What is a Self-Managed Super Fund?
Like other super funds, a Self-Managed Super Fund (SMSF) is a concessionally taxed trust to help you save for retirement. There are some key differences between a SMSF and other super funds:
- There can only be four members and all members need to be individual trustees of the fund or directors of a corporate trustee of the fund.
- Trustees are responsible for the compliance of the fund and personally liable if the fund breaches the law.
- Trustees design the investment strategy of the fund and select the investments. This allows the members control over what their super is invested in.
- Trustees are responsible for review and implementation of insurance for their members.
- SMSFs are regulated by the ATO, other super funds are regulated by APRA.
- There is no government protection against fraudulent activities or formal complaints resolution processes for SMSFs, as for other funds.
How does it work?
Establishing a SMSF
There is a formal process governed by law that you must adhere to when establishing a SMSF:
- Decide on the name of the fund and trustee structure before developing and executing the fund Trust Deed. Trustees must be appointed and a declaration signed confirming that there is nothing that disqualifies them from acting as trustee.
- Hold a trustee appointment meeting where trustee responsibilities are explained.
- Complete paperwork to elect to become a regulated fund and lodge this with APRA. This is how the SMSF gets its concessional tax status.
- Apply for an ABN and TFN for the SMSF.
- Complete paperwork for members of the fund. This includes membership details, death benefit nominations, insurance cover held / to be held by the fund, and TFNs.
- Open a bank account and/or rollover existing member super benefits.
- Establish and document the investment strategy for the fund including insurance reviews and exit strategies.
- Finally, there are various functions to be performed within the Fund. Some, such as the audit, will need to be outsourced. For other functions, you have the option to do it yourself or get professional assistance. This includes administration, investment selection, accounting (member accounts, annual returns) and legal support.
Key trustee responsibilities
- To act in accordance with the fund trust deed and provisions of super laws across various sources.
- To ensure the sole purpose of the fund is to provide retirement benefits to its members.
- To appoint and remove trustees.
- To establish, implement and monitor the investment strategy of the fund including regular insurance reviews for members.
- To accept contributions and pay withdrawal benefits.
- To manage administrative tasks of the fund, including member statements, the annual returns, record and trustee minute keeping.
- To appoint an auditor to complete the annual audit and any other professional services appointment including accountant, adviser, administrator, etc.
Types of trustees
There are two forms of trusteeship – individual and corporate. There are some key differences in these trustee structures relating to the operation of the fund. Careful consideration should be given to the structure you choose as it may impact the transactions allowable in the fund. Areas which may be impacted include asset ownership, ability to borrow to invest, administration of assets, fees, penalties and succession planning.
What are the benefits?
- Choice and control: As trustees and members of the fund, you choose what your retirement benefits are invested in. This is often what drives people to manage their own fund.
- Investment flexibility: You can hold assets that might not otherwise be held within super, within the investment rules of the law. For example, you can hold direct property within the fund including commercial premises for your business.
- Tax management: With more control, you can manage the timing of asset transactions to improve tax outcomes. You can also offset contributions tax with expenses from the fund. This can improve the investment returns of the SMSF, when actively managed.
- Cost: Taking on some of the management responsibilities can save money on the costs of the fund.
- Creditor protection: Holding assets with the SMSF and leasing to related parties is a way to protect these assets from creditors outside of the fund.
- Estate planning: Preservation of assets may be possible with the introduction of family members over time.
What should I be thinking about?
- Trustees of the SMSF are ultimately responsible for the compliance of the SMSF to the governing law. Non-compliance can result in the SMSF losing its concessional tax status and can also result in penalties and fines payable by you, as the trustee.
- The fund must invest in line with the defined investment strategy and within the Trust deed provisions of the fund.
- There are several rules and regulations that govern the administration of your SMSF. You must submit an annual return, keep records of meetings, actuarial certificates, audits, financial statements and have adequate member records.
- You will need to notify the ATO of any changes to trustees, members, and/or contact details of the fund.
- The SMSF must have liquidity and reserves to pay member benefits.
- Managing your own fund takes time and requires knowledge of your extensive obligations as trustee of the fund. If you are time poor, you should consider outsourcing the administration and investment functions to avoid non-compliance.
- Many costs are fixed. This can be favourable when you have a substantial balance in the SMSF. It is not cost effective for small balances.
- Your trust deed must outline what is required if you wind up your SMSF. Trustees must be aware and agree to the terms of the wind up to assist closing the fund in the future.