Self-managed Super Funds (SMSFs) are growing in popularity these days. Latest ATO figures reveal that there have been 597,009 Self-managed Super Funds in Australia as of December 2018. That’s an approximately 3% increase compared to the December 2017 figures.
It means that more and more people are controlling their own super through self-managed super funds. If you are thinking of getting a Self-managed Super Fund, then there couldn’t be a better time to do it.
But are you aware of what’s really involved in a Self-managed Super Fund? If you want to embark on this journey, you need more information about how it works, and how you can manage it.
What is Self-Managed Super Fund?
A self-managed super fund or SMSF is what its name implies – you are managing super by yourself.
Simply put, a self-managed super fund is a trust structure that offers retirement benefits to the members. What makes SMFs different from other superannuation funds is that the members can also serve as fund trustees.
An SMSF is created by a deed of trust and should have around four members or fewer with every member acting as a trustee and no trustee receiving payment for the services.
Being the trustee, you should ultimately be accountable for the management of your fund and should satisfy the administrative as well as the regulatory obligations applied to the super funds.
How SMSFs Work
SMSFs are made to provide retirement benefits to its members and beneficiaries. The members possess their own Australian Business Number or ABN, Tax File Number or TFN, and a transaction bank account that enables them to receive rollovers and contributions to make investments and acquire pensions and lump sums.
The trustees manage all SMSF investments made on behalf of the fund.
How to Set Up a Self-managed Super Fund
Your SMSF must be set up properly to receive contributions, qualify for tax concessions, and acquire contributions that can be easily administered.
To set up an SMSF, you can consider the following:
1. Appoint a Professional for Assistance
You can work with SMSF professionals in setting up your fund. It would be good to work with them right from the beginning so both of you’d would be on the same page all throughout the process. Even with professional help, you still need to ensure the work is done correctly.
2. Choose a Corporate Trustee or Individual Trustees
You can select four individual trustees or a corporate trustee, which is a company that serves as the fund’s trustee.
The moment you are engaged in a managed fund, there should be a trustee of that fund. It could be the ANP, the state government; it could be anybody. They are the trustees of their money. They control the money, and invest it on your behalf.
You can instruct them within individual portfolios whether it’s sales, cash, or property. You can notify the trustee, but they control the money. You are a member of that fund.
3. Appoint your Directors or Trustees
All fund members should be individual directors or trustees for the corporate trustee. Directors and trustees are generally appointed under the fund’s trust deed.
You have to make sure that the individuals who serve as directors or trustees of the SMSF are:
- Eligible at being a director or trustee
- Informed of what it takes to be a director or trustee.
All directors and trustees should:
- Written consent of appointment
Signing the trustee’s declaration which states that they know the responsibilities (this should be accomplished in 21 days after becoming a director or trustee)
These documents must be kept on file at all times and for a decade after the SMSF was established.
You can become Both Trustee and Member
If you set a self-managed super fund, you become both the trustee and the member. So you effectively wear those two hats. One other rule for self-managed super funds in Australia is that you cannot have more than four members in that fund.
You may be asking why and the obvious answer is because that is just the way it goes. And you control all of the investment decisions.
There are certain legislative restrictions and those decisions that you can make. You cannot just buy anything. But you do control the investment decisions in your fund.
4. Create the Trust deed and Trust
A trust is an agreement wherein a company or person (or trustees) keep trust assets or property with a trust for others or the beneficiaries.
An example of trust is a super fund, maintained, and set up to offer benefits to its members or beneficiaries.
To have a trust, you must:
- Directors or trustees of corporate trustees
- Enforced rules (the trust deed)
- Beneficiaries or members
The Trust Deed
- The trust deed is a document that lays down rules for starting and managing your fund. It also incorporates things like fund objectives which can serve as members and pay as an income stream or lump sum. Thus, super laws and trust deed laws form the rules of the fund.
The deed should be:
- Set by somebody competent enough to write the legal document
- Dated and signed by the trustees
- Appropriately executed in accordance with the territory and state laws
- Reviewed and updated regularly
To set up your fund, the assets must be reserved for the member’s benefit.
If a contribution, transfer, or rollover is expected to occur in the future, a minimum amount, i.e., $10, can be set aside for the trust deed.
The amount deemed as contribution should be allotted to a member.
Should the member be incapable of meeting the SMSF contribution requirement, i.e., they are over 65 and doesn’t satisfy the work test, then the administrative decision is applied automatically to enable a minimum contribution for members. The amount should be allotted to a member for the sole purpose of recording SMSF.
5. Check whether your fund is an Australian Super Fund
To receive tax concessions as a legitimate super fund, your SMSF must be an Australian super fund for the financial year.
Should your fund cease becoming an Australian super fund because it did not meet the residency rules, it may be deemed as non-complying, and the assets along with its income will be taxed at a much higher marginal rate.
6. Register your fund to obtain an ABN
Once the fund has been established, and all the trustees have been assigned, you must register the SMSF with the ATO within 60 days.
7. Set up a Bank Account
You need to have a bank account with your fund’s name while managing the fund and accepting contributions, super rollovers, and investment income. This is utilized in paying the fund’s liabilities and expenses.
8. Obtain an Electronic Service Address
Should your SMSF get employer contributions (aside from related employers), it should be capable of getting contributions and SuperStream data electronically.
SuperStream data and payment standards that apply to superannuation contributions from employers towards any superannuation fund.
To get SuperStream data, you must have an electronic service address or a special internet address. It is a bit different from email addresses.
The administrator will provide the electronic service address for you to be able to utilize a SuperStream message solution provider.
An employer must have this information on your SMSF:
- Electronic service addresses
- Bank account details (account number and BSB)
9. Have an Exit Strategy
Even while setting up an SMSF, you must consider the possibility that your SMSF might end.
Sometimes an SMSF can be difficult to cope up with because of unexpected events like:
- Relationship breakdown among trustees
- An accident or illness that incapacitates the trustee
- Death of a trustee
An exit strategy should reduce the consequences of these unexpected misfortunes. In formulating your exit strategy, you need to consider the following:
- Make sure that all trustees are capable of accessing SMSF’s electronic transaction accounts and records
- Incorporate specific rules within your trust deed that have been triggered by specific events that could lead to your fund becoming unmanageable.
- Members making binding death benefit nominations
- Encouraging members to have a lasting power of attorney
- The probable costs of a failed SMSF
Self-managed super fund investments denote a range of assets that an SMSF member or trustee can invest in. SMSF members are legally obligated to document their investment strategy.
What investment should align with an investment strategy which is considered, implemented, recorded, and reviewed constantly?
Trustees must reach a strategy after having considered the objectives, the dangers involved in specific investments, and the investments which are suitable for the SMSF.
The strategy should and could change along with the review where it is intended to keep on meeting members’ requirements for retirement.
As a member gets closer to retirement, the investment strategy should align towards becoming more conservative as the time left to get relieved from a bad investment is reduced.
The one significant pros of an SMSF is the amount of control it provides the trustees, especially in terms of tailoring the fund to satisfy their needs. As long as you are unfazed by documentation, an SMSF will give you the following benefits:
- Provides you with more control over your super fund
- Provides various investment opportunities
- Enables members to pay lump sums and retirement benefits
There are also several disadvantages to SMSF that aspiring members need to consider. These include:
- An SMSF may be more costly than retail funds if it holds minimal assets. The ATO suggests that you need at least $200,000.
- SMSF trustees are personally accountable for their actions with the fund are legally responsible in its management for its members. Thus, trustees should always be updated with the latest legislation or hire an SMSF adviser or expert with reliable superannuation knowledge. There are hefty fees and fines for trustees who do not comply.
So if you are looking at your super fund today and feel that you are not really that happy with how it’s going, and you think you can do better, then maybe you are up for it, or perhaps you don’t. If you feel you could do better, then here’s an opportunity for you to prove that to yourself.
You can manage your own fund. It is essential that you research before you decide which self-managed fund is right for you. You could choose as an option to simply make specific contributions to a fund that is managed independently.
A brief look at SMSF needs could help you in finding out if you should join the movement or not. The right question that one should ask is if you have the time, knowledge, and alignment to be managing your investments yourself.
You need to avoid schemes, especially those who are giving different ways of accessing the funds before retirement – they are just illegal and not workable. The ATO has been monitoring and watching these schemes closely in the past few months.
Due to the complications of managing SMSFs, along with potential privileges which could be produced through SMSFs, it is essential that you find advice from the right person who has the necessary license and expertise.
Louis Lim is a writer and blogger who specializes in topics related to superannuation. He’s written hundreds of articles related to the subject at AustralianSuperFinder.com.au.