Self-Managed Super Funds

As the name implies, a Self-Managed Super Fund or SMSF, is a private super fund you manage yourself.  The number one reason that people choose to set up an SMSF is control.

As a Trustee of your own SMSF you control how your retirement savings are invested.  There are about 600,000 SMSF’s in Australia with about 1.1 million people members of these funds.

SETTING UP AN SMSF

Setting up an SMSF involves creating a trust with either individual or corporate trustees.  A corporate trustee is just a fancy name for a company that is set up to be the trustee of the SMSF.  

 

TIP: Get advice from your Accountant or Financial Adviser about choosing individual or corporate trustees before you set it up.

 

Every member of the SMSF (and from 1 July 2021 you can have up to 6 members) must be an individual trustee or a director of the Corporate Trustee.  

 

You can have a sole member SMSF but then you must have a Corporate Trustee.

WHO CAN BE A MEMBER?

To be eligible to become a member of the SMSF you cannot:

  • Be a registered bankrupt
  • Have previously been disqualified as an SMSF trustee by a court, the ATO or ASIC
  • Have an employer/employee relationship with another fund member (unless they are a relative).

 

A person must consent to becoming a trustee and accept their responsibilities by signing a trustee declaration.

HOW DOES AN SMSF WORK?

Trustees manage the SMSF by making investment decisions.  It is a legal requirement for SMSF’s to have a documented investment strategy.  This investment should satisfy the sole purpose test and be used to guide trustee decision-making.

 

What is the sole purpose test?  This means the fund needs to be maintained for the sole purpose of providing retirement benefits to your members, or to their dependants if a member dies before retirement. Contravening the sole purpose can see the fund lose its concessional tax treatment and trustees can face civil and criminal penalties.

 

You can engage the services of a professional to help prepare the investment strategy.  Financial Advisers are authorised to help Trustees formulate and implement an investment strategy.

WHAT ARE SOME BENEFITS OF SMSF’S?

TAX FLEXIBILITY

SMSF’s can potentially use tax strategies around capital gains tax, taxable income, or franking credits.

 

GREATER CONTROL OVER INVESTMENTS

Trustees of SMSF’s have control over how their funds are invested.  They can invest in many products that are available through retail super funds but can also invest directly in residential property.  Residential property cannot be used by any member of the fund, nor a direct relative of that member.

 

However, SMSF’s can also purchase commercial property which can then be leased to a member of the fund, or a relative of that member.  The rent must be market rent.

 

POTENTIALLY LOWER FEES ON VERY HIGH SUPER BALANCES

Because the fees for SMSF’s are typically based on flat fees, rather than a percentage of money invested, the fees can be lower.  However, APRA research found that for balances under $2m, average ongoing fees for SMSF’s were higher than public funds.

 

TIP: Talk to your Accountant and Financial Adviser about the ongoing costs so you can make an informed decision, before setting up an SMSF

 

ESTATE PLANNING

Trustees of SMSF’s have more flexibility with member death benefits than public funds.  For example, an SMSF member can arrange for:


  • Non-cash assets (such as property or shares) can be transferred directly to a beneficiary, rather than having to sell them and transfer the cash.
  • Death benefits can be paid to a dependant as a pension rather than a lump sum, allowing the SMSF to continue

 

WHAT ARE SOME DISADVANTAGES OF SMSF’S?

TIME

Running an SMSF can be time-consuming.  There are many compliance obligations placed on SMSF Trustees and whilst some of these can be outsourced, Trustees are still responsible if something goes wrong.

 

In addition, a good knowledge of fundamental investment principles is required.  If trustees don’t have this expertise, it is recommended they seek independent financial advice, which will of course incur a cost. 



HIGHER FEES ON LOWER SUPER BALANCES

The fees charged for setting up and running an SMSF are generally flat fees so the amount you have in your SMSF is not considered.  If you have a low super balance, then you are generally going to be charged less fees by retail funds than you will incur by having an SMSF.  

 

TIP: Talk to your Accountant and Financial Adviser about the ongoing costs so you can make an informed decision, before setting up an SMSF

 

INVESTMENT CHOICE

Whilst trustees of SMSF’s have more choice with respect to investments, this also comes with some responsibility.  Choosing a speculative investment could see the members lose their retirement benefits.  There are literally thousands of different investments available so unless you have a good investment knowledge, it is recommended that Trustees outsource this responsibility to a financial adviser. 

 

EXIT STRATEGY

You need to consider an exit strategy for your SMSF.  Difficult situations arise with unwinding an SMSF if there is a relationship breakdown, a trustee dies or a trustee loses capacity.

 

TIP: Your Super is often the largest asset you will have outside owning your home, so make sure you talk to a Financial Adviser or Lawyer to work out an Exit Plan before you need it.

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