know
If you are looking to start your SMSF journey and don’t really understand all the SMSF lingo…
Firstly, that’s okay – you don’t need to, because we are the experts! Although, if you do want to scrub up on your SMSF terminology, let’s break down some commonly used terms.
Account Based Pension
Income stream paid from a super account held in the members name. The amount supporting the pension must be allocated to a separate account for each member.
Bare trust / Custodian Trust
Is a simple trust arrangement (a different trust from the SMSF itself) required by superannuation law under which a custodian holds assets purchased by an SMSF, when using borrowed money via limited recourse borrowing arrangement (LBRA).
This trust arrangement is established by the Bare/Custodian Trust deed. The Custodian Trust commences when the custodian named in the Custody Trust deed takes title to the asset purchased with the loan money.
This trust holds the asset and the borrowing exclusively to protect the fund’s other assets from the borrowing risks.
Beneficiary
Means a person immediately and absolutely entitled to a benefit under the trust deed in respect of a member. It does not include a member except where that member is immediately and absolutely entitled to a benefit under the deed in respect of another member.
Cryptocurrency
A digital currency in which transactions are verified and records maintained by a decentralised system using cryptography, rather than by a centralised authority.
Custodian
Means the trustee of a Bare Trust / Custodian Trust. The custodian can be one or more individuals or a company. Most banks usually require the custodian to be a company.
Concessional Contribution
Contributions made into the SMSF that are included in the SMSFs assessable income. Taxed at a concessional rate of 15% (often referred to as ‘contributions tax’).
Included super guarantee and salary sacrifice contributions, and personal contributions made by the member that the member claims as an income tax deduction.
Subject to a yearly cap of $27,500 for all individuals but can be carried forward for 5 years if total super balance is less than $500,000
Invest
‘Invest’ is defined in subsection 10(1) of the SISA to mean applying assets in any way, or making a contract, for the purpose of gaining interest, income, profit or gain.
Limited Recourse Borrowing
A loan used to purchase a single asset or group of assets where the lender’s claim on assets is limited to the asset(s) purchased with the loan, if the borrower defaults on the loan.
Member
Means an individual who has contributions made for them or receives benefits from the fund.
Member Contribution
Anything of value that increases the capital of a superannuation fund provided by a member, spouse of a member or an employer whose purpose is to benefit one or more particular member of the fund or all the members in general
Non-Concessional Contribution
Contributions made into the SMSF that are not included in the funds assessable income. If these contributions exceed the cap, they are taxed at 47%.
Includes:
Personal contributions made by the member for which no income tax deduction is claimed
Excess concessional contributions for the financial year which the member does not elect to remove from the superfund after the ATO sends them an excess contributions determination
Does not include:
Super co-contributions
Structured settlements
Orders for personal injury or capital gains tax that the member has validly elected to exclude from their non-concessional contributions
If individuals re-contribute their Covid-19 early release amounts before 30 June 2030, they won’t count toward the non-concessional contributions cap
Participating Employer
Means an employer permitted by the trustee to make contributions in respect of a member or an eligible person who wishes to become a member.
Principal
Is the term given in the trust deed to a member of the fund who establishes the SMSF. The role of principal is merely a procedural role to get the SMSF up and running: that person has no further obligations operating the SMSF apart from those obligations it has as a member, trustee or director of the trustee.
Product Disclosure Statement
Is a document containing a summary of the important provisions of the fund’s deed and the effects of those provisions on members. It is a document required under the Corporations Act.
Reversionary beneficiary
The person to whom the pension must be paid after the member dies; or
Any person to whom the pension must be paid on the death of another under a pension payment agreement.
SIS Act
Means the Superannuation Industry (Supervision) Act 1993 (Cth).
SIS Regulations
Means the Superannuation Industry (Supervision) Regulations 1994 (Cth).
SMSF
Self-managed super fund. A private superfund that you manage yourself. You choose the investments and the insurance.
Special Purpose Company
Means a company that has been created for a specific purpose stated in its constitution or internal operating rules. Generally, special purpose companies are either superannuation trustee companies, a home unit company or not-for-profit company. They qualify for a lower ASIC annual review fee.
Trust Deed
Means the document containing the governing rules of the superannuation fund.
Trustee
Means the individuals or company who are responsible for all decisions made in relation to the fund including its investments and its dealings with other people and service providers. The trustee has a position of trust or responsibility to exercise due care, skill and diligence in its duties. The funds assets must be recorded as being owned in the trustee’s name/s.
Vesting date
Is the date defined in the trust deed when the trust ends. The standard vesting date is 80 years from the commencement of the trust.
If you want to know more about these terms or want to chat about your super journey, enquire with us!