How does a self managed super fund work?
SMSF’s are becoming a popular option for Australians because it’s a way of having full control over the investment options for their retirement funds.
The difference between Self Managed Super Funds and other funds, is that the members are usually also the trustees, which means the members of the SMSF run it for their benefit, and are responsible for compliance with superannuation and tax laws.
- An SMSF can have up to six members in Victoria (this varies from state to state in Australia)
- If the fund has more than one member, each trustee is equally responsible for the decisions made about the fund
- Members cannot employ another member
- Trustees cannot be financially rewarded for their services to the fund
The key benefits of a Self Managed Super Fund
There are many advantages to running your own SMSF, however it’s worth noting that the advantages may not apply to everyone. Everyone’s situation is different, and running a successful SMSF is dependent on a wide range of variables.
Advantages of an SMSF
There are many key benefits to running your own Self Managed Super Fund.
One of the biggest draw-cards of an SMSF, is access to investment options. These can include direct shares, direct property, Cash, Term Deposits and Debt Securities, Income Investments, and more. Having full ownership over your investment strategies, gives you flexibility to maximise your return on investment.
As a perk of this kind of control over investments, an SMSF offers trustees the complete visibility and transparency over where their investments are allocated. If you’re passionate about shares, property, or sustainable and ethical investing, then the choice is yours.
SMSF Tax Benefits
Self Managed Super Funds benefit from concessional tax rates just like all other super funds, i.e tax on investment income is capped at 15 percent in the accumulation phase, and no tax is payable in the pension phase.
Consolidating with others = larger fund balance
It’s possible to combine your superannuation assets with up to three other members. By consolidating your accounts, your fund balance will be much larger which means you’ll have access to much more investment opportunities, and your fund will be subject to only one set of fees.
Lower fees (as a percentage of your fund balance)
This might sound counterintuitive, but for some, an SMSF can have lower fees based on a percentage of your super balance. Unlike some other funds, your SMSF is capped at the cost involved in maintaining your fund, not based on a percentage of your balance. Generally, you can expect that a larger fund balance will have lower fees as a percentage. Ultimately the cost depends on the funds investments and cost associated with professional consultation and support.
Disadvantages of an SMSF
Possible higher fees.
Depending on your situation, there can be higher fees involved in an SMSF compared to other funds. For those with a lower fund balance, a capped set of fees instead of a percentage of your fund balance, means you end up paying more in fees. The return on investment might not outweigh the recurring costs.
Trustees are liable
Trustees are liable for all decisions managing the fund. If the fund is not managed properly, then liability falls back to the trustees.
One of the most important compliance rules, is that the fund must be setup for the sole purpose of providing retirement funds for the members. Other responsibilities include developing an investment strategy, monitoring total SMSF balance and transfer caps, taking out appropriate insurance cover, only accepting contributions from the members, appointing a registered auditor, maintaining administration and record keeping, and lodging annual tax returns to the ATO.
With the right kind of professional support, the risks can be sufficiently lowered, however trustees still remain liable.
Time & Skills
There is time and skill required to effectively manage an SMSF. Being entirely responsible for your investment decisions means you’ll need the skills and knowledge of an investor. Professional support will give you a leg up, but it’s worth doing your due-diligence and taking responsibility in understanding where and how your money is going. This can take time to develop, but is advantageous to those willing to put in the work.
How much does an SMSF cost?
There are a number of fees associated with setting up and maintaining a SMSF, but remember to think of these as a percentage of your balance, as when your fund balance starts to grow, other funds often base their fees on a percentage of your balance, while an SMSF is a set of fees.
Much of the cost involved in an SMSF is related to professional services, so now would be a good time to consider who might be involved in your SMSF.
You’ll need an auditor who is registered with ASIC, to complete your funds audit each year. The auditor must be independent from your SMSF accountant and/or Financial Planner. If there’s any issues with your SMSF, they’ll give you a qualified audit report.
An actuary will provide you with an actuarial certificate. This will help you work out the amount of tax benefits available to your SMSF, where the fund has both accumulation balances and is paying an income stream.
Each year, you’ll have to work out the value of your asset. In some cases, you’ll need an independent valuer who’s qualified to do this.
You might also need an administrator who can manage most of the day-to-day running of your fund
For financial accounts, statements, and tax returns, this is best suited to an accountant who can prepare these each year before the SMSF is audited. Consulting a tax accountant is a must, to make sure you’re complying with the ATO’s regulations around Self Managed Super Funds.
Being responsible for those investment decisions means you’d be wise to seek council to select the right investments for your fund. A financial planner can help you choose and manage fund investments so you can be confident in your return on investment.
Finally, for complex setups, you might want to consult a superannuation specialist, tax specialist, or legal specialist to help smooth out the fine details of your SMSF, and cover all your bases.
SMSF investment strategies
There’s a number of areas to consider when putting together an SMSF strategy; risk, liquidity, Insurance, diversification, members circumstances are some of the most important to include. However, it’s not something you can just set and forget.
Your investment strategy should take into consideration the level of risk or volatility that is involved in your investments and if it’s appropriate for the members of your SMSF at this stage in their lives.
Spreading your investments is usually a wise idea. Your investment strategy should outline your plan around where you’re investing your money.
Your fund will need access to cash for fees like administration or income tax. Your strategy might want to ensure your money isn’t completely tied up in fixed assets so you have access to cash when fees are due.
Your strategy will need to account for your members and their insurance needs, along with allocating a beneficiary.
Regularly reviewing your investment strategy is a good idea to ensure it’s up to date with you and your other members circumstances. A good time to comb over your strategy would be if you add another member to your fund or if you start paying an income stream to another member.
Setting up an SMSF
There’s a few steps in setting up an SMSF. Our recommendation is to seek professional advice before you begin, an SMSF accountant will do the trick.
This is how you can set up an SMSF:
- Involve SMSF professionals right from the start, including an accountant to set up the fund's financial systems and provide tax compliance advice, a fund administrator to assist in administrative tasks, a legal practitioner to prepare your funds trust deed, and a financial advisor to help develop your investment strategy
- Choose individual trustees or a corporate trustee
- Appoint your trustees/director
- Develop your trust and trust deed
- Check compliance as a compliant fund
- Register your SMSF and get an ABN
- Open a bank account
- Get an Electronic Service Address (ESA) and set up SuperStream
- Put together an exit strategy
Is an SMSF right for you?
That’s the big question. If you’ve made it this far, chances are you’re pretty sure an SMSF could be a viable option for you, and we’ve given you a kickstart in understanding the circumstances that lend themselves to starting an SMSF. However, there are many nuances that the right SMSF accountant can help you understand, so you’ll feel confident you’re doing the right thing.
If you’re ready to talk to an accountant about whether an SMSF is right for you, we have a passionate team of SMSF accountants here to help. Just jump on the phone or send an email and we’ll be happy to chat.