financial plan

Different types of Self-managed super funds (SMSF)

Self-managed super funds (SMSFs) are now firmly embedded in Australia’s superannuation system, so what type of people are attracted to running their funds?

SMSFs are privately run super funds that can currently have between one and four members.  

According to the latest Australian Taxation Office (ATO) statistics, more than 1.1 million Australians are members of SMSFs. The number continues to grow steadily, although the rate of growth has been falling for several years as the sector matures. Collectively they hold 26% of the $2.9 trillion in super assets.

Increasingly, those SMSF members are female, especially in younger age groups. At last count, 47% of SMSF members were female with an average balance of $624,000. While lower than the average balance of $754,000 for men, women are growing their savings at a faster rate, up 28% over five years compared with 21% for men.

Almost 70% of SMSFs have two members, typically an older married couple; 23% have one member while only 3.5% have three members and a similar proportion have four members. And these percentages have been consistent for many years. Plans to increase the maximum number of members from four to six have been delayed. The Morrison Government has indicated it remains committed to the move, but the current make-up of funds would indicate there may not be much demand for change.

A self-managed super fund (SMSF) is a particular type of trust created and managed following superannuation legislation. It, therefore, requires an SMSF trustee to control and make decisions for the fund and ensure it complies with the super rules. In a retail fund, a board of trustees makes the decisions for all fund members, but in a self-managed super fund, each member is also a trustee or a director of the SMSF trustee company.

When considering setting up an SMSF, you’ll need to decide whether to have an individual or corporate trustee structure. And the format you choose can have several lasting implications for how you administer your fund, the rules you need to abide by, and costs (among other things). So it’s essential to understand what you’re getting into and consider each structure carefully, before establishing your fund.

Self-managed super fund (SMSF) is a super private fund that you manage yourself. SMSFs are different from industry and retail super funds.

When you manage your own super, you put the money you would typically put in a retail or industry super fund into your own SMSF. You choose the investments and the insurance.

Your SMSF can have up to four members, who are friends or family. Most SMSFs have two or more. As a member, you are a trustee of the fund — or you can get a corporate trustee. In either case, you are responsible for the fund.

While having control over your own super can be appealing, it’s a lot of work and comes with risk. Only set up your own super fund if you’re 100% committed and understand what’s involved.

Make the right choice, understand the differences. 

When you first set up your SMSF, you’ll be asked to choose between establishing your SMSF by using an individual or corporate SMSF trustee structure. With a unique design, each member acts as the trustee, but with a corporate network, a company acts as the trustee and the members are directors. While an individual SMSF trustee may sound more straightforward than a corporate SMSF trustee initially, it may not necessarily be the most efficient option for you in the long-term. 

Types of SMSF 

Individual trustee

Structure

Two to four members. Each member of the fund must be a trustee, and each trustee must be a member of the fund.

Single-member fund

There must be two trustees. One of the two trustees must be a fund member. If the fund member is an employee of the other trustee, then the fund member and the other trustee must be relatives.

Sole member benefit does not exist. As the only member SMSF must have two individual trustees, this still requires the sole member to find another individual to act as the second trustee and assist in managing the SMSF.

Fee

It is less expensive as there is no ASIC fee. So, setup cost and ongoing administrative requirements are lower.

Setup cost is around $350 Annual maintenance comprises typically:

  • Administration cost: $1,200
  • Audit cost: $395

Note: Any extra work is charged separately. Examples of such extra work include establishing the Bare trust, preparing investment strategy, etc.

Ownership

It would help if you informed the ATO and financial institutions (related to your SMSF) when you remove or add an individual trustee. This is time-consuming and slightly expensive as most of the authorities and institutions will charge for the title changes.

Assets

Fund assets must be in the name of the fund, and must not be combined with member personal assets of a member.

Penalties

If the laws set in super are breached, then the penalty is levied on each individual trustee. For example, if there are four individual members in the trustee, then all four members will receive penalties.

Succession

Whenever changes in trustees occur, the fund is not likely to continue to operate as usual unless an appropriate succession plan is prepared.

Borrowing

The LVR (Loan to Value Ratio) under individual trustees is usually lesser. Banks typically give less preference to individual trustees compared to corporate trustees.

Estate planning flexibility

The death of a member requires a change of trustee, and this gives rise to considerable administrative work and costs.

How an individual SMSF trustee works

An individual trustee SMSF structure has:

Trustees who are individual people (as the name suggests) each trustee is a member (exception may apply for single-member funds) at least two trustees, with a maximum of four*

no more than four* members who must also be trustees and cannot be employees of another member of the fund, unless they are related.

Assets registered in the name of the individual trustees and owned in trust for the members of the SMSF.

If the benefits of an individual trustee structure include:

  • it’s cheaper to set up than a corporate system and may be less expensive to run – you don’t need to set up a company, and there are no ASIC fees
  • because it’s not a company, you don’t need to abide by additional regulations that companies are bound by.

On the other hand, an individual SMSF trustee structure also has some disadvantages, such as:

  • always having to have two trustees, which can be problematic for succession planning (e.g. where there are two members and one leaves or passes away)
  • it may be cumbersome to add or remove members and change the ownership of your assets.
  • Having trustees as the legal owner of assets can easily lead to SMSF and personal investments inadvertently being mixed.
  • Declarations of trust may be required for specific asset types, such as property.
  • ATO administrative penalties apply to each individual trustee. This can result in penalties of up to four times that of a corporate trustee.  

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.

Single-member fund

The corporate trustee can have one or two directors, but no more than that. The fund member must be the sole director or one of the two directors.

If there are two directors and the fund member is an employee of the other director, then the fund member and the other director must be relatives.

Sole member benefit exists. An SMSF can be set up where one individual is both the only member and the sole director.

Fee

ASIC charges a fee during setup, and also a fee for ASIC annual review.

Please note that the fee is lower if you run the corporate trustee solely as a super fund trustee, but is higher if the corporate trustee also performs another function such as running a business.

Setup cost is around $1,000 Annual maintenance comprises of typically:

  • Administration cost: $1,500
  • Audit cost: $395

Note: Any extra work is charged separately. Examples of such extra work include establishing the Bare trust, preparing investment strategy, etc.

Ownership

When you start or stop being the member of the SMSF, you cease as the director of the corporate trustee. You must notify ATO and ASIC for any changes to the directorship.

Assets

Fund assets must be in the name of the fund, and must not be combined with the personal assets of a director.

Penalties

If the laws set in super are breached, then the penalty is levied on the corporate trustee, instead of any of the individual members. For example, if there are four members/directors in the trustee, then only one penalty will be levied on the corporate trustee.

Succession

In the event of the death or incapacity of a member, the control of the SMSF and its assets by the corporate trustee is more specific.

Borrowing

The LVR under corporate trustee is usually higher. Banks typically give preference to corporate trustees.

Estate planning flexibility

Greater flexibility for estate planning, as the trustee does not change as a result of the death of a member. A director can also have greater control over their succession plans by passing on their shares in the corporate trustee.

How a corporate SMSF trustee works

A corporate trustee SMSF structure has:

  • a company that is set up to act as the legal trustee
  • no more than four directors in the company*
  • no more than four* members who must also be directors of the company, and cannot be paid or employees of another member of the fund, unless they are related.
  • Assets registered in the name of the company.

The benefits of a corporate SMSF trustee structure include:

  • It can be easy and more cost-effective to add or remove members
  • Legal ownership of assets does not change when a director/member is added or removed
  • It’s the only option if you want to manage your SMSF by yourself
  • there may be fewer problems for succession planning where you have two members, and one passes away, as the remaining member can stay as the sole director of the trustee company
  • ATO administrative penalties apply to the corporate trustee, not each individual director. 

Alternatively, SMSF corporate trustees also have some disadvantages, including:

  • Additional expenses – because you’re setting up a company, there are more established and running costs involved (unless you set up an outstanding purpose company whose only purpose is to act as your corporate trustee; in this case, the running costs can be reduced, and you don’t have to lodge an additional tax return for the company, only for your SMSF).
  • Your SMSF is also bound by corporation legislation.

Weighing up the different SMSF trustee structures  

An SMSF can provide you with more choice and control when it comes to managing your own retirement wealth. However, you need to ensure that your SMSF trustee structure complements your overall financial goals, and this isn’t always easy to work out on your own.

Before proceeding with your decision, we recommend you discuss these questions, among others, with your family and adviser:

  • Are you aware of all the associated costs and regulatory implications for each SMSF trustee structure?
  • What assets do you wish to invest in (e.g. property or shares)? Some structures are better suited to different types of financing.
  • What would happen if one of the trustees were to leave the fund or pass away?
  • Will you have other assets outside of your SMSF? And what protections do you have in place to protect these in case a claim is made against your fund? In an individual structure, your assets outside of your fund are not protected from liability claims.
  • This is not an exhaustive list of considerations, but merely a sample of some of the things you will need to consider – too many to cover here. Therefore, it’s essential to seek advice before proceeding with your decision.

Different types of SMSF members

The most common trait for those deciding to start or join an SMSF is having the motivation to choose and manage their own super investments. In 2017, CBA and the SMSF Association produced a report that broke down SMSF members into the following four investor profiles:

The Controller

This is the most common type of SMSF member. They want to have a high degree of control over the management of their fund and investment decision-making. They may seek professional advice, but they are also confident in their own ability to manage their SMSF, especially concerning investment decisions.

The Self-directed Investor

This type is less likely to seek professional advice in managing their fund or making investment decisions than a controller. They have a high level of confidence in their own abilities.

The Coach Seeker

Coach seekers take a moderately active role in managing their SMSF and making investment decisions. They seek professional guidance to help them but don’t outsource completely.

The Outsourcer

This type of SMSF member prefers to almost totally outsource the day-to-day administration of their fund and investment decision-making to professionals that they hire.

The risks and responsibilities of SMSFs

All members of an SMSF are responsible for the fund’s decisions and for complying with the law.

These responsibilities come with risks:

  • You are personally liable for all the fund’s decisions — even if you get help from a professional, or if another member made the decision.
  • Your investments may not bring the returns you expect.
  • You are responsible for managing the fund even if your circumstances change — for example if you lose your job.

There may be a negative impact on your SMSF if there is a relationship breakdown between members, or if a member dies or becomes ill.

If you lose money through theft or fraud, you won’t have access to any special compensation schemes or to the Superannuation Complaints Tribunal.

You could lose insurance if you’re moving from an industry or retail super fund to an SMSF. 

SMSFs take time and money.

Managing an SMSF is a lot of work. Even if you get professional help, it’s time-consuming.

You need enough time to set up the fund, and time to manage ongoing activities, such as:

researching investments setting and following an investment strategy, accounting, keeping records, and arranging an audit each year by an approved SMSF auditor SMSF trustees spend, on average eight hours a month to manage an SMSF. That’s more than 100 hours a year. 

The number of SMSFs in Australia has continued to rise in recent years, along with average individual member and overall fund balances. Another trend is the growing number of women with SMSFs and a tightening of the gap between male and female account balances.

SMSF members are generally attracted by the freedom to choose and manage their own super investments. But there can be significant costs and responsibilities involved with setting up and running an SMSF, so the benefits must outweigh the costs.

You need financial and legal knowledge.

You need the financial and legal knowledge and skills to:

  • Understand different investment markets, and build and manage a diversified portfolio
  • Set and execute an investment strategy that meets your risk tolerance and retirement needs
  • Comply with tax, super and investment regulations and laws
  • Organise insurance for fund members
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