So far in The Good Super Guide we have talked about how super choice will affect you and how you can go about choosing a super fund. But what if you want to manage your superannuation yourself in your own self-managed super fund?
In examining all the types of super funds available, we have talked about workplace and personal super funds, and we have also talked about public offer super funds (funds that are open to the public). In all these types of funds, we have been referring to funds that are run by someone else.
But what if you want to manage your superannuation yourself? If you do this it means you become responsible for the fund as you become the fund trustee, and you have to arrange its administration, compliance, and organise its investments. You can also nominate your SMSF to become your preferred 'choice' fund to receive your employer paid contributions.
You can arrange for other people to look after these tasks for you, but when you run the fund the buck stops with you. After all, that's why these are called self-managed superannuation funds.
If you want simple, easy superannuation do NOT set up your own SMSF. This is because when you have an SMSF you are in the business of running a super fund and the rules you have to follow are much more complex than if you area member of a typical super fund.
|SMSFs - Things to consider|
|SMSFs can't invest in just anything
Running your own SMSF doesn't mean you can do anything you want with the investments. When you run an SMSF, you are a trustee and you are responsible\for everything the fund does. To make sure SMSFs are run properly, the government has created a range of special rules for SMSFs to make sure the money in them is used and invested properly and that the funds themselves are operated appropriately.
If you think that running your own SMSF means you can bend the investment rules, e.g., to use your super to buy your house or your business, don't start an SMSF.
An SMSF is just a structure
You don't invest in an SMSF but, rather, use it as a way to structure or organise your superannuation. Inthis way they are an alternative to funds administeredby arm's length trustees. The main advantages of SMSFs are that members, who are also required to be trustees, have greater control and flexibility overinvestment decisions and so can tailor the overall operation of the fund to suit their needs. There are also some taxation advantages compared to other types of funds due to the timing of investments and possiblecost advantages. But all the normal superannuation tax rules still apply.
You'll need around $250,000
If you have enough money in super, running your own SMSF can be surprisingly cost effective. But even though their cost ratios can be among the lowest of all fund types, in dollar terms they can still cost several thousand dollars each year to run when you take into account their initial set-up costs, ongoing administration and compliance costs, and theinvestment transaction and management fees.
As a result, many SMSF experts use the rule of thumb that for an SMSF to be cost effective it needs at least$250,000. This threshold is based on the finding that the average SMSF costs about $2,500 annually and this converts to a Total Expense Ratio (TER) of1% which is about the same TER as many MySuperproducts.
Adding more subtlety, many SMSFs below $1 million don't achieve the same investment performance as the average MySuper product. So while the flexibility available in an SMSF is very attractive, trustees should manage them with the clear objective to achievestrong investment returns.
Creating a trust deed for your SMSF
Your SMSF must have its own trust deed, which is a list of rules for how the fund operates, deals with its members, pays benefits, and handles its investments.
This trust deed is required for the simple reason that superannuation in Australia is based upon Trust Law, and under this law you must always have a set of predetermined and agreed rules in place so everyone associated with the fund knows what to expect. Incase of any disputes, it will be this trust deed that will be used as the basis for determining if the fund was properly managed.
Prepackaged trust deeds can be obtained from special SMSF advisers, so finding one isn't difficult.But equally you should make sure your trust deed is properly set up as it will be very expensive to fix things up later if something isn't right.
Individual or corporate trustees?
After you have established or obtained your SMSF's trust deed, you then need to appoint its trustees and decide if they should be individuals or a corporate trustee. Having individual trustees can be simpler and comes with less compliance, but if something goes wrong the individual trustees could be liable. Using corporate trustees, however, means the liability is held by the trusteecompany. It's also much simpler for succession planning,i.e., when members exit or new ones join the fund.
The rules SMSFs should follow when appointing their trustees include:
If these rules are met, you need to apply to the ATO to formally set up your SMSF (part of which means'electing' to be regulated by the ATO). You must then arrange a tax file number and establish a bank account for the SMSF (the bank account is so you can keep the money and transactions of the super fund separate to those of the trustees as individuals). It may also help for the SMSF to have an Australian Business Number(ABN), though this isn't compulsory.
What super contributions will your SMSF accept?
Your SMSF trust deed must state what types of super payments it will accept. For example, will it accept contributions from each member's employer? Will it accept roll-overs from other super funds? Will it accept contributions from each member's non-working spouse (so-called 'spouse accounts')? Will it accept contributions from and for children, and if so underwhat conditions?
While it would be easiest for your SMSF to simply say it will accept all types of super contributions, the nature of super is that the rules for an SMSF have to be more specific because there is no one-size-fits-all definition of what the term 'super contribution' actually means.
Reinforcing these rules around super contributions, SMSFs cannot accept non-cash contributions from related parties and cannot allow assets belonging to members to be transferred into the fund unless they satisfy special provisions in the general superannuation rules; e.g., they must not make up more than 5% of the fund's assets, they must be listed securities assets (such as shares, bonds, or units in a managed fund), or they are real business property. See the later section in this chapter on SMSF investment rules.
|WHAT IF YOU DON'T WANT TO BE A TRUSTEE?
While some people like the idea of running their own fund, not everyone wants to be the trustee. Some people are also not allowed to be SMSF trustees because they may be undischarged bankruptsor have other difficulties.
This, however, shouldn't cause any problems if you are willing to appoint an Approved Trustee to your SMSF to act as the trustee. SMSFs that operate this way are known as Small APRA Funds (SAFs). Because you are paying someone else to be trustee, they are more expensive to operate than normal SMSFs.
Despite these differences in how the trustees operate, these SAFs have all the same investment, compliance and administration rules that apply to regular SMSFs.
Setting up your investment objectives and strategy
As part of setting up an SMSF, trustees must develop and officially record a clear investment objective and strategies to support their objective. For example, if the SMSF has members close to retirement age the investment objective and strategies of the fund might be more conservative.
Examples of questions your investment strategy may cover include:
Your investment strategy is not restricted to these issues, but if it covers them then it will be a very tough and robust strategy that should easily pass muster. You are also required to document the strategy and to keep minutes of meetings held by the trustees to discuss the investments of the fund.These minutes must be kept for at least 10 years.
An SMSF must be maintained solely for the purpose of providing retirement benefits to members or to their dependants if the member dies. Breaching the sole purpose test can lead to the trustee facing both criminal and civil penalties. Penalties can include up to five years' imprisonment and a fine up to 2000 penalty points, with each point currently worth $222. A breach of the sole purpose test is also likely to result in the fund being deemed noncomplying, in which case both current and past tax concessions can be reversed, leading to a significant tax bill.
It can be very tempting for the trustees of an SMSF to invest in assets that provide current benefits to members, but in doing so you are putting your compliance with the sole purpose test in jeopardy. It is important to note, however, that the regulator, in this case the ATO, is concerned with the purpose of the investment, not the type of investment, e.g., an SMSF might invest in some quite exotic investments and still comply with the sole purpose test.
Trustees are permitted only to acquire assets from a 'related party' of the fund where the acquisition of the asset will NOT result in the 'in-house' assets of the fund exceeding 5% of all assets. Related parties include members, trustees and employers who contribute to the fund. Related parties also include relatives of members. SMSFs are, however, allowed to acquire business real property from related parties which exceeds 5% of all assets.
Superannuation funds are not allowed to borrow longer-term monies in order to gear up returns. SMSFs can, however, use a separate trust to undertake leveraged investments. Trustees are meanwhile not allowed to lend money or provide financial assistance to members or related parties.
All transactions are to be made on an arm's length basis, that is, on strictly commercial terms. The purchase and sale price of an asset should always reflect the true market value. Income from assets should always reflect the true market rate of return.
The relationship between trustees and members in SMSFs means that members are in a position where they may try to push the investment restriction boundaries - sometimes beyond what the auditors and regulators deem is acceptable.
While members of large superannuation funds might be also tempted to breach the investment rules, in reality the separation between trustee and member in large funds is such that members are not really in a position to breach the rules.
|HOW POPULAR ARE SMSFs
In 2020 there were 596,180 SMSFs run by 1.119 million Australians. The number of SMSFs in previous years used to grow by about 20,000 each year but has recently slowed. These funds hold just 8% of all superannuation accounts but almost one third of all superannuation savings. SMSFs have the lowest fees of any superannuation market segment, averaging about 0.35% for administration and compliance before adding investment costs.
|The Good Super Guide SMSF Checklist. Click here.|
Collectibles and artworks
SMSFs may invest in collectibles, e.g., artworks, but the investments must be independently valued and appropriately authenticated. The SMSF must also insure the artworks in the name of the fund and be stored according to the conditions of the insurer - a condition of ownership can nullify the reasons some SMSFs want to own these types of assets. Trustees must also be able to reasonably demonstrate the commercial value of any lease or exhibition terms and conditions.
|Choosing the Right Retirement Income Scheme Product||The Superannuation Guarantee and Awards|