The term self-managed superannuation fund – otherwise known as an SMSF – basically refers to do-it-yourself super. Having an SMSF means simply having control of how your superannuation is being invested, and it has recently become a popular method of saving for retirement.
If you choose to go down this path, it’s essential that you are aware of the administrative and compliance requirements of SMSFs. The information below should answer many of the questions and obligations specific to managing your own SMSF.
Before you consider leaving your current superannuation fund to establish an SMSF, you should discuss your options in detail with a financial planner.
An SMSF is a trust where funds or assets are held and managed on behalf of a maximum of four individuals, to provide future retirement benefits. Subject to certain exceptions, all members of an SMSF must be trustees of the fund or directors of the fund’s corporate trustee.
What are the benefits?
The main rationale for establishing your own SMSF is the increased level of control you have, as well as the investment choice and flexibility. You become the trustee of your fund and therefore make decisions on your fund’s investment strategy and the type of assets that are held within your fund.
Your SMSF can also invest in almost anything, including investments not usually available in a public super fund (please note, however, that these investments are subject to certain limitations and legal restrictions). This will allow your fund’s investments to be customised to suit the precise requirements of members, before and after retirement.
Furthermore, similar to all complying super funds, an SMSF is taxed at a concessional rate. The top tax rate for investment earnings from your SMSF is 15 per cent. This tax concession, however, is only available for complying funds – which are SMSFs that fulfil all the rules set out by the ATO, the Superannuation Industry (Supervision) (SIS) Act 1993 and the SIS Regulations.
Things to consider
Who are the governing bodies?
The Australian Taxation Office (ATO) is responsible for overseeing the regulation of SMSFs. While the ATO’s regulatory approach to SMSFs has been focused mainly on education and information, it is fast becoming more aggressive in its stance on fund compliance.
Obligations and rules
As an SMSF investor, you need to consider your fund’s investment philosophy – like any other super investment, you will need to establish what the acceptable rate of return is and how much risk you are willing to take with your retirement savings. These are areas where professional management can be a good idea.
As an SMSF trustee, you are required to regularly review the investment strategy of your fund and consider insurance for the members of your fund.
Many investors who open an SMSF employ the services of specialist administrators to take on the difficult compliance activities on behalf of their fund. This is beneficial as they can still enjoy the investment control and flexibility without the added burden of administration.
Your fund’s compliance with superannuation law is vital and you are legally accountable for ensuring your fund complies with all the rules – even if you pay for professional management.
The main components of compliance for an SMSF relate to:
- how and when an SMSF is permitted to borrow in-house asset rules
- acquisition of assets from related parties, and
- conducting all dealings at arm’s length.
Sole purpose test
The foundation of the SMSF regulatory system is the ‘sole purpose test’ – the sole purpose of your fund should be to provide retirement benefits to fund members.
Separation of assets
The assets of the fund must be separate to those of a business where one or more of the trustees are involved. For instance, if the trustee is declared bankrupt or if their business is placed in receivership and the assets are held in the name of that trustee, rather than being clearly held as a part of the fund, the fund risks the loss of the asset. The failure to separate assets is a clear contravention of SIS.
To assist in making sure the assets in an SMSF are available to produce retirement funds, SMSFs are limited in the investments they can make. However, one of the concessions that the SMSFs can enjoy, is the ability to invest up to 100 per cent of the funds’ assets in a business real property. The disadvantage of this, however, is the lack of investment diversification and liquidity.
More restrictive rules apply to investments in personal use assets and collectables, that are in addition to the sole purpose test. Under the latter members cannot enjoy the benefit from the investment prior to reaching their retirement age. This means that unless strict conditions are met and must be removed from the fund – like in the case of leasing the art to a member or related party, in line with the ‘in-house asset’ and ‘arm’s-length’ rules – the art cannot be displayed in the trustee’s home or office.
The in-house asset rules suggest that the particular investment can make up a maximum of 5 per cent of the fund’s entire assets and the arm’s-length requirement means that it should be leased to the related party at commercial rates.
It is of the utmost importance to meet trustee responsibilities, especially in regard to the SMSF holding its own bank account (and not personal accounts), and ensuring this account isn’t overdrawn.
SMSFs that comply with all regulations are demonstrating to the ATO that they are appropriately managed. It is also important to note that the costs associated with the management of the SMSF, including ensuring compliance with all regulations, generally means that fund members collectively need between $200,000 and $250,000 to make the exercise of establishing an SMSF worthwhile. This does not include the initial set up costs involved.
To discuss your SMSF options, contact our office to speak to one of our SMSF Specialists.
Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.