A Self-Managed Super Fund (SMSF) Right For You?

Seeking control over your retirement investment? A self–managed super fund can indeed be an attractive option. However, SMSF is a major responsibility. If you get it wrong, you may have strong financial impacts. Many people move their retirement savings from an Australian Prudential Regulation Authority (APRA)-regulated fund into their investing strategy to have more choices, control, and freedom. But your choice will be based on factors like age and situation.

People who are trustees of an SMSF and want more control over their investments usually think they can get better returns or that their balance has hit a point where the time and money spent on self-management is worth it. We spoke to our most experienced accountants and created a short guide to help you understand if a self-managed super fund is the right option for you.

So, what exactly is an SMSF?

An SMSF is a trust fund where an arrangement is made concerning a person or a company (trustee) that holds assets for other individuals (also called beneficiaries). The main difference between an SMSF and other types of super funds is that all members of an SMSF are also directors and trustees. This means that they can run the fund for their own retirement benefit and are in charge of following all tax and super law rules. 

A trust must have a trustee, beneficiaries, assets and trust deed

With SMSF, the purpose is to manage assets of the created trust for the benefit of its beneficiaries (members) – when they retire. Speaking in general terms, it is illegal to benefit from the SMSF (if not created for its sole purpose). According to our accountant, Anaiyat Ulah, who mentions that “it is illegal to use the funds for the following:

• Invest in a related business
• Use the fund’s assets for holidaying in your investment property (SMSF property).
• Using the SMSF to pay for services or duties as a trustee

Anaiyat says, “Anything without complete information and compliance, is a road to lose. As accountants, we understand that SMSF is time-consuming. However, with the right method, you can always benefit from it, provided that we are using it for its sole purpose and not for personal benefits”.

How does the self-managed super fund (SMSF) work?

As a trustee, individuals are personally responsible for ensuring their fund is in complete compliance with the super and tax laws. Moreover, this is applicable to an SMSF professional or if an individual relies on another trustee. However, non-compliance can result in various consequences such as penalties, disqualification and tax consequences.

What SMSFs do and what risks they take

Everyone who is part of an SMSF is responsible for following the law and the choices made by the fund. Some dangers come with these duties:

• Nobody can help you get your money back if you lose it because of theft or scams. Not even the Australian Financial Complaints Authority (AFCA).
• You are responsible for all choices made by the fund, even if a professional (like a lawyer, accountant, or financial adviser) helped you or if another member made the choice.
• Your investments might not give you the money you hope for.
• The fund is still your responsibility, even if your situation changes, like if you lose your job.
• If members of your SMSF lose touch with each other or if someone dies or gets sick, it could hurt the fund.
• If you switch from an industry or retail super fund to an SMSF, you might lose your insurance. Check out merging super funds.

The lifecycle of an SMSF generally has 3 stages:

• Working out if SMSF is the right option for you? If yes, then set up your fund.
• Operating the fund, such as fund administration, investment management, and paying the benefits.
• Finalising the reporting and any other obligations involved and closing the fund.

“Make sure you are aware of your role and responsibilities as a trustee! Seek advice if you don’t. And never fall into schemes” ~ Madeeha Usman

Your accountability lies with your decisions!

All the trustees are responsible for making decisions that may affect the retirement interests of each fund member, including yourself (If you are a fund member). Individuals are certainly encouraged to run their own SMSF fund, however, if they are unsure, they may choose to hire a professional. In the end, the final accountability lies with the trustee. There are specific obligations under the Superannuation Industry (Supervision) Act 1993 that need to be met by the trustee.

Essential steps to set up an SMSF fund

To be eligible for tax concessions, it is important for you to set up your SMSF correctly. Here are important steps to be followed and tips that can help you along the way.

1. Choosing your structure

You can choose one of the following SMSF structures:

• Individual trustees (restrictions apply).
• Corporate trustee (a company that acts as trustee for the fund).

The two structures differ in terms of cost, member requirements, ownership of fund assets, separation of assets, succession and penalties.

#Tip 1: It is always advisable to work with a professional before you consider choosing any of the business structures.

2. Appointing your director or trustee

According to the Australian Taxation Office (ATO), a key point here is that all members of the SMSF must be either director of the corporate trustee (if you choose to go ahead with the corporate trustee as a structure) or must be an individual trustee.

#Tip 2: If an individual is not eligible to be a director or an individual trustee, they do not qualify to be a member of an SMSF.

3. Have you created a trust deed?

Once you have satisfied the trust requirements, you must prepare a legal document ~ also called a Trust deed. A very important legal document explains the rules for creating and operating a trust fund. Moreover, it also establishes the eligibility of a member. Also, how can the benefits be paid – as an income stream or a lump sum?

#Tip 3: A trust deed is a legal document and must only be prepared by someone competent. Also, ensure that it is signed and dated by all trustees.

4. Be aware of your residency rules

To be eligible for a compliant super fund, an SMSF needs to be at all times an Australian super fund. If not, it may become non-complying and fail to satisfy the residency rules. Moreover, who would like their income to be taxed at a higher marginal tax rate?

#Tip 4: If the member of your fund, due to any circumstances becomes a non-resident but wishes to receive or make contributions. They must do this outside their SMSF either via an industry super fund or through a retail one. Hence, they can roll over their contributions to their SMSF (as they return as an Australian resident).

5. Establish your Trust fund, and create an ABN (Australian Business Number)

Once you have set up your trust fund, including your trustees. You are required to register the SMSF by applying for an ABN within 60 days.

#Tip 5: Always ensure the details of the members, directors or trustees involved in the trust fund – should have correct information listed, as this may affect their ABN application.

Pros and Cons of SMSF

Not everyone should have an SMSF. It's important to think about both the risks and the benefits of managing your own super before making a choice. Here are some things to think about.

Pros of SMSF	Cons of SMSF
When it comes to investments, SMSFs give you more choices than other retirement funds.	To manage and carry out your investment strategy, you need time, information, and skills. You might not be able to get help from compensation plans or AFCA if you lose money because of theft or fraud.
You can quickly make changes to your investment portfolio when you are in charge of your super fund. This way, you can quickly get into trends that will make you money or eliminate trends that will lose you money.	You are legally responsible for the fund's choices and for following the law. This includes reviewing your investment strategy, accounting, keeping records, and having an annual audit.
Because you'll be investing your own money, you'll have a better idea of how it's doing and how your retirement funds are being used.	SMSF trustees also need to spend a lot of time ensuring investments are handled well.
It is possible to use tax-efficient investment methods.	The people who are part of an SMSF must be Australian citizens or permanent residents in order for the SMSF to be legal.
Through your SMSF, you can pay for disability income security insurance and life, total and permanent disability insurance.	If the assets in an SMSF are not very valuable, the cost of running that SMSF may not be worth it.

Is SMSF right for you?

A lot of people enjoy the challenge of managing their own day-to-day investments and are happy to spend time researching all of their choices. You might be able to make a fund that does better than the big players if you think you can beat the market and are willing to make regular "big picture" decisions.

Also, SMSFs are the only kind of super fund that let married couples put all of their money into one fund. It may be better for your funds to do this, especially as you get closer to retirement and start taking out money from your savings.

One of the best things about SMSFs is that, unlike APRA-regulated super funds, they let you buy direct property investments in both residential and industrial real estate, including your own business building. SMSFs can also put their money into cryptocurrencies and items like jewellery, coins, stamps, old cars, art, and wine. But there are strict rules about how to keep these things in an SMSF.

In the end, you want to enjoy the concessions available, and also be compliant with the required superannuation laws. To ensure the smooth functioning of your fund, you must ensure every minor detail has been given complete attention. Working with a professional can help you save money, and operate your trust fund to its full capacity.

Conclusion

Because there are so many rules about super, it's important to get it right from the start. That's where our financial planners at The Kalculators come in. We have a dedicated "super" team of experts who are very good at their jobs. They know about all the latest changes to the law and business strategies. As the top experts in SMSFs, our team is ready to discuss your choices and help you decide if an SMSF is the best way to spend your money. Our team can also help you set up an SMSF if you decide you want to do that. Call us now or book an appointment to decide on your plan.

We hope you enjoyed our mini-guide on creating an SMSF.

Still, have questions?

Give us a call today on 08 7480 2593 to find out if creating an SMSF is the right option for you?

Frequently Asked Questions:

Why choose an SMSF?

There are several reasons why people may consider setting up an SMSF:

• Flexibility and control: SMSFs offer a high level of flexibility and control over investment decisions, allowing members to tailor their portfolio according to their individual needs and goals.
• Cost-effectiveness: SMSFs are often considered more cost-effective compared to other types of superannuation funds, as members avoid management fees and brokerage charges.
• Asset protection: SMSFs provide greater asset protection compared to other types of funds, as the assets are held in a separate trust structure.

Can I start an SMSF?

Yes, individuals can start an SMSF in Australia if they meet certain eligibility criteria. These criteria include:

• Being an Australian resident for tax purposes
• Having a minimum balance of $500,000 at the beginning of the financial year
• Not being a disqualified person (e.g., bankrupt, disqualified by ASIC)

Can I transfer my existing superannuation balance to an SMSF?

Yes, individuals can transfer their existing superannuation balance to an SMSF through a process known as 'rollover.' However, there are specific rules and conditions that need to be followed, including trustee consent and meeting eligibility criteria.

Can I retire from my SMSF?

Yes, SMSF members can retire from the fund by accessing their superannuation benefits. This typically involves a gradual drawdown of pension payments or lump sum withdrawals.

How much money do I need to begin an SMSF?

It varies, even though it seems like a simple question. If I want to know how much it will cost to start an SMSF that is also good value for money, I should think about how much it costs to run your fund and whether the net returns after costs are comparable to APRA funds. It's difficult to say, and everyone will have a different answer. Read the next part to learn more about the costs.

Still, after years of heated debate, a lot of studies done for the SMSF Association have confirmed that an SMSF must have at least $200,000 in it to start saving money. 

Do I need a professional financial advisor?

While SMSF members can make informed decisions based on research and professional advice, it is generally recommended to seek guidance from a qualified financial advisor who can provide guidance and advice on various aspects of SMSF setup and management. If you are in Australia and need help with your SMSF management, don't hesitate to contact us at The Kalculators. We can make the process easy and seamless.