Are you looking to take charge of your own superannuation? Self-managed super funds (SMSFs) provide the opportunity for individuals and small groups to manage their own retirement savings in an efficient and cost-effective way.
Not only are you able to make decisions over how your tax savings are managed, but you can also design investment strategies and access a range of investment options not available through retail or industry funds.
If this sounds like something that interests you, then read on; we’re about to look into what self-managed super funds are all about and exactly how they work so that you can decide if it could be the best option for your financial future!
Let's get started!
Considering A Self-Managed Super Fund (SMSF)?
About one million people in Australia have their own Self Managed Superannuation fund and have taken the initiative to take control of their retirement savings by managing their own superannuation (SMSF). The Self-Managed Super option has been around for quite some time, and the industry as a whole currently has a combined asset value that is greater than $550 billion.
There are a lot of different reasons for this, but in our experience, control is the primary one. This includes control over investment decisions, control over asset allocation, control over costs, and control over assets.
One of the primary motivations for setting up a self-managed superannuation fund (SMSF) among Australians is the desire to make use of tax methods (such as direct property acquisitions) that are unavailable in retail funds.
What Is A Self-Managed Super Fund (SMSF)?
A self-managed super fund, also known as an SMSF, is a type of superannuation trust structure that offers members retirement benefits in the form of financial compensation. The fact that members of an SMSF are also allowed to serve as trustees of the fund is the primary distinction between SMSFs and other types of super funds.
SMSFs can have as few as one person and as many as four members, and one of the primary benefits is the level of discretion that trustees have when it comes to customising the fund to match the specific requirements of each individual member. This is in contrast to retail and industry super funds, which are intended to assist a big group of members. As a result, choices regarding these funds are focused on the interests of the group as a whole, as opposed to what is in the members' individual best interests.
How Does An SMSF Work?
Providing financial advantages to members of the SMSF during retirement and to their beneficiaries is the sole reason SMSFs are founded. Because they have their own Tax File Number (TFN), Australian Business Number (ABN), and transactional bank account, they are able to collect contributions and rollovers, make investments, and pay out pensions. Moreover, they have the ability to receive rollovers.
The trustees of an SMSF are in charge of managing each and every investment that is made in the name of the fund itself. An SMSF is considered to be a trust; hence it must have a trustee. There are two different structures that might be used for trustees:
- Corporate trustee – The role of trustee is played by the corporation, and each member also serves as a director. This structure makes it possible to document and register assets more easily, resulting in greater administrative efficiency and freedom for members. However, under this structure, there are fees associated with the establishment of the company as well as recurring fees.
- Individual trustee – Every member is given the opportunity to serve as a trustee, and the organisation must have a minimum of two trustees.
What Costs Are Associated With Self-Managed Super Funds (SMSFs)?
The following are examples of some of the expenses that may be connected with SMSFs, however, this list is not exhaustive:
- Introductory consultation fees;
- Setup expenses;
- Continuing costs of administration;
- Audit fees;
- Legal expenses.
What Are The Primary Benefits Of Establishing A Self-Managed Super Fund (SMSF)?
- SMSFs provide their members with a greater level of financial flexibility, allowing them to participate in a wider variety of assets and investment options;
- The buying power of the organisation can be increased by allowing members to pool their superannuation assets;
- The decision-making process on investments is open to participation from all members of the SMSF.
What Are The Most Significant Drawbacks Associated With Establishing A Self-Managed Super Fund (SMSF)?
- When you shift out of your current fund and into the SMSF, you are required to pay capital gains tax on the sale of any interests you have sold.
- A self-managed superannuation fund (SMSF) that has a high concentration on a single asset is not appropriately diversified and may sustain disproportionately large losses if the price of the asset decreases.
1. What are the annual costs?
- The annual supervisory levy for SMSFs, which is paid to the ATO;
- costs associated with preparing financial accounts and submitting applications to the ATO;
- The fees incurred by accountants in the preparation of an annual tax return and financial statement;
- Yearly auditors fees;
- Costs associated with the initial structural setting of the SMSF, which may include the fees of a trust deed and an investment plan;
- The cost of maintaining one's actuarial certification on an annual basis (when required).
2. What are the expenses that are not required to be considered?
- Fees charged by ASIC for the establishment of a corporate trustee;
- Costs associated with professional investing advice;
- Costs associated with accounting and bookkeeping;
- Investment management costs.
3. What are some of the other significant factors to take into account?
- The trustees of an SMSF are responsible for being aware of and in compliance with all applicable legal duties;
- The trustees are responsible for developing, putting into action, and evaluating the SMSF's investment plan.
- The trustees are accountable for the management of the fund, including the delegation of some responsibilities to third-party service providers;
- In the event that the fund violates the legal duties it has taken on, the fund may be subject to a penalty tax rate of 46.5%.
What Steps Are Needed To Be Taken In Order To Launch My Own Self-Managed Super Fund?
After you have decided on the name of the self-managed super fund, consulted with our super experts, and signed the documents for the self-managed super fund, we will fulfil all of the essential criteria for you, including the following needs:
- Getting an SMSF trust deed and selecting trustees are two important first steps (who must be members)
- In the event that it is required, establishing a trustee corporation and acquiring an ABN
- Make the decision to transform into a regulated fund.
- Acquire all required registrations from the Australian Taxation Office (ATO).
- Establish a banking relationship for the self-managed superannuation fund.
- You with the establishment of an investment plan for your superannuation, as well as the other requirements for the fund
- The process of obtaining the money for your rollover or transfer from your current superannuation accounts
- You will receive training in SMSF in order to aid you in comprehending your obligations.
Who Should Serve As The Trustees Of A Self-Managed Super Fund?
It is essential to ensure that all members of the self-managed super fund are qualified to serve as trustees since, in the majority of instances, every member of the self-managed super fund needs to be a continuous Australian citizen and either a trustee or director of the trustee company. In most cases, anyone who is at least 18 years old and does not have a legal impediment (such as being a kid, bankrupt, or suffering from mental illness) is eligible to serve as a trustee.
There is a wide variety of flexibility within the realm of single-member self-managed super funds. For example, because an SMSF cannot have a single individual serve as a trustee, the single member can either appoint a second individual (not the fund's employer) to serve in this capacity or serve as the sole director of the trustee firm.
When a trustee company is selected, all of the members of the super fund are required to serve as directors of the trustee company. In cases where a member is deemed to be legally incapable of making their own decisions, that member's legal representative may take on the role of trustee.
What Duties Are Included In Being An SMSF Trustee?
The trustees of an SMSF are the individuals accountable for choosing investments and guaranteeing that an investment plan is put into action for the fund. In addition, SMSFs are subject to stringent administrative duties, which require trustees to keep records, present financial reports, fill out a tax return, and organise an independent audit.
For this purpose, numerous trustees hire SMSF specialists to help them manage their accounting, auditing, and tax reporting, as well as provide financial and investment advice; nevertheless, they invariably simply remain accountable for the choices and administration of their funds. Therefore, trustees of self-managed superannuation funds (SMSFs) are required to hire SMSF experts.
The Superannuation Industry Supervision (SIS) Act 1993 specifies all of the responsibilities that trustees of self-managed super funds must fulfil. These responsibilities include, but are not limited to the following:
- Honesty should be practised in all aspects relating to the self-managed super fund.
- While managing the financial affairs of another individual, employ the level of knowledge and discretion that is typical of a prudent individual of average intelligence.
- Act in the interests of the members of the super fund as well as the dependents of those members.
- SIS requirements must be met in full (Superannuation Industry Supervision Act 1993)
- Keep records and fulfil the standards set forth by the ATO (the ATO, and not APRA, is the regulator for SMSFs)
- Observe any restrictions placed on investments.
- Contributions to superannuation should be accepted, and benefits should be distributed in accordance with applicable superannuation and tax legislation.
- Appointing a qualified SMSF auditor on an annual basis
- Doing an analysis of, as well as making any necessary updates to, the investment plan and trust deed of the self-managed super fund
What Kinds Of Contributions Are Able To Be Included In A SMSF?
A payment that is made to your self-managed super fund in the shape of cash or an asset other than cash is referred to as an "in specie" contribution. This type of payment is known as a superannuation contribution. You are required to accept contributions to your superannuation account in accordance with the following:
- Your trust deed for your self-managed superannuation fund
- The "contribution standards" that are included in the super laws
The applicable contribution limits (sometimes known as "contribution ceilings") are as follows:
Investing limitations of any kind
In general, your self-managed super fund should be capable of accepting the following, given that the governance laws of your super fund do not prohibit it:
- Employer contributions
- Personal contributions
- Salary sacrifice contributions
- Super co-contributions
- Eligible spouse contributions
In general, if you are the trustee of a self-managed super fund, you are not allowed to buy non-cash assets from connected parties. These related parties include fund members, as well as members of their families and partners, as well as associated companies and trusts.
There are a few noteworthy exceptions to this rule, the most notable of which are listed shares and securities as well as commercial real estate (land and buildings used wholly and exclusively in a business).
The Dangers of Self-Managed Super Funds
1. A lack of compensation required by law
The government does not provide the same protections to self-managed super funds that it does to APRA-regulated superannuation funds. As a result, self-managed super funds are also known as SMSFs.
When moving a current superannuation account balance from a superannuation fund that is regulated by the Australian Prudential Regulatory Authority (APRA) to a self-managed superannuation fund (SMSF), there are a few considerations to keep in mind, including the following:
- Members will exempt themselves from the compensation structure that is provided to investors in super funds that are regulated by APRA in the event that there is theft or fraud.
- If the fund suffers a loss because of theft or fraud, the members' eligibility for reimbursement under the laws governing superannuation will be affected.
2. Influence on the cost of insurance
When particularly in comparison to an APRA-regulated super fund, which can frequently obtain default levels of cover for life and TPD insurance with no medical evaluation, obtaining life insurance and TPD insurance through an SMSF is typically more difficult and more expensive.
This is the case because an SMSF is not subject to the same regulations. Therefore, it is possible that the fund does not have any insurance protection in place if the trustee of the SMSF does not actively seek such protection for the fund.
3. Access to several channels for filing complaints
There is a possibility that SMSFs will not have access to all of the dispute resolution systems, including the Superannuation Complaints Tribunal.
4. The viability of a variety of SMSF organisational configurations
When the SMSF has been formed, any modifications to the fund's structures, the ownership of assets, or the trustees can be expensive.
5. Responsibilities of trustees in the management of an SMSF
According to superannuation and taxes legislation, a trustee of an SMSF is legally obligated to comply with a number of significant tasks. These are the following:
- managing the Self-Managed Superannuation Fund (SMSF) in order to offer retirement benefits to members of the fund or members' dependents in the event that a member of the fund passes away before reaching retirement age;
- accepting contributions and distributing advantages to members and their beneficiaries in accordance with the SMSF trust deed, superannuation rules, and taxes regulations;
- preparing the financial statements by accurately appraising the assets contained inside the fund based on their actual value in the market;
- obtaining approval from an authorised auditor for the yearly SMSF audit; and
- satisfy the Australian Taxation Office's minimal standards for reporting and management as outlined in their guidelines (ATO).
6. Trustees have a responsibility to create an investment plan
The investment plan of an SMSF is something that needs to be formulated, put into action, and monitored on a consistent basis by the trustees. The following items are mandatory knowledge for trustees:
- ways to increase the risk and return profile of the fund by spreading its assets across a variety of asset classes in an appropriate manner;
- that there are limitations placed on the investments that can be made using the SMSF; and
- there are certain transactions that are not allowed, such as lending money from the fund to a member of the group.
7. When the time comes, you should think about an exit strategy
There are a lot of different reasons why trustees could desire to close down their SMSF. It is imperative that trustees of SMSFs analyse and implement exit strategies for their funds in order to facilitate a transition out of the fund in the simplest manner feasible. In the trust deed for the fund, detailed instructions for the winding-up process should be included.
Bottom Line
A self-managed super fund, also known as an SMSF, is a type of superannuation fund that gives people the capacity to handle their own retirement savings as well as their investments. In brief, an SMSF stands for a self-managed super fund.
It demands a major time and financial investment, but it also has the potential to deliver significant advantages and degrees of flexibility. However, when establishing a self-managed super fund (SMSF), you must consider the potential legal and tax ramifications and check that you have the necessary skills and experience to administer the fund successfully.