Most people have their superannuation connected to and controlled by a third party. This means that the superannuation fund is usually managed by a corporation, an industry body or a fund manager. In recent years there has been an increase in the number of people wanting to manage their own investments and that is where a self-managed super fund comes into play.
However, establishing and managing your own Self-Managed Super Fund (SMSF) can be time consuming and is not a decision that should ever be taken lightly. The advantages are that you get to make all the investment decisions. You are also responsible for complying with all the relevant laws concerning taxation and superannuation. Setting up an SMSF can be a life changing decision, so it is very important that you have some understanding of how a SMSF actually works before making any decisions.
What is a Self-Managed Super Fund?
SMSF is a means of saving for your retirement. Unlike other superannuation funds, a SMSF is one that you can manage on your own. The only purpose of an SMSF is to provide financial payouts to its members during their retirement. In the event of death this can then be passed on to any of it stipulated beneficiaries.
SMSF have their own bank account, as well as a designated Australian Business Number (ABN) and a separate Tax File Number (TFN). This allows the SMSF to make investments, receive contributions, pay out pensions as well as lump sums.
How Does a Self-Managed Super Fund Work?
A Self-Managed Super Fund (SMSF) can have up to four trustees. Once it has been set up, these trustees make payments into the SMSF. The trustees also make decisions on how this money should be invested, as well as managing the fund’s records, insurances and any expenses.
There also has a certain number of conditions that must be met before it an SMSF can be set up. These are as follows:
- An SMSF cannot have more that 4 members.
- Each trustee of the fund is also a member.
- Each separate member of the fund is a trustee.
- Trustees cannot be paid for their services as a trustee.
- Unless they are related, no member of the fund can be an employee of another member within the same fund.
In order to set up a SMSF, the first thing you need to do is create a trust. To establish the trust, you will need the following:
- Your trustees. These can either be individual members or a corporate trustee
- Your beneficiaries
- The intention to create a trust
- Any assets
The next step is to obtain the Trust deed. The Trust deed is a legal document that provides information on how to establish and run your SMSF. This is a useful document that you can refer to whenever making decisions about your fund. All trustees must date and sign the Trust deed and ensure that it is executed correctly under the law.
In order for the trust to be established, the fund must have some funds deposited into it even if it is just a token amount.
The Trustee Declaration must then be signed within 21 days of becoming a trustee or director of the corporate trustee. You must keep a signed copy of this declaration for your records.
Your SMSF must then be registered though the Australian Business Register. To take advantage of any tax benefits, you must choose the option to be Regulated by the Australian Tax Office (ATO). Once your SMSF has been registered, it will then be listed under Super Fund Lookup. This will allow employers and other funds to check your eligibility to receive contributions and rollovers.
You may also need to sign up to an SMSF messaging provider before your fund can receive employment payments. You will then have to provide each members Tax File Number in order to receive personal contributions from them. If a member does not provide this information then the fund will have to pay more tax towards their employer contributions.
You will also need to open a bank account under the names of all the trustees. This account will be used to accept cash and income from investments. It will also be used pay expenses and benefits to its members.
All money in this account must be completely separate from all business and personal assets.
There may be other actions that need to be taken in order to set up your SMSF, but this will depend on your personal circumstances. In order to avoid any potential problems with your fund going forward, you should discuss your circumstances with an SMSF advisor. That way you can be sure that your SMSF gets set up correctly from the start.
What are the Benefits of a Self-Managed Super Fund?
There are several benefits to setting up your own SMSF. These include:
- Control. With a SMSF you have more control over your savings for retirement. Instead of relying on a third party to manage your risk profile and make financial decisions concerning your investments, you become the fund manager.
- Investment Options. You have more flexibility on the buying and selling of your investments. As market conditions fluctuate you can quickly adjust your investment portfolio accordingly.
- Tax benefits. SMSF are entitled to tax concessional rates. This means that members can claim tax deductions for their superannuation contributions, as long as they don’t exceed the annual cap.
- Estate planning. SMSF members can make death benefit nominations that are permanent and don’t need to be updated every 3 years. Members may also have the flexibility to stipulating how death benefits can be paid out.
Interest Rates and Fees
There are several types of cost that go into setting up and running an SMSF. There are the initial costs in setting up the fund as well as the ongoing audit, administration and compliance fees.
Other fees to consider include:
- Broker fees
- Investment fees
- Professional advice
- Annual accounting fees
- Australian Tax Office Levy
- The annual ASIC Fee for corporate trustees
Anyone who is over the age of 18 years of age, and is not legally disabled, can qualify to be a trustee/member of a superannuation fund.. There are some exclusions to these criteria. An individual may not become a member of a superannuation fund if they are a disqualified person. A disqualified person includes anyone who:
- Has ever been convicted for dishonesty.
- Has been disqualified by the ATO.
- Is undischarged bankrupt.(if you have one)
- Has ever received a civil penalty order under the SIS Act.
A company may not act as the trustee of an SMSF if:
- Actions to close the company have begun.
- A liquidator, receiver or administrator has been appointed to the company.
- A responsible officer of the company is a disqualified person.
SMSF Finance Tips and Considerations
The decisions and responsibilities around the management of the find lie solely with you, the trustee. You are responsible for ensuring that the ongoing management of the fund complies with the Trust deed and all laws governing SMSFs. There are harsh penalties for non-compliance.
The laws around superannuation are complex. In order to be eligible for tax concessions, your SMSF is set up correctly from the start. The Australian Tax Office recommend that you appoint a professional to help in setting up your SMSF.
You need to be aware that there are some set up costs involved in the establishment of an SMSF. You can also expect some ongoing fees for the general running and maintenance of the fund.
While SMSF’s can be a good choice for some people, they are not the best option for everyone. It is advisable to discuss your personal situation with a professional to see whether an SMSF is the right option for you.
SMSF FInance FAQs
What is a trustee?
A trustee is a person or organization who manages the money or assets in trust for the benefit of someone else.
How many members can you have in Self-Managed Super Fund?
Self-Managed Super Funds can have a minimum of one member and a maximum of four members. All members need to be trustees of the fund.
How much money do I need to set up an SMSF?
Experts recommend a minimum of $200,000 in order to cover the initial set-up and ongoing running costs.