What to consider prior to setting up an SMSF
A Self-Managed Super Fund (SMSF) is a form of trust regulated by the Australian Tax Office (ATO). Its sole purpose must be to provide an income upon retirement for its members, or as a death benefit. Like other super funds, SMSF help you save for retirement. The big difference between a retail/industry fund is that an SMSF is run by you, giving you extra control of your retirement. By choosing to set up an SMSF, all trustees are responsible for ongoing management of the funds' investments and administration and ensuring that the fund complies with super laws.
SMSFs can have up to four members. All members must be trustees (or directors, if there is a corporate trustee) and are responsible for decisions made about the fund and compliance with relevant laws.
Prior to setting up a super fund, you should be asking yourself the following questions:
- Why do you want to set up an SMSF?
- Are you going to be setting up an SMSF alone or with others?
- What trustee structure will you choose?
- Are you ready to carry out the role of a trustee or director, which imposes legal obligations?
- Do you have financial experience to make sound investment decisions?
- Do you have enough time to manage an SMSF?
- Do you have enough super to make it worthwhile?
As a trustee of an SMSF, you’re responsible for ensuring compliance with super and tax laws. With SMSF’s, there are additional responsibilities that you need to consider:
- Tailoring your trust deed and investment strategy to suit your member - A trust deed is a legal document that sets out the rules for establishing and operating your fund. Together with the super laws, they form the fund’s governing rules. The trust deed needs to be correctly drafted and executed to meet legal requirements.
- An investment strategy is a written document that is required to be prepared having regard to all circumstances, including diversification of the fund's investments, insurance considerations for its members, liquidity, risks involved in making, holding, realising and likely return from fund's investments. The investment strategy needs to be correctly drafted to meet legal requirements, funds objectives, and member's needs.
- Meeting your record keeping and reporting obligation - One of your responsibilities as a trustee of an SMSF is to keep proper and accurate tax and super records. It is a good idea to take minutes of all investment decisions especially as to why a particular investment was chosen and whether all trustees agreed with the decision.
- Annual Administration, Tax lodgment and Audit - You have a legal obligation to have your SMSF financial accounts independently audited annually. An annual return will need to be lodged once the audit of the SMSF has been finalised. The SMSF annual return is more than an income tax return. It is also used to report super regulatory information and member contributions.
Some of the benefits in establishing an SMSF
SMSF allows you to have full control of your retirement savings. That means you decide how you wish to invest your super money. SMSF’s also provide a range of investment options, as a trustee, you can potentially invest in cash, Australian and international shares, property, term deposits, bonds and loans, managed funds collectibles, gold, and silver.
Compare to most super funds, SMSF’s incur a fixed administration and audit fee, regardless of the value of the fund. If there are multiple members in the fund, the administration and audit fee can be shared across all members to further reduce the cost. The more an SMSF grows, the more cost-effective it becomes.
The current tax rate on earnings within a superannuation fund is 15%. In the accumulation phase, tax on investment income is capped at 15% and in the pension phase, there is no tax payable. This difference in tax rates means that by having control over the disposal of assets, you may be able to reduce, or potentially eliminate a capital gains tax liability.
While there are numerous benefits in establishing and running an SMSF, there are also many considerations and risks to understand and be aware of when making your decision. These include trustee responsibilities, costs, and insurance cover.