What kind of people are drawn to administering self-managed super funds (SMSFs), which are now firmly established in Australia's superannuation system?
Currently, SMSFs, which are privately managed super funds, can have one to four members.
More than 1.1 million Australians are members of SMSFs, according to the most recent statistics from the Australian Taxation Office (ATO). Although the rate of growth has been declining for some years as the industry ages, the number is still increasing rapidly. They possess 26% of the $2.9 trillion in super assets collectively.
These SMSF members are increasingly female, especially in younger age groups. Women made up 47% of SMSF members as of the most recent count, and their average balance was $624,000 Women's savings are growing at a higher rate than men's, up 28% over five years vs 21% for males, although being lower than the average balance of $754,000 for men.
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Nearly 70% of SMSFs have two members, who are often an older married couple; 23% have just one member; only 3.5% have three, and a comparable percentage have four. And for many years, these percentages have remained stable. The proposed increase in the maximum member count from four to six has been postponed. Although the Morrison Government has stated that it is still committed to the reform, the present funding structure suggests that there may not be much of a need for it.
An SMF, or self-managed super fund, is a specific kind of trust established and run in accordance with superannuation law. As a result, an SMSF trustee is needed to oversee the fund's operations, make decisions for it, and make sure it abides by the super laws. In a self-managed super fund, each member is also a trustee or director of the SMSF trustee firm, as opposed to a retail fund where a board of trustees takes decisions on behalf of all fund members.
Choose between an individual or corporate trustee structure when thinking about creating an SMSF. Additionally, the format you select could have a number of long-term effects on how you manage your fund, the regulations you must follow, and fees (among other things). Therefore, before establishing your fund, it's crucial to know what you're entering into and give each structure due thought.
A super private fund that you administer yourself is referred to as a self-managed super fund (SMSF). SMSFs are distinct from retail and industry super funds.
When you manage your own retirement savings, you put the money that you would typically put into a retail or industrial super fund into your own self-managed super fund (SMSF). You have options with regards to both investments and insurance.
Your SMSF allows for the participation of up to four close friends or members of your immediate family. The use of two or more is typical in SMSFs. As a member of the fund, you have the option of serving as its trustee or hiring a corporate trustee. In either of the two possible outcomes, you will be in command of the fund.
Being in command of one's own super can seem appealing, but doing so calls for a significant amount of effort and is fraught with danger. You should only establish your own retirement savings plan if you are completely committed to doing so and well aware of the associated dangers.
Choose the option that is best for you and understand the differences.
You will be given the option to construct your SMSF utilizing an individual or corporate SMSF trustee structure when you first set it up. While in a corporate network, a business serves as the trustee and the members are directors, in a unique design, each member serves as the trustee. While initially, an individual SMSF trustee may seem more straightforward than a corporate SMSF trustee, it may not always be your best long-term option.
Various SMSFs
Individual trustee
Structure
Two to four individuals. Every trustee must also be a fund member, and every fund member must be a trustee.
One-person fund
Two trustees are required. One of the two trustees needs to belong to the fund. The fund member and the other trustee must be related if the fund member works for the other trustee.
There is no benefit for a single member. The sole member of the SMSF must still locate a second person to serve as the second trustee and assist in managing the SMSF because the SMSF must have two separate trustees.
Fee
Since there is no ASIC cost, it is less expensive. Consequently, setup fees and continuing administrative needs are lower.
The setup fee is about $350. Typically, annual maintenance includes:
- Cost of administration: $1,200
- Cost of audit: $395
Any further work will be billed individually. Examples of this additional labour include creating the Bare trust and creating an investing plan, among others.
Ownership
When you add or remove a personal trustee, it would be beneficial if you notified the ATO and any financial institutions that are connected to your SMSF. As most institutions and authorities will charge for title changes, this takes time and costs a little money.
Assets
Assets belonging to the fund must be in its name alone and cannot be mixed with the personal assets of any member.
Penalties
If the rules established by the super are broken, each individual trustee will be penalized. For instance, if the trustee has four individual members, each one of them will be subject to fines.
Succession
The fund probably won't keep running normally whenever there are trustee changes unless a suitable succession plan is created.
Borrowing
Under individual trustees, the LVR (Loan to Value Ratio) is typically lower. Individual trustees often receive less favour from banks than corporate trustees.
Estate planning flexibility
A trustee must be replaced when a member passes away, which results in a lot of administrative labour and expenses.
How a personal SMSF trustee operates
An SMSF system with individual trustees includes:
Trustees who are private individuals (as the name suggests) The trustees are all members (exception may apply for single-member funds) a minimum of two and a maximum of four trustees
There can be no more than four* members, all of whom must also be trustees and who are not permitted to work for another fund member unless they are related.
assets held in trust for SMSF members and registered in the names of the individual trustees.
If an individual trustee structure offers the following advantages:
- Trustees who are individual people (as the name suggests) each trustee is a member (exception may apply for single-member funds) of at least two trustees, with a maximum of four*
- no more than four* members must also be trustees and cannot be employees of another member of the fund unless they are related.
- Assets are registered in the name of the individual trustees and owned in trust for the members of the SMSF.
On the other hand, there are some drawbacks to an individual SMSF trustee arrangement, including:
- need two trustees at all times, which can be challenging for succession planning (e.g. where there are two members and one leaves or passes away)
- Adding or removing members and changing the ownership of your assets may be difficult.
- Having trustees as the legal owners of assets makes it simple for personal and SMSF investments to unintentionally become jumbled together.
- For certain asset categories, including property, declarations of trust could be necessary.
- Each individual trustee is subject to ATO administrative fines. Penalties that are up to four times those of a corporate trustee may come from this.
Corporate trustee
Structure
One to four members.
Each member of the fund must be a director of the corporate trustee (that is, the company), and each director of the corporate trustee must be a member of the fund.
One-person fund
A maximum of one or two directors may serve as the corporate trustee. The only director or one of the two directors must be a fund member.
The fund member and the other director must be related if there are two directors and the fund member works for the other director.
There is a member-only advantage. One person can create an SMSF in which they are the only member and the lone director.
Fee
ASIC charges a setup fee and a fee for its yearly review.
Please be aware that the charge is higher if the corporate trustee also serves other purposes, such as managing a business, as opposed to just serving as a super fund trustee.
The setup fee averages $1,000. Typically, annual maintenance includes:
- Cost of administration: $1,500
- Cost of audit: $395
Any further work will be billed individually. Examples of this additional labour include creating the Bare trust and creating an investing plan, among others.
Ownership
You cease serving as a director of the corporate trustee if you begin or end is a member of the SMSF. In the event that the directorship changes, you must inform ATO and ASIC.
Assets
Holdings belonging to the fund must be in its name alone and cannot be mixed with a director's personal assets.
Penalties
If the rules established by the super are broken, the corporate trustee will be penalized rather than any of the individual members. For instance, if the trustee has four members or directors, only one fine will be assessed against the corporate trustee.
Succession
The corporate trustee's control over the SMSF and its assets are more defined in the case of a member's demise or incapacity.
Borrowing
Under corporate trustee, the LVR is typically higher. Corporate trustees are often given precedence by banks.
Estate planning flexibility
Greater flexibility in estate planning because the trustee remains the same after a member's death. A director who transfers their shares in the corporate trustee can also exercise more control over their succession plans.
Workings of a corporate SMSF trustee
An SMSF arrangement with corporate trustees includes:
- a business created to serve as the legal trustee
- Four directors maximum in the corporation
- There can be a maximum of four members, all of whom must be corporate directors. Unless they are related, members of the fund cannot be paid or employed by other members of the fund.
- assets held in the corporation's name.
A corporate SMSF trustee structure has the following advantages:
- Adding or removing members can sometimes be simple and more affordable.
- When a director or member is added or dismissed, the legal ownership of the assets is unaffected.
- If you want to operate your SMSF independently, this is your only choice. If you have two members and one of them passes away, there may be less issues with succession planning because the other person can continue to serve as the sole director of the trustee company.
- The corporate trustee is subject to ATO administrative penalties, not each individual director.
As an alternative, SMSF corporate trustees also have a few drawbacks, such as:
- Additional costs - since you're forming a company, there are more startup and operating costs involved (unless you form an outstanding purpose company with the sole intent of serving as your corporate trustee; in this case, the running costs can be reduced and you only need to file one tax return for your SMSF).
- Corporation law also imposes obligations on your SMSF.
Сomparing the various SMSF trustee structures
When it comes to managing your own retirement wealth, an SMSF might give you more options and control. However, you must make sure that the trustee structure of your SMSF supports your overall financial objectives, which is not always simple to determine on your own.
Before making a choice, we suggest you consult your family and advisor about the following issues, among others:
- Are you aware of all the expenses and legal ramifications for every trustee configuration for an SMSF?
- What assets (such as stocks or real estate) are you looking to invest in? Certain structures work better with certain forms of financing.
- What would transpire if one of the trustees resigned or passed away?
- Will you have additional assets in addition to your SMSF? And what safeguards are in place to safeguard these in the event that a claim is made against your fund? Your assets outside of your fund are not shielded from liability claims in an individual structure.
- There are far too many factors to mention here, so this is only a sample of some of the things you should think about. Therefore, it is imperative to get counsel before making a decision.
Members of various SMSF types
Having the drive to select and control one's own super investments is the characteristic that drives the majority of people who decide to form or join an SMSF. In a report released in 2017, CBA and the SMSF Association classified SMSF members into the following four investor profiles:
The Controller
The most typical kind of SMSF member is this one. They desire to have extensive control over the management of their fund and the choice of investments. Although they may consult a professional, they are confident in their abilities to manage their SMSF, particularly when it comes to making investment decisions.
The Self-directed Investor
Compared to a controller, this type is less likely to consult a professional advisor when managing their fund or choosing investments. They are extremely confident in their own skills.
The Coach Seeker
Coach seekers manage their SMSFs and make investment decisions with a moderate level of activity. They don't entirely outsource, but they do seek professional advice to assist them.
The Outsourcer
This particular type of SMSF member likes to hire specialists to handle their fund's day-to-day administration and investment decision-making.
The dangers and obligations of SMSFs
An SMSF's choices and adherence to the law are the responsibility of all members.
There are risks associated with these duties:
- Every decision made by the fund must be approved by you directly, regardless of whether a professional or another member assisting you.
- The returns on your investments could not meet your expectations.
- Even if your situation changes, such as if you lose your work, you are still in charge of administering the fund.
A member's death or illness, the dissolution of a member's relationship, or any other of these events could have a detrimental effect on your SMSF.
You won't have access to any unique compensation plans or the Superannuation Complaints Tribunal if you lose money as a result of theft or fraud.
If you switch from an industry or retail super fund to an SMSF, you can lose your insurance.
Would you like to speak to a specialist? Book a complimentary discovery session by calling: (03)999 81940 or emailing team@klearpicture.com.au.
SMSFs require both time and money.
An SMSF requires a lot of work to run. It takes time, even with professional assistance.
You need sufficient time to establish the fund and to oversee continuing tasks, such as:
- looking into investments establishing and implementing an investment strategy, keeping financial records, and scheduling an annual audit by a certified SMSF auditor An SMSF is managed by its trustees for an average of eight hours per month. That equates to more than 100 hours annually.
- Along with the average individual member and total fund balances, the number of SMSFs in Australia has increased over the past few years. Another trend is the rise in female SMSF owners and the narrowing of the gender pay gap in account balances.
- The ability to select and manage their own pension assets typically draws SMSF members. However, establishing and managing an SMSF can come with a number of expenses and duties, so the advantages must exceed the drawbacks.