Self-Managed Superannuation Fund- what is it and is it for me?

Self Managed Superannuation Funds are an effective way of creating and preserving wealth for retirement but they are not for everyone. On one hand, flexibility and control over investments, estate planning and risk management are significant benefits and compelling reasons for having a self-managed fund. On the other hand, trustees' responsibilities and assets management are also of great significance.

What is a Self-Managed Superannuation Fund?

A Self Managed Super Fund (SMSF) is a special trust which is established under the legislation relating to Superannuation Funds - known as the Superannuation (Industry) Supervision Act 1993. The fund can have up to a total of four members who also become the Trustees of the Fund and make decisions relating to the investments and other management aspects of the fund.

The rules governing SMSF are very broad and just about anyone can set one up, from employees or self-employed people, to directors of a private company, non-working spouses, or anyone with existing super assets or about to receive a retirement or redundancy package.

A SMSF is regulated by the Australian Taxation Office (ATO)

The trustee requirements for a SMSF are different depending upon whether the fund has one or more members.

One Member:

  • A company with the member acting as the sole director; or
  • A company with two directors, one being the member and the other being a relative or non employee of the member; or
  • Two individual trustees, one being the member and the other beinga relative or non employee of the member.

Two to Four Members:

  • A company with all members as directors and all directors asmembers; or
  • All members acting individually as trustees of the fund
  • Importantly, every trustee must ensure the fund is managed for thesole purpose of providing retirement benefits to members and isfully responsible for the fund's compliance with the SIS Act, evenwhen advice is obtained from an accountant, financial planner ortax agent.
  • In addition, generally, no member of a SMSF can be an employeeof another member unless they are related.

Why establish a Self Managed Superannuation Fund?

There are many benefits for having your own SMSF, the more important ones include:

  • You make your own decisions on the fund's investments. You can make all the key decisions especially how, where and when your money is invested. You may also switch or modify your investments as and when you see fit.
  • The investments can cover a wide range of assets such as shares, banks and other deposits, property (restrictions apply), managed investments, discretionary trusts, etc.
  • You can choose to have your life insurance policies paid by the fund, with a resulting tax benefit. It can help establish a more tax effective structure for your family in the event of your death.
  • With a tax rate of only 15%, superannuation already offers favourable tax treatment. SMSF allow you to plan your investments to be tax effective for the individual members of the fund, for example using franking credits from dividend payments to reduce the 15% standard tax rate on contributions. Having both pension members and accumulation members in the same fund can provide additional opportunities to offset the tax payable.
  • The costs are usually significantly lower than belonging to a public fund run by a bank, insurance company or fund manager. You can save a great deal of money by managing your own super and sharing running costs between the members. The cost break-even point versus a superannuation managed fund can be as low as $200,000, with the savings growing rapidly thereafter. This does not preclude funds being established with lower balances depending on individual circumstances; however, as a rule of thumb, cost benefits become more favourable once the balance of the trust exceeds that level.
  • For those moving from the accumulation phase to the retirement phase, the advantage of simply re-arranging your assets within the fund without the need to sell any existing assets is of great benefit.

What do you do to start a Self Managed Superannuation Fund?

If you decided that owning your own super fund is for you, then you really need to do your homework thoroughly because a self managed superannuation fund (SMSF) is not the plaything of former times, although many trustees are yet to realise that fact. It is a serious investment vehicle with real responsibilities for trustees and real (and onerous) penalties for not doing the right thing.

Whenever you feel ready to manage your own Superannuation Fund, talk to us to find out how we can assist you make a success of it. Augeo Pty Ltd specialises in advising clients on how to manage their own fund, and gain control and flexibility of their super investments. We work with your accountant and legal representative to ensure your super fund fully complies with all legislative requirements, and assist with all administrative tasks and trustee responsibilities.

Once we have ascertained the appropriateness of a self managed fund for you, we will explain how it works, the benefits, limitations, restrictions and costs, and liaise with both your accountant and solicitor to ensure the fund comprehensively addresses your taxation and estate planning needs, and is compliant with the “sole purpose test” principle.

We will establish the trust, ensuring that the trust deed and investment strategy are both accommodative and flexible, and adequately structured to meet the members’ retirement objectives. We will assist you to undertake your trustee responsibilities in accordance with the SIS Act 1993.

The term "DIY" superannuation fund appears somewhat misleading and no longer applies nowadays, due to the increased complexities and regulations imposed onto superannuation. Consequently, the time required, arising from legislation changes, regulatory policies, changing economic conditions and the plethora of investment products now available, have taken management of these funds beyond the knowledge or time availability of most SMSF trustees. Professional assistance is now a requirement rather than something you sometimes used.

Existing trustees and people considering SMSF must be mindful of:

  • the nature, benefits and responsibilities of SMSF
  • what is required to establish and maintain a SMSF
  • investment rules and opportunities
  • the importance, benefits and pitfalls of properly examining (orignoring) estate planning and insurance
  • the importance of compliance
  • the importance of constantly reviewing your SMSF and investment strategy
  • the services available to assist them meet their responsibilities legally

We will never attempt to entice people into SMSF by offering cheap and quick ways of establishing their fund by completing some on-line forms with lots of personal data. Nor will we ever consider recommending individuals establish their SMSF unless the benefits and trustee capabilities are convincingly stacked in favour of such a fund.

These are not 'set and forget' structures, nor are they for everyone, as we have previously mentioned.

Should I establishing my SMSF?

Establishing a SMSF requires full analysis of the proposed members’

  • intentions, goals and individual needs,
  • circumstances and resources (current and potential),
  • investment risk profile and knowledge of investment markets
  • ability to undertake their trustee role and responsibilities, and
  • their level of comfort with the idea.

This requires meaningful communication and personal contact between professional adviser and proposed members, and a team effort by investment adviser, accountant and solicitor. Be wary of low-cost establishment offers for SMSF without professional advice and assistance.

If you are considering a SMSF or if you already have one but have not consulted a specialist adviser recently regarding a review of the trust deed or investment strategy, we invite you to contact our office to learn how we may be of assistance.

SMSF Review Service

There is no doubt that SMSF will continue to be subjected to the increasing scrutiny of the Australian Taxation office in coming years, with the major focus being on:

  • Sole purpose test
  • "In house" assets
  • Compliance in all its aspects.

The penalties for non-compliance and other breaches of the legislation are quite severe. Apart from the ability of the Commissioner for Taxation to levy tax at 47%, penalties can range to fines of $220,000 and custodial sentences. These can be applied to trustees (i.e. you) as well as various professional advisors and SMSF service providers.

We believe these to be compelling reasons to consider a comprehensive review of your SMSF for full compliance and effectiveness. Trustees need to have a very comprehensive understanding of their role and responsibilities when it comes to Self-Managed Super Funds.

The penalties for infringing the rules can be very severe. The practices of only focusing on the fund’s investments, or leaving everything to the accountant, now belong very firmly in the past. Indeed, the Financial Services Reform Act (FSRA) has now prevented unlicensed accountants from giving financial advice on important aspects of SMSF.

The regulatory and compliance environment for SMSF is ever changing and becoming more complex; a non-professional simply no longer has the knowledge to keep on the right side of the regulators simply by accident. SMSF are now regulated by the Australian Taxation Office (ATO) who are not noted for their benevolence and who are raising the scrutiny and focus on SMSF.

The Financial Services Reform Act (FSRA) has had a dramatic effect on who can give advice on financial products. No adviser (including your accountant) can advise on establishing a SMSF unless they hold an appropriate license under the new act. Nor can they advise on investment strategies or products.

A more important aspect is that SMSF offer more potential benefits than simply flexibility, control, and investment choices.

  • There are opportunities for very effective estate planning to ensure that your beneficiaries do not lose out through ignorance or poor planning. Did you know that a SMSF can last forever whereas other forms of trust have a limited life of about 80 years? This provides excellent opportunities for looking after present and future generations.
  • Manage your Reasonable Benefits Limits or eligibility to the Age Pension more effectively

Trustees are strongly advised to ensure they remain knowledgeable about the obligations, constraints and opportunities attached to SMSF, and to seek professional assistance in fulfilling their responsibilities.

For more information about self-managed superannuation funds, or if you have any questions regarding your current self-managed superannuation fund, please call us on 02 4984 5545 for a confidential risk-free consultation and to discuss your concerns.

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