An SMSF, commonly referred to as DIY super, is a super private fund that you administer on your own, as the name suggests. Control is the top justification given by people for choosing to fly solo, which is not surprising.
Members of SMSFs have influence over the investments made with their retirement funds. Poor performance of an existing public fund and recommendations from an accountant or financial planner are two additional factors for adopting an SMSF.
The Australian Taxation Office's recent statistics show that there are close to 600,000 SMSFs in Australia. These funds have more than 1.1 million Australian members.
Consequently, how do SMSFs operate and how do they stack up against super public funds?
Would you like to speak to a specialist? Book a complimentary discovery session by calling: (03)999 81940 or emailing team@klearpicture.com.au.
An overview of SMSF rules
The sole objective of establishing an SMSF must be to provide members with retirement benefits (or to their dependants if any of the fund members die before retiring).
Making a trust—a legally binding tax structure—with either person or corporate trustees is necessary in setting up an SMSF. The SMSF's assets are managed by trustees, who ultimately make sure the fund consistently complies with tax and superannuation laws. The ATO must be taxed, audited, and reported on annually as part of this compliance.
Who can be a member of an SMSF?
An SMSF must have trustees who are also all of its members. Each member of an SMSF must serve as a director of the corporate trustee if the fund elects to have one. Each director of the company must be a member of the appropriate SMSF, and the company must be registered with the Australian Securities and Investments Commission (ASIC).
Currently, an SMSF can have a maximum of four trustees or members, although there have been discussions about raising that limit to six in the future.
A person must agree to serve as a trustee and accept their obligations by signing a trustee declaration in order to be qualified to join (and subsequently become a trustee of) an SMSF. Members/trustees of SMSFs cannot:
- Having a bankruptcy filing
- Formerly been barred from serving as an SMSF trustee by an administrative body, a court, or ASIC
- Have a relationship of employment with another fund participant (unless they are a relative).
Under the condition that a trustee agrees to act on their behalf, minors under the age of 18 are permitted to join an SMSF. In most cases, this is a parent or guardian.
How does an SMSF work?
Trustees make investment decisions on behalf of SMSF funds. Having a written investment strategy is a regulatory requirement for SMSFs. This investment plan should meet the only purpose test, and trustee decisions should be based on it.
When creating an investing strategy for an SMSF, it is crucial to take the following into account:
- Individual characteristics of fund participants, including their age, financial status right now, and risk tolerance
- The advantages of risk-reduction through investment diversification for the fund. Shares, real estate, and fixed-interest products are the main investment possibilities.
- How quickly its assets may be converted into cash when necessary to provide future rewards to members
- The members' current insurance requirements to guarantee that the right coverage is set up.
What are some of the benefits of SMSFs?
Among the principal advantages of SMSFs are:
Greater flexibility with tax
Investing through superannuation may be tax-efficient. The general rule in Australia is that SMSFs that abide by the superannuation laws are entitled to tax their members' contributions and fund earnings at the 15% concessional superannuation rate (up to certain limits).
Additionally, rewards earned after 60 are tax-free. When an SMSF is in pension mode, fund profits are also tax-free. SMSFs may apply tax planning techniques related to capital gains, taxable income, or franking credits.
Greater control over investments
SMSF trustees have more authority over the investments made with their funds. Many of the items accessible to public funds and certain others are available for investment by them. For instance, unlike many public funds, SMSFs aren't restricted to property trusts and can invest directly in residential real estate.
SMSFs may also be able to buy commercial real estate that they can later lease to a connected party.
Potentially lower fees on very high super balances
Members of public super funds are frequently assessed a percentage fee based on how much money they have invested. In contrast, SMSF costs are typically based on a fixed fee for advice and services rather than fund balances.
The average ongoing annual costs for public superannuation funds in June 2017 were 0.8 per cent of member fund balances, according to APRA. Accordingly, a person with a $1.5 million balance in a typical ordinary super fund would be required to pay $12,000 in annual fees. The average ongoing expenditures for SMSFs with the same balance were $15,900 (1.06 percent).
However, the average ongoing fees for SMSFs were lower than those for public funds until balances reached $2 million ($13,800 annually or 0.69 percent of member fund holdings).
However, there is no such thing as an average fee in real life. The actual costs associated with an SMSF will vary depending on the investments you select and the expert services you employ.
Estate planning
The fact that SMSF funds can offer more flexibility with member death benefits than public funds is one of their sometimes ignored advantages.
An SMSF member could, for instance, arrange for:
- Allowing the SMSF to continue running, death benefits will be provided to a dependent as a pension rather than a lump payment.
- Money that will be given tax-efficiently to future generations
- Non-cash assets (such as real estate or stock) will be given directly to a beneficiary.
Asset protection
SMSFs offer a practical means to safeguard member assets from potential bankruptcy or other creditors' claims. They may therefore be particularly appealing to business owners and professionals.
The Bankruptcy Act does not regard superannuation money to be "property."
What are some of the drawbacks of having an SMSF?
The following are the main drawbacks of owning an SMSF:
The knowledge, time and cost required
It might take a lot of effort and money to manage an SMSF. There are requirements for compliance, including the filing of tax returns, annual financial statements, and independent audits. Despite many of these responsibilities being outsourced, SMSF trustees still need to devote time to organising and supervising them.
Additionally, it's generally advised to have solid knowledge of fundamental investing principles. It is best to obtain independent expert financial counsel if trustees lack this understanding. There will be a price for this advise, of course.
Higher costs on lower super balances
Because SMSF services often have flat fees, members with modest balances typically experience greater fluctuation than they would if their money were placed in public funds.
For instance, a person with a balance of $100,000 in a public fund would be charged $800 in yearly fees based on the average ongoing annual public super fund costs (0.8 percent of balances) recorded by the Australian Prudential Regulation Authority (APRA) in June 2017. This is a great deal less expensive than the average annual costs for SMSFs with the same amount, which are $6,400. Average annual ongoing fees for SMSFs were $8,150 and $2,000 for members of public funds, respectively, for balances of $250,000.
Average fees are deceptive once more. Your exact costs may vary depending on the investments and services you select.
Higher insurance costs
Typically, public funds are able to offer their members insurance at a lower cost than SMSFs. This is due to the fact that they have sizable memberships and may bargain with insurance companies to receive cheaper bulk premiums.
To continue receiving the insurance benefits, some SMSF members continue to maintain some funds in a public fund.
How are SMSFs regulated?
The ATO and ASIC both directly regulate SMSFs (indirectly).
The ATO makes sure SMSFs adhere to their tax and financial reporting requirements.
ASIC handles Independent SMSF auditor registration. SMSF auditors are essential in making sure that all regulations are followed. Any violations must be reported to the ATO and fund trustees.
For non-compliance, SMSF trustees may face severe sanctions, such as:
- Loss of their fund's favourable tax treatment
- Being removed from their positions (meaning they can no longer be members of the SMSF, nor can they start a new fund)
- Depending on how seriously a law was broken, fines or imprisonment may be imposed.
What distinguishes an SMSF from other types of super funds?
The following are some key distinctions between an SMSF and other super funds:
1. Members of SMSFs are the fund's trustees
This implies they are in charge of managing the fund and are liable for ensuring that it complies with tax and superannuation regulations. Generally speaking, competent, licenced trustees who oversee legal compliance are employed by public super funds.
2. SMSFs can only have a limited number of members
An SMSF may have a maximum of four members. Since a couple or a single person operates most SMSFs, this is often not seen as a restriction.
The customary maximum number of members for super public funds is unlimited (other than a small APRA fund explained later in this article).
3. All investment choices are made by SMSF trustees, who also create their fund's investment plan
Members of public super funds typically aren't able to select the precise assets in which their monies are invested. They typically do, however, have some degree of control over the variety and composition of their investments.
4. ASIC and the ATO regulate SMSFs
The APRA oversees public funds.
5. Public fund members have access to the Superannuation Complaints Tribunal to resolve disputes
In the event of trustee misconduct or fraud, members of public funds may also be entitled for a government compensation programme.
Members of SMSFs, on the other hand, are required to settle their disagreements, if necessary by going to court.
What is the difference between an SMSF and a super wrap?
A super wrap is an account that combines some of the traits of an SMSF and a super public fund. Public funds' obligation for the expansion of SMSFs lies with wrap accounts.
Members of super wrap accounts don't have to be trustees, but they do own the underlying investments in those accounts. Therefore, those who have a great wrap are not accountable for maintaining it or ensuring that it complies with the law. The APRA, not the ATO, is in charge of super wrap account regulation.
Despite the fact that super wrap account holders often invest largely in equities, term deposits, and cash, they frequently have access to wholesale and institutional investment products that SMSFs do not.
Members of SMSFs have access to a wider variety of prospective investment assets than those who have a super wrap, such as direct investments in residential or commercial property.
What is the difference between an SMSF and a small APRA fund?
Superfunds governed by APRA that have less than five members and a licenced trustee are known as small APRA funds (unlike SMSFs where fund members are the trustees). Small APRA funds are often offered by large financial institutions with an Australian financial services licence from ASIC.
Investors can have more control over their super assets with a small APRA fund than they can with a normal public fund without having to become trustees. In contrast to SMSFs, small APRA funds have recourse to the Superannuation Complaints Tribunal to handle member issues.
The conclusion
A self-managed super private fund (SMSF) gives you more influence over the investments made using your retirement funds.
However, creating an SMSF is a significant decision that has continuing costs and time-consuming legal compliance obligations.
Ultimately, factors like these will determine whether an SMSF is a good choice for you:
- Your amazing balance at the moment
- How much experience do you have with investments, and free time do you have to manage your fund
- The kind of investments you wish to make in assets.
It is best to seek independent professional advice to ascertain whether establishing an SMSF is appropriate for your circumstances as the information in this article is broad in nature.
Would you like to speak to a specialist? Book a complimentary discovery session by calling: (03)999 81940 or emailing team@klearpicture.com.au.
SMSF administration
To ensure that their fund complies with superannuation legislation, SMSF trustees have a number of administrative responsibilities, including:
- time the fund is established by executing and providing its trustee declaration to the ATO.
- set up to show they understand all of their obligations,
- making sure a trust deed is used to establish the fund,
- selecting a licenced independent auditor by ASIC,
- Putting fund assets up for market,
- I've paid the ATO supervisory levy.
- reporting based on events,
- disclosing any changes to trustees or fund members, and
- keeping financial and general fund records.
Depending on the seriousness of the non-compliance, the ATO may apply a variety of sanctions on SMSF trustees who breach their administrative duties. Some trustees might find it beneficial to seek professional guidance to help them achieve organisational compliance.
- Fees associated with managing your money. ...
- Residing in a foreign country. ...
- Despite the quicker decisions, SMSF is time-consuming. ...
- Restrictions on access to dispute resolution institutions. ...
- Decision-making involves financial and legal risks.
- Establish a Trust. The first step involved with setting up an SMSF and registering an SMSF with the ATO is establishing a trust. ...
- Obtain the trust deed. ...
- Sign a declaration. ...
- Lodge an election with the regulator. ...
- Open a cash account.