SMSFs – The Devil is in the detail
23 Sep 2014
By Shadforth Financial Group
It is essential that anyone considering setting up or joining a Self Managed Super Fund (SMSF) has the information they need to make the right decision. If you want to establish your own 'Do-It-Yourself' super fund, there are many factors you need to think about. The following are some of the important matters to take into consideration when establishing or running your own fund:
- Make sure you have enough assets, time and skills (or a suitable adviser) to run your own fund.
- Keep up-to-date with the super and tax laws and understand the risks.
- Tailor your trust deed and investment strategy to suit the members of your fund.
- Make sure you can meet your record-keeping and reporting obligations.
- Make sure you understand your annual auditing obligations.
There are strict rules that govern how you can use an SMSF and how you manage the fund's investments. Your fund must be maintained, at all times, for the sole purpose of providing retirement benefits to your members.
It can be difficult as well as time consuming to manage an SMSF, so it is crucial you consider all of your superannuation options. Make sure you seek professional advice before establishing a fund and have your support team in place to assist with the ongoing management and running of the fund.
Starting an SMSF is a very important decision, so we recommend you see a qualified and licensed professional to help you decide if an SMSF is right for you.
Like other super funds, SMSFs are a way of saving for your retirement. Generally, the main difference between an SMSF and other types of funds is that members of an SMSF are the trustees.
This means the trustees of the SMSF run it for their own benefit (as the trustees and members are one and the same). There are two types of trustee structure you can use:
Individual trustees – with up to four individuals; or
A corporate trustee.
A corporate trustee is a company incorporated under the law that acts as a trustee for the fund. It can be more costly to set up the fund initially under this option as you need to establish a company to act as trustee. There are also annual reporting requirements to the Australian Securities & Investments Commission (ASIC) which need to be met. However, having a corporate trustee can make it easier to administer the ownership of fund assets, and importantly, keep the assets of the fund separate from any personal or business assets which are one of the key requirements of the Superannuation Industry Supervision (SIS) Act.
If you decide that an SMSF is the appropriate vehicle for your savings, you need to ensure the fund is set up and maintained correctly so that it is eligible for tax concessions, can pay benefits and is as easy as possible to administer.
Once your SMSF is established you, as trustee, control the investment of the contributions and fund earnings. Your SMSF must have a trust deed that forms part of the governing rules for operating the fund. You must also prepare and implement an investment strategy and ensure it is reviewed regularly. There are rules and regulations that you must follow to ensure the fund's assets are protected to provide benefits in retirement.
While contributions are being made to the fund it is considered to be in the accumulation phase. When one or more members retire, you as a trustee need to understand and follow the law and regulations governing the payment of benefits.
The payment standards contained in the legislation and regulations, the sole purpose test and the preservation rules ensure that money in the fund is paid to members in the appropriate manner.
It is important to note that the rules and regulations that apply to funds in the accumulation phase continue when one or more members retire; however, there are additional rules which apply to the retirement phase.
You should continually reassess the circumstances of the fund and each individual member to determine whether an SMSF is still the most appropriate option for your retirement savings. In some cases, you may find that you no longer have the capacity to deal with the complexity or the time required to manage your SMSF.
You may decide that it is not cost-effective to continue to run your own fund. Depending on your circumstances, it may be necessary to transfer member benefits to another complying super fund. Other reasons why you might wind up your SMSF include when all the members have left the SMSF (for example, they have rolled over their benefits to another fund or have died) or all the benefits have been paid out.