The desire by individuals to have greater control over their retirement savings and investment choices is the prime driver behind the decision to establish a self-managed super fund (SMSF). By pooling resources with your spouse or family members (SMSFs can now have up to six members), investors can access larger sums for potentially more lucrative investments.
But these are not the only reasons. Small business owners may hold their business premises in their SMSF for various reasons, including asset protection, succession planning and security of tenancy.
So too with farmers, with the National Farmers Federation estimating that more than 30% of farm businesses have an SMSF.
Today, it’s widely accepted that $200,000 in assets is the accepted benchmark for establishing an SMSF. With that balance, SMSF Association research shows that an SMSF can be competitive in terms of costs and investment returns compared with larger funds.
But with greater control comes more responsibility. It’s essential to recognise that a shared SMSF comes with risks related to member behaviour and life events such as bankruptcy, death, or divorce. Adequate preparation for these scenarios is crucial in managing a collective SMSF.
Managing an SMSF demands time, skill, and ongoing operational costs. Trustees play a vital role in ensuring legal compliance with superannuation and tax laws and possibly the Corporations Act if a corporate trustee is involved. They are responsible for making decisions in the best financial interests of all fund members, overseeing the day-to-day operation of the fund, and ensuring that the assets of the SMSF remain separate from personal assets.
The choice between a corporate and individual trustee structure is an important one, considering factors such as cost, member requirements, changes in membership, asset separation, succession planning, legal liability, and borrowing considerations.
Choosing a corporate trustee offers several advantages, including enhanced asset and trustee protection, continuous succession, administrative efficiencies, flexibility for sole and multiple member SMSFs, and the complete separation of SMSF and personal assets.
Although the cost may be higher, the lower impact of any administrative fines and penalties, as well as the potential long-term benefits, make the corporate trustee structure a strategic choice for many SMSFs. Most lenders for limited recourse borrowing arrangements (LRBAs) prefer an SMSF having a corporate trustee.
For those opting for the individual trustee pathway, advantages include minimising the administrative hassle and upfront costs of establishing a company to act as trustee, no Australian Securities & Investments Commission (ASIC) forms to complete to establish the SMSF, as well as not having to comply with ongoing ASIC reporting obligations.
The primary objective of managing an SMSF is to comply with all legal requirements, and this starts with formulating and implementing an investment strategy. This is not optional – the law demands an investment strategy that is reviewed regularly.
Trustees must define the fund's investment objectives, consider diversification of the investment portfolio, maximise tax effectiveness, consider the fund’s cash flow and liquidity requirements (i.e. expenses, pension payments).
Understanding permissible investments, setting target asset allocations, considering the insurance coverage needs of each member and beneficiaries, and assessing risk tolerance, are other considerations in creating and documenting a robust investment strategy.
There are restrictions on the investment activity that SMSF trustees can undertake. These include:
SuperStream measures introduced for rollovers to and from SMSFs have streamlined and digitised the process. Trustees must now initiate rollovers online through SuperStream, ensuring efficiency and accuracy in transferring super benefits to their SMSF. The process facilitates the verification of member identity, regulatory compliance, and checks for potential illegal early release and fraudulent activity. These measures enhance the overall efficiency of the SMSF sector.
New trustees need to be aware that although there is a three-day requirement for SuperStream rollovers to be enacted, this only takes effect once all the required information has been provided, so ensure any issues are resolved early if a property settlement is pending.
Managing an SMSF involves financial commitments, including set-up and ongoing operational expenses, which may exceed other super funds.
Trustees must be prepared to allocate time for investment research, decision-making, and completing the ongoing administrative tasks.
The key responsibilities to ensure a fund is compliant are:
Remember, the ATO can impose a range of administrative penalties on trustees if the fund is not compliant. Trustees must understand and acknowledge that they are solely responsible for their funds’ compliance and any penalties that may result from non-compliance.
SMSFs are long-term investment vehicles, and much can happen over the course of the journey. Therefore, it’s smart thinking to have contingency plans in place to deal with unexpected events. Events that require such planning include:
Embarking on an SMSF journey offers individuals, couples, and families an opportunity to take greater control over their retirement savings. But as stated at the outset, with greater control comes more responsibility, and as a trustee it is incumbent on you to fully understand what’s involved in overseeing an SMSF, appreciating that you are ultimately legally responsible for your fund’s compliance.
It has always been the mantra of the SMSF Association that SMSFs are not for everyone, so, before deciding to embark on this journey, ensure you fully understand what’s entailed. Getting professional advice is a good starting point.
DISCLAIMER
The information contained in this document is provided for educational purposes only, is general in nature and is prepared without taking into account particular objective, financial circumstances, legal and tax issues and needs. The information provided in this article is not financial advice and is not a substitute for legal, tax and financial product advice. Before making any decision based on this information, you should assess its relevance to your individual circumstances. While the SMSF Association believes that the information provided in this article is accurate, no warranty is given as to its accuracy and persons who rely on this information do so at their own risk. The information provided in this bulletin is not considered financial product advice for the purposes of the Corporations Act 2001.
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