Understanding Self-Managed Superfund – The Rules
What Exactly is an SMSF?
Am SMSF is a self-managed super fund, which is a private superannuation fund you are permitted to manage yourself and which is regulated by the Australian Tax Office. Just as with a regular super fund, your employer contributions are still paid into the SMSF and you are also able to make extra contributions whenever you see fit. The difference is, you as trustee have full control over the assets of the fund. Self-managed super funds are allowed to have no more than 4 members and those members must be trustees of the fund. If there is a corporate trustee then they must be directors of that company. All 4 of the trustees will be responsible for any decisions the fund makes – anyone who is a member of an SMSF is therefore responsible for ensuring that the fund complies with all of the laws of the land and for the management of that fund. Anyone considering a self-managed super fund should be aware from the outset that they are very different entities to most of the mainstream funds that are overseen by the APRA (Australian Prudential Regulation Authority) which offer the more traditional route of pooling, then investing, all of their members’ money.
How Do SMSF’s Work?
Self-managed super funds are legal tax structures which are designed to help people manage their money for their retirement and are overseen and regulated by the ATO (Australian Tax Office.) As mentioned above they are for up to 4 members who become trustees and those trustees are therefore subject to all of the legal duties that the fund requires. These duties include establishing and then executing an investment strategy that will make certain that the fund can meet the anticipated retirement requirements and funds; ensuring that the money in the fund is used solely on benefits for retirement; maintaining comprehensive records and organising a yearly audit to be done by an auditor who is SMSF approved.
Is An SMSF Right for Me?
It’s important to note that when it comes to retirement planning and investment, SMSF’s are definitely not the mainstream option. The first thing to be aware of is that if you want to set up and manage an SMSF you are going to need a large amount of money. That’s because the set up costs and the yearly running costs are quite high and will mean it is only worth doing if you are going to be dealing in larger sums of money. For example, you will need to put in place a budget that will be able to cover the ongoing extra expenses of professional accountants, tax advisors, SMSF approved auditors and legal experts. There will also be extra costs involved in getting yourself income protection insurance, life insurance and permanent disability cover which would previously have been covered by an employer provided super fund. With all these extras in mind and all the added expense, you need to ask yourself – will a self managed superfund actually save me money? Do I have enough money to take this on and make it work? A good place to start with this decision is by making a comparison of the costs of the accounting and auditing of your SMSF to the interest charges of 1-2% that you would pay on a regular superannuation fund. The fund will also take up a lot more of your time both in terms of research before you set it up and then research with regards to the ongoing management of the fund. Is that worth it? Are you willing to give up that time? And the most important question of all – can you manage the fund effectively? You will need confidence in your own financial skills and a belief that you have the expertise to handle something like this and you will need to be certain you can keep making wise investment choices. You will also need to acquaint yourself with all of the taxation, requirements, legal requirements and regulations you are expected to stick to. Your previous employer-provided superfund would have been managed by a professional investor who spends their working life studying the markets. Can you really match that? Because if you don’t, and your investment calls are not as effective, you won’t be managing the fund well and won’t be getting the best returns for your money. In reality, SMSF funds are best handled by people who have had previous investment experience, particularly when you remember that if you lose money there is no possibility of compensation, unlike with professionally managed super funds. The buck stops with you.
How Would I Actually Set Up an SMSF?
Again, setting up a self-managed super fund is more complex than setting up other financial products. There are several steps to take and each one needs to be done in accordance with the current regulations and legislation as well as reported to the Australian Tax Office. In brief however, you must (a) decide what to call the fund (b) chat to your SMSF advisor or accountant as to how to set up the correct trust and trustee structure to match your particular needs (c) put together your investment strategy (d) make an application for regulation of the trust (e) get a tax file number (f) get an ABN (Australian Business Number) (g) set up a bank account. Banks will usually require a certified copy of the signed trust deed, the ABN and the certificate showing the trust’s tax file number before they can open an account for you. Lastly, most people would also need to get in touch with their old super fund in order to request a rollover of their current funds. Depending on which fund they have been registered with this can take anything from a couple of weeks to a couple of months. They will also need to see the signed deeds of trust.
Self Managed Super Fund Rules
As has already been made clear, there are very specific rules and legal requirements for the management of SMSF’s and which govern how it will be run. These will be set out in the deed of trust for the fund. The most obvious and important rule is that the fund must always be managed with the sole purpose of providing retirement benefits to its members. As well as that, here are the other important factors to be considered:
Management of Investments
– any investments that the fund makes must be managed entirely for the benefit of the trustees and members and no personal financial interests or affairs should ever be tied into that management in any way. When it comes to asset ownership there are strict rules that have been put in place by the ATO to ensure that any and all assets are held solely in the name of the SMSF and not any one individual. Additionally, the SMSF must never stray from its own declared investment strategy.
Administration of the SMSF
– Anyone who is a trustee of a super fund is responsible for ensuring that the fund meets all of its reporting responsibilities and that it also maintains up to date records of the fund’s activities. This can either be done by the trustees or by hiring an accountant to take care of the audit and annual tax reports and income tax.
– An SMSF can be made up of between one and four members or trustees. The structure can either be with all members being individual trustees or with one trustee company, owned by all individual members.
– Contributions can be accepted from members of the fund but there are a few restrictions which are dependent on the member’s age and the cap on their contributions. It is important to note that such caps change on a yearly basis and there are fines for over-contribution so it is essential that any additional contributions are well planned for.
Accessing the SMSF
– SMSF members will only be permitted to have access to their super funds once they retire, reach the ‘preservation age’ or meet other pre-set release conditions. SMSF’s cannot be used to get improper or early access to superannuation.
– Super income will usually be taxed at 15% although it is possible to face higher rates under certain circumstances. These would include receiving a non-compliance notice because you have broken the rules of the super fund or being charged a higher rate because of ‘special income’ from any investments that are personally related to you.
– It is now possible for an SMSF to borrow, though there are certain criteria which must be met first.
SMSF – Choosing a Professional Advisor
With so many complex rules to keep track of and responsibilities to fulfil, if you are going to invest in a self-managed super fund it is extremely advisable to retain the services of an experienced tax agent who is qualified to advise on SMSF’s. Spending the money on a trustworthy and competent advisor to both help with the financial decisions and handle the administration of the fund will be a decision you will not regret in the long run. However, you should always bear in mind that you need to completely understand what that adviser is doing and why they are doing it – because the legal responsibility of a trustee or director cannot be passed on to a financial adviser. It is yours and your fellow trustees alone. That’s why it is essential to choose an accountant or financial adviser who is licensed (ask for their AFSL number and check on the ASIC register which financial products they are allowed to advise you on) and who comes with a good reputation both online and through word of mouth via someone you know.