Superannuation tends to be a ‘set and forget’ ordeal for many Aussies and as long as contributions are being made by their employer, they don’t really pay it too much mind. Self-managed super funds (SMSFs) offer a more hands-on and flexible approach to super. It may not be for everyone, but with its growing popularity and over 1 million Aussies taking the SMSF approach, understanding what it is and it works is important.
So, let’s get right into it!
What is an SMSF?
An SMSF is still a regulated superannuation fund, just run by someone privately rather than through a big retail fund. In order to be valid, a SMSF must still comply with some fairly stringent superannuation laws. With it come advantages, disadvantages, flexibility, control, compliance, and obligations. The trustee(s) manages the fund, including implementing the investment strategy, admin duties and tax requirements.
How does it work?
An SMSF is a separate legal entity, and members of the fund are also either the trustee(s) of the Fund themselves, or a director of a corporate trustee.
The trustees are responsible for their financial future, building retirement savings and providing for dependants. They must also follow all legal obligations and care for the fund’s investments. This is a serious responsibility that should not be taken lightly because there are guidelines to follow.
A trustee of an SMSF cannot be remunerated for their role. Additionally, no member of the Fund can be an employee of another member of the Fund unless they are relatives.
An SMSF is regulated by the Australian Taxation Office (ATO). SMSFs are trusts, and consist of a trustee, a trust fund (assets), and beneficiaries (members, and sometimes their dependents). Obligations undertaken by the trustee on behalf of the trust generally entitle the trustee to a right of indemnity against the trust assets in the event of a claim or dispute, however, if there are insufficient assets, the trustee can be held personally liable. For this reason, to limit personal liability, corporate trustees are popular.
Setting up an SMSF & Costs:
To establish and maintain an SMSF, there are several broad steps to take, which include the following:
- Complete an instruction sheet for your SMSF, this should entail the members names, address and birth dates, the name of your SMSF (this does not have to be a registered name or unique), and where a corporate trustee is being used – the trustee’s name, Australian Company Number (ACN), address and name of Directors.
- The trustee confirms their intention to establish the SMSF and act as a trustee, the trustee then signs the deed and sends a letter to each member of the trustee accepting their application for membership.
- The trustee completes an application for ABN registration for superannuation entities and provides this to the ATO within sixty days of formation of the fund.
- The trustee opens a bank account in the name of the trustee and the SMSF.
- Contributions to the superannuation fund are deposited into the bank account formed.
- The trustees formulate an investment strategy, and note this down in writing.
- A minute book is kept by the trustee noting down various decisions made by the trustee.
- An accounting record system is established including records for each member and the member’s entitlements under the fund.
- Investment of the contributions is made in accordance with the investment strategy of the fund.
Behind the scenes, lawyers take several legal steps, including registering the corporate trustee and preparing any of its constituent documents (shareholders’ agreements, company constitutions), then preparing the trust deed and other necessary documents.
SMSFs are popular because they provide a wide array of benefits. Maintaining compliance for an SMSF can be tricky and sometimes onerous, depending on the construction of the fund.
Advantages of an SMSF:
Generally, for standard family-type set-ups:
- Income of the SMSF is taxed at 15% on its ordinary assessable income and 10% on qualifying capital gains made in respect of the disposal of investments held for more than 12 months.
- Concessional tax contributions, which are subject to strict caps, are taxed at a rate of 15% once received in the SMSF, and non-concessional contributions are not taxed. In the event that the combined income and superannuation contributions are in excess of $250,000, then a further 15% tax is applied to contributions above the $250,000 threshold.
- Where assets are held to support the payment of pensions to the members of the funds, no tax is payable on the income derived on those assets or the capital gains made on the sale of those assets.
- Earnings from assets supporting a transition to retirement income stream are taxed at 15% regardless of the date the transitions to retirement income stream commenced.
- If benefits are paid to members over the age of 60, then the benefits are received tax free by members.
- Flexibility and control: having a SMSF gives you a general discretion on the investment strategy of the fund, this allows you to make quick adjustments regarding your portfolio following market changes or to take up a sudden investment opportunity that arises.
- Asset protection: creditors generally cannot access an individual’s SMSF, there are however exceptions, such as in bankruptcy when an individual deliberately transferred there assets into its SMSF to escape paying their creditors in the view of impending bankruptcy.
Disadvantages of an SMSF:
- Being self-managed, your superannuation fund becomes your own responsibility. Therefore, as trustee (should you appoint yourself as trustee), you should make sure you have a sound understanding of investment options and markets, as poor decisions will directly impact the assets of your fund you’re your retirement savings.
- Staying compliant to SMSF legislation is importantly but also a really tedious task. Trustees are responsible for ensuring their fund complies with the legislation and rules, this is not a responsibility to be taken. If the ATO believes you have been in breach of your responsibilities and obligations, it can impose penalties on trustees (who can be personally liable). You could be looking at an increased tax rate of up to 47% if you breach your compliance obligations.
- Living and working outside of Australia and making contribution to your funds whilst living overseas can also potentially impact your SMSF compliance.
Common types of investments in SMSFs are:
- Shares and other listed securities, including exchange traded funds (ETFs).
- Term deposits.
- Property – including business, residential, commercial and retail property.
As with any investment strategy (or anything for that matter), there are no advantages without the disadvantages and everything comes with a risk-to-reward ratio. As the individual forming the trust, it is ultimately up to you to decide whether the advantages outweigh the risks with respect to your individual circumstances.
This article should not taken as the holy grail of advice for SMSF but rather a basic outline. As you can probably tell SMSF’s are a complex area of the law along with many other commercial and personal matters we deal with. The success of the fund will require both sound financial and investment advice, but also legal advice from pre-establishment phase through to ongoing compliance in maturity.
If you or someone you know want to establish an SMSF or has any questions about SMSF, please feel free to contact our office today or book an appointment.
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