A self-managed super fund (SMSF) is a type of trust with the sole purpose of providing retirement benefits to its members. Generally, A SMSF can have up to 6 members, and the members are also trustees of the fund. Depending on the structure of the SMSF, members can be individual trustees or a director in the case of a corporate trustee.
An SMSF is a popular way of saving for retirement for those interested in being highly involved in planning their superannuation and retirement. It allows members control over the choice of assets and insurance, responsibility for investment decisions, and compliance with tax and superannuation laws.
If you are considering whether an SMSF is suitable for you, it is advisable to seek professional advice, and an SMSF professional can help set the fund up correctly.
Setting up and maintaining an SMSF involves a lot of time, effort and cost and includes
- Determine the members and trustees of the SMSF.
- Create a trust deed which legal document signed by all trustees that outlines the establishment and operation of the SMSF. It includes details such as the members and trustees, rules, investments, contributions, and it must be referred to when making decisions.
- Each trustee must sign a declaration to acknowledge that they understand the duties and responsibilities.
- Register the SMSF through the Australian business register
- Set up a bank account for the SMSF
- Register the SMSF with the ATO
- Create an investment strategy and review regularly and ensure investments comply with the superannuation laws
- Rollover members existing super
- Ensure all member contributions are within the required limit
- Document and maintain records
The SMSF will require ongoing maintenance to comply with the tax and superannuation law. Each year the assets within the super fund will need to be valued, and the SMSF is required to prepare financial statements that meet accounting standards. The trustees must appoint an SMSF auditor registered with ASIC to conduct an annual audit and provide an audit report. The SMSF must prepare yearly tax returns, pay any outstanding tax, and pay the necessary SMSF levy. You will need to consider whether you want to manage this yourself or pay an SMSF professional and appoint a financial planner to help with investment decisions.
We outline some of the advantages and disadvantages when considering an SMSF.
Control and Flexibility
As a member of SMSF, you have a more comprehensive range of assets to invest in compared with retail and industry super funds, subject to relevant regulatory requirements. This may include;
- Listed and unlisted shares
- Managed funds
- Fixed interest
- Investing directly in property
- Collectables such as fine wines and artworks
- Physical commodities such as gold or precious stones
- Managed portfolios
- Derivatives which can be used to hedge risk.
You may also be eligible to borrow funds to purchase higher-value assets such as property. There are some specific rules to consider, such as borrowed funds cannot be used to improve a property or buy a development.
Some business owners may choose to have their business property owned by their SMSF. They then lease the property back to the business at market rates, freeing business capital to focus on growth and provide a reliable income stream to the SMSF. Again there are specific rules and situations where this is applicable.
Currently, all superfunds are eligible for the concessional tax rate on the accumulation phase at 15%, and there is no tax payable during the pension phase. An SMSF has the flexibility to carefully plan and time decisions to optimise and reduce the tax payable for members.
If a member or their businesses experience financial issues, generally, the assets within an SMSF are protected from creditors so that members retirement is protected.
An SMSF allows members to align the investment decisions with their personal goals and understand where their funds are being invested and how they are performing.
Pooling of Assets
The SMSF allows members to pool their superannuation assets with the other members, increasing possible investment opportunities and spreading the fees.
Duties and Responsibilities
The members of an SMSF are responsible for the fund’s investment decisions and for ensuring compliance with the legislation, and a breach of the laws could result in harsh penalties. Therefore members will require a certain amount of financial and legal know-how and skill to ensure the fund complies with the relevant legislation and that they have a reasonable understanding of investment choices. They must ensure the strategy meets their level of risk tolerance allows for their retirement needs.
SMSF’s require a lot of time to ensure the investments are adequately managed and meet all the administration requirements. If you are short on time, you may outsource this to the relevant professionals, but you will remain ultimately responsible.
The cost of setup and maintaining an SMSF includes investment costs, financial advice, accounting and administration expenses, auditor fees, legal fees, and SMSF levy. Costs may be an advantage or disadvantage depending on the value of the fund. Low-value funds may be more expensive to maintain than retail and industry super funds, as SMSF costs are usually fixed. Retail and industry super funds may vary their costs to members based on the balance in the fund, so once the member’s value in the fund reaches a certain point managing an SMSF may become more economical.
Conflict With Members in the Fund
Any conflict or disagreements that arise between members may have an adverse impact on the fund’s performance and may require specialist legal advice to resolve.
Before committing to an SMSF rather than industry or retail super fund, it is highly recommended that you obtain professional advice tailored to your situation.