Self Managed Superannuation Funds (SMSF) are a type of superannuation fund that can be utilised to save for retirement. Self Managed Superannuation Funds arguably provide individuals the highest level of flexibility, allowing investments in any form allowed under the Superannuation Industry (Supervision) Act 1993. With the added flexibility comes added responsibility and the decision to set up a SMSF is one that should not be taken lightly.
How much do I need before starting a SMSF?
SMSF’s cost money to run. To set up a SMSF there are establishment fees, running costs, investment costs, advice costs, audit and compliance costs to name a few. These costs add up and the ATO estimates the cost to run an SMSF is around $2,000 p.a.1 To offset this cost and to make the cost of setting up a SMSF more competitive with other types of superannuation (the time element aside) the ATO suggests a person should have around $200,000 in superannuation assets.2
What to think about before starting a SMSF?
There are a number of considerations and the list below is not exhausting, but important points to be given thought when thinking about setting up a SMSF;
Knowledge and Time – Running a SMSF takes a considerable amount of time and requires good knowledge in a number of areas including investing and law. Even a simple mistake can cause a SMSF audit to fail. Making the wrong decisions when running an SMSF can result in large investment losses or even the fund losing its concessional tax status! Whenever thinking about setting up a SMSF, good initial and ongoing advice from a range of professionals including financial advisers, accountants and lawyers will ensure that knowledge is maintained and mistakes are avoided.
Liability – SMSF members are also the trustees (unless a corporate trustee is used) of the fund and have all the legal obligations to maintain the fund according to the relevant laws and regulations. The ATO regulates and supervises SMSF’s and trustees must complete regular SMSF audits to ensure that the fund is operating correctly. The trustees must be able to answer specific questions about investment and fund decisions and produce any relevant documentation. This liability also extends to the other trustees and members. Members’ investment and in some cases insurance needs are maintained by the trustee and this obligation can be tricky to manage when the ages of the members are significantly different. The superannuation needs of a pre-retiree is vastly different to that of their accumulating children and the trustees are obligated to ensure that all needs continue to be met within the SMSF. Trustees are personally liable for the decisions of the SMSF, even if those decisions have been
Residency – a less known fact surrounding SMSF’s is the ‘residency test.’ In order to be a complying superannuation fund and receive the normal taxation concessions, the control of the fund needs to remain in Australia. The interpretation is less than exact however it is held that if the trustees or main decision makers of the fund leave the country for a period of longer than 2 years (similar to the rules surrounding individual tax residency) then the SMSF may no longer meet this test and may become non-complying. The result of a SMSF becoming non-complying is a tax rate of 46.5%!
Access to Compensation Schemes – a less known fact is that SMSF’s do not have the same protections as APRA regulated superannuation funds. Unlike large superannuation funds, there is no access to compensation schemes for theft or fraud for SMSF’s. Where trustees make investment decisions, thorough research needs to be conducted to reduce the chance of fraud/theft causing potentially unrecoverable losses for the SMSF. The collapse of Trio Capital highlighted this risk where larger superannuation funds were eligible for compensation, however SMSF’s were not.
SMSF Life Insurance
When thinking about setting up a SMSF, insurance is an important consideration. Many people are insured to some degree within non-SMSF superannuation funds. When starting a SMSF, the ability to transfer insurance or re-insure needs to be considered to ensure that insurance benefits are not lost. If a person cannot be re-insured and needs to maintain a balance in an existing fund to maintain insurance coverage, the impact and additional administration requirements needs to be considered in view of the overall plan to self manage superannuation.
It is now a requirement that trustees consider life insurance for members as part of the investment strategy of the SMSF and this consideration needs to be reviewed regularly.
SMSF’s are usually established to invest in assets that are not normally available under other types of superannuation for example direct SMSF property. When thinking about starting a SMSF, thought needs to be given to the types of investments that are going to be sought. If direct SMSF property is not part of the mix, and you are simply looking for a way to invest in shares, term deposits and cash, then other superannuation options may provide a less involving and less costly method of saving for retirement with a similar level of flexibility and access to investment types. Diversification is also important. SMSF investment strategies usually stipulate that sufficient diversification across a range of other assets is required. SMSF’s that invest 100% of the assets in direct SMSF property may be breaching their investment strategy, may be placing the fund in a position of unnecessary risk and may also be unable to liquidate assets quickly if funds are needed to pay members for retirement, disablement of another condition of release.
Self Managed Superannuation Funds can be an effective vehicle for astute investors to take a higher level of control over their retirement savings; however SMSF’s can also be a trap for unwary investors who step into a structure that is not fully understood. If a long term structure is required to invest in business, property, unlisted assets and other valuables then an SMSF can provide the flexibility to suit a range of situations. Where individuals want a higher level of control of their retirement savings then seeking further advice can assist with making a decision that will help with reaching those retirement goals!