Self managed super funds
What you need to know about SMSFs ….
Self managed superannuation funds (SMSFs) are an increasingly popular option for investors seeking greater control and flexibility of their superannuation. At the same time, you need to consider the wide-ranging reporting requirements and compliance obligations when deciding if an SMSF is right for you.
- What are the advantages of SMSFs?
- What are the drawbacks?
- What type of investors does a SMSF suit?
- What are the specific requirements of an SMSF?
- What is a SMSF investment strategy?
- Setting an investment strategy
- Consideration of need to hold insurance for members
- What are the record-keeping requirements of a SMSF?
- What are your obligations as a trustee?
- Do you need a minimum amount to establish a SMSF?
- Transferring a business premises to your SMSF
What is an SMSF?
SMSFs are sometimes referred to as ‘do it yourself’ or DIY super funds. Like other super funds, an SMSF invests members’ contributions and in turn provides benefits to members at retirement or death benefits to beneficiaries, in the event of the member’s death.
The main difference between SMSFs and other types of superannuation funds is that an SMSF member also acts as a trustee or director of a corporate trustee and must prepare and implement an investment strategy for their fund and manage the benefit payments.
Members of an SMSF are responsible for appointing an approved auditor and may choose to involve a tax agent, accountant and financial adviser, although the ultimate legal responsibility for ongoing compliance rests with the trustees (being individual trustees or the directors of the corporate trustee).
What are the advantages of SMSFs?
SMSFs provide a greater degree of control and flexibility than a public offer super fund, making them suitable for sophisticated investment and retirement strategies. An SMSF can support a wide range of investment options including:
- direct shares – both Australian and international
- direct property – residential and commercial property (that can be leased back to a member’s business)
- managed funds
- fixed interest
- alternative assets such as artwork and collectibles.
The superannuation investment rules also allow SMSFs to borrow to invest, however, the borrowing must be under a limited recourse loan arrangement and in accordance with a strict set of requirements on how the borrowed money is utilised.
You have the added scope of purchasing your business commercial property within your SMSF, and leasing it back to business, provided that property is used solely for your business’s purposes. You also have the flexibility to pay retirement income streams from your SMSF as well as to take advantage of a number of estate planning features that only apply to these funds.
What type of investors does a SMSF suit?
With more than 475,000 SMSFs in Australia (each having up to four members), SMSFs have attracted a diverse range of investors including:
- sophisticated investors with a wide range of assets
- small business owners who want to acquire a commercial property that can be leased back to their business
- families who have complex wealth management and estate planning needs
- people who have the time, inclination and skills needed to administer a fund.
What are the drawbacks?
One of the main drawbacks of an SMSF is that you as trustee will be legally responsible for the fund and must comply with a range of trustee duties and obligations including:
- Taking responsibility for ensuring the fund complies with its administration and reporting obligations.
- Expending the time and effort to invest and manage the fund’s assets in accordance with the fund’s investment
- To accept contributions and pay benefits in accordance with the fund’s rules and the superannuation fund operating standards.
- Failure to comply with these requirements can result in the application of trustee penalties and could result in the loss of the fund’s complying status resulting in severe tax penalties.
Other risks and disadvantages of SMSFs include:
- Depending on the level of assets, the fees and charges incurred to maintain an SMSF may exceed the management fees charged by other large super funds.
- A majority of the trustees will generally need to reside in Australia to ensure the fund retains its complying status.
- Disputes between trustees and potential beneficiaries over issues, such as the payment of death benefits, may need to be referred to the Courts which can involve significant cost and delay.
- Unlike large superannuation funds, an SMSF is ineligible to apply to the Federal Government for a grant of financial assistance where a fund has suffered a loss due to theft or fraud.
Everyone’s circumstances are different, so talk to Hern & Associates about whether an SMSF is appropriate for your needs.
What are the specific requirements of an SMSF?
SMSFs must meet a broad range of compliance and governance requirements including:
Trustees and members
- An SMSF can have up to four members
- All members must be trustees (or directors of the corporate trustee) and there can be no other trustees (or directors if the trustee is a company). This aims to ensure each member is fully involved in the running of the fund.
- A single-member fund must appoint a company as trustee or a second person to act as an individual trustee.
- No fund member can be an employee of another member of the fund, unless those members are related.
- No trustee of the fund can receive any remuneration for services as a trustee.
Trustees must set out the fund’s objectives and formulate and implement an investment strategy specifying how the fund will invest to achieve that objective. Investment strategies should be in writing and should be reviewed on an annual basis.
- An SMSF must be maintained for the sole purpose of providing retirement benefits to members and its investments must be entered into with a view to achieving a commercial rate of return, not for any lifestyle or private purposes.
- An SMSF must not lend money or give financial assistance to a member or a relative of a member.
- The SMSF cannot acquire an asset from a member of the fund or any other person related to the trustee. There are some exceptions including listed shares, widely held trusts (eg managed funds) and business real property.
- Where an SMSF acquires certain collectible and personal use assets, such as artwork, strict rules apply to the use, insurance and storage of those assets.
- An SMSF is prohibited from borrowing with some exceptions including:
- limited recourse loans in accordance with a strict set of requirements
- certain short-term loans to pay benefits
- funds used to settle certain security transactions.
What is an SMSF investment strategy?
An investment strategy is a plan for investing, holding and realising a fund’s assets so it achieves the stated investment objectives. Having an investment strategy helps ensure the fund grows your retirement savings.
The main requirements for an investment strategy are to:
- set out the fund’s objectives
- formulate an investment strategy that is designed to meet those objectives
- choose investments which have the sole purpose of providing retirement benefits to members.
Setting an investment strategy
When formulating the investment strategy trustees should consider:
- the range of permitted investments
- the likely return and risk associated with an investment
- the level of diversification of the fund’s assets, ideally listing the expected percentage to be invested in each asset class and the permitted range
- the liquidity of the fund’s assets and its ability to pay benefits.
- the need to hold insurances for the members of the fund.
It is vitally important that the trustees regularly review the investment strategy to ensure it remains appropriate and comply with the investment rules of a SMSF. Failure to do so can result in the fund losing its tax concessions or you (as the trustee) being fined or disqualified.
Consideration of need to hold insurance for members
As part of formulating an investment strategy trustees are also required to consider the need to hold insurance for members, such as life, total and permanent disability and income protection insurance. To satisfy this requirement, a trustee will generally need to demonstrate that they have considered each member’s personal circumstances, including:
- their income as well as their assets and liabilities.
- their existing insurance arrangements both inside and outside the Fund.
- what impact the death or disability of the member would have on their own / their beneficiaries’ standard of living and their ability to fund ongoing expenses as well as pay any associated medical bills and care costs.
- the affordability of the cover having regard to the member’s retirement savings and other financial goals.
- the availability of cover given the member’s personal circumstances.
Trustees are required to document their decisions in the Fund’s records. It is very important that trustees comply with this requirement as failure to do so could result in trustee penalties being applied and members being underinsured.
What are the record-keeping requirements of a SMSF?
Trustees and members are responsible for ensuring a SMSF meets the extensive reporting requirements which include:
- keeping accurate and accessible accounting records
- preparing an annual operating statement
- providing an annual statement of the fund’s financial position.
As you might expect, the Australian Taxation Office closely monitors SMSFs and can impose financial penalties on non-compliant funds. It is worth seriously considering engaging professional experts such as Hern & Associates to help your SMSF comply with these obligations.
What are your obligations as a trustee?
As a trustee of an SMSF you will be required to comply with your fiduciary obligations as the trustee of a trust. These include the requirement to comply with the governing rules of the trust (such as the trust deed), to act honestly in all matters, to exercise skill and diligence in managing the fund and to keep the fund’s assets separate from your personal assets. Before becoming a SMSF trustee it’s important that you fully understand the significant responsibilities the role entails. To find out more, you can click here and download the Running a self managed super fund – your roles and responsibilities as a trustee brochure (document code: NAT 11032) from the Australian Taxation Office.
Do you need a minimum amount to establish a SMSF?
While there is no statutory minimum to set up a SMSF, you generally require a minimum of $200,000 of assets to make it cost effective. However, cost is only one consideration. Hern & Associates can help you determine if the strategies and benefits of an SMSF are appropriate, even without this level of superannuation savings.