SMSFs Simplified: Key Factors to Consider for Self-Managed Superannuation Funds
Self-Managed Superannuation Fund (SMSF’s) are not for everyone. They come with a responsibility on the members (who are also required to be the fund trustees or Directors of the trustee company) to manage and administer the SMSF in accordance with superannuation laws that govern SMSF’s. This includes the requirement to prepare annual fund financial statements and income tax return as well as ensuring the fund is audited by a registered SMSF auditor each year.
So why might someone consider one?
Well, many people wish to manage their own affairs and have more say over where their superannuation monies are invested – and sometimes what people may wish to invest in (such as direct property or unlisted property investment trusts), are not something that can be done via a retail or industry fund.
Some small business owners like the idea of holding their business premises in the superannuation environment – so that the rent they are paying on the premises is tax deductible to the business but is also going towards increasing their retirement benefits at the same time. Rather than funding someone else’s retirement (by paying rent to an unrelated landlord), they are funding their own!
So a SMSF may give you more flexibility in making certain investment choices that you cannot get in retail or industry funds.
Another major reason many people opt for a SMSF relates to succession planning. Generally, an industry or retail fund will only allow you to maintain a single pension account (or if they allow multiple pension accounts, there are additional account fees charged).
This is not the case with a SMSF. You can have as many pension accounts as suite your circumstances and being self-managed provides greater flexibility around pension commencements, commutations, withdrawals and recontributions – all of which can be very important aspects of effective retirement and succession planning strategies.
Additionally, the administration required to access your benefits (once you have met a condition of release) is often far simpler than when dealing with an industry or retail fund (many of which require multiple documents to be provided in order to just take a small lump sum payment of your superannuation entitlements). Dealing with just yourselves can be far easier!
What about the cost of running your own SMSF?
Whilst there are annual costs involved in maintaining a SMSF (such as preparing financial statements and fund tax return, and having it audited), these can often be lower than the fees in retail and industry funds (who generally charge based on a percentage of funds held), particularly once you start to have fund balances of $200,000 or more.
There are costs involved in setting a SMSF up – including ordering a trust deed, forming a trustee company (which is the preferred trustee structure rather than having individual trustees) and the advice that goes around the decision to establish a SMSF in the first place. It is difficult to put a dollar figure on the establishment costs but it could be in the order of $3,000.
Choosing the most appropriate trustee structure
Choosing the most appropriate trustee structure is also an important consideration. Best practice is to establish a special purpose company whose only role is to act as fund trustee.
A corporate trustee enables changes in fund membership to be managed very easily (by appointing and/or removing Directors and/or shareholders), and means that you don’t need to change the name fund assets are held (assets must be held in the name of the fund trustee) each time there is a change in fund membership.
Additionally, if the ATO applies any penalties for non-compliance, a corporate trustee effectively minimises these (as any penalties apply to each trustee).
Self-managed superannuation funds are not suitable for everyone.
They must be maintained for the sole purpose of providing retirement benefits to the members and are subject to strict regulation by the ATO.
There are some restrictions on what sorts of assets can be held by a SMSF as well as strict rules in relation to related party transactions.
Before looking to establish one, you should talk to a financial advisor to see if a SMSF could work for you.
Associate - Business Advisory and SMSF