The majority of Australians entrust their super fund to a professional superannuation company which invests their contributions on their behalf. In addition, the company handles the administration, tax and compliance issues associated with doing so. You pay an annual fee – a percentage of your assets – for the convenience of this service.
But more than 800,000 have taken control of their own super fund. Not only does managing your own super give you more control, it can save you thousands on fees.
But is it right for you?
Weighing up the benefits and disadvantages can help you decide…
The upsides -
Control: You can invest the money as you fit – in particular companies, an ultra-safe fixed interest term deposit, or even a property to live in when you retire.
Choice: You have a wide variety of investment options – bank deposits, direct mortgages, shares, managed funds and direct property.
Lower fees: If you have more than $300K in your super, you will generally be able to operate your SMSF for less than the annual management fees charged by a conventional superannuation company.
Gearing: You can use gearing and leverage to buy assets such as property or shares to make your investments grow faster.
Tax savings: Contributions to your SMSF are tax deductible and SMSFs allow you to buy other assets and pay a maximum of 15% tax; you can save more tax by targeting franked dividend income and timing the realization of your capital gains carefully.
Estate planning: SMSFs can continue indefinitely and surviving family members may enjoy tax-advantaged income after your death.
The downsides -
Responsibility: As a trustee you’ll have to meet super and taxation law – penalties can be very harsh, including hefty fines and imprisonment.
Know-how: You’ll need to be savvy about investing to ensure your SMSF is outperforming gains it could have made with a traditional superannuation company. You can appoint advisers or brokers to help you, but that will cost you money.
Paperwork: You will be required to meet all your record-keeping and reporting obligations, including annual tax returns, records of transactions and contributions. Relying on experts to handle this aspect will cost you money (but could be worth it).
Investment risk: Your SMSF will likely be less diversified than one chosen by a superfund company. Using gearing adds another level of risk.
Insurance: While regular superfunds sometimes come with insurance coverage, you’ll need to independently source the life, total permanent disability and income protection insurance that you’ll need
Your Money Magazine’s six steps to starting your own SMSF:
1. Assemble your team: Unless you’re an experienced investor, lawyer, financial planner and SMSF expert, then you’ll need some help (preferably ones who specialize in SMSFs). To begin with you’ll need: a financial planner, a solicitor, an accountant and an investment strategist.
When choosing the right people to help you, ask the tough questions. Check their fee structures and their accreditation. Financial planners should have a CFP certification and some training in SMSF management. Don’t be afraid to get a second opinion. And be wary of one-stop shops offering you huge savings on setting up your SMSF. While some may be good, others may not have the expertise in all areas that you need.
2. Appoint trustees: A SMSF can have up to four trustees. You may prefer to be the sole trustee or you may want to include family members or friends. According to the rules, no member can be an employee of another member (unless they are related) and no trustee can be paid for carrying out their trustee duties.
Anyone over 18 can be a trustee, so long as they are not disqualified under SMSF law (ie. Someone who has been convicted of an offence involving dishonesty or has been the subject of a civil penalty, is insolvent or bankrupt).
Trustees are responsible for ensuring the fund is properly managed and complies with SMSF rules, as well as tax and legal obligations. Duties of trustees include:
-ensuring the SMSF comples with the ‘sole purpose’ test of providing retirement benefits to members
-regularly reviewing and updating the SMSF investment strategy to sure it takes into account members’ retirement goals
-ensuring that SMSF assets are not used for personal benefit until after retirement
Trustees may also need to appoint parties to carry out various functions on their behalf, including:
-maintaining each member’s information and account balances
-investing of the fund’s assets
-preparing financial accounts, regulatory reports and audits of financial statements
-budgeting and paying for costs and bills (ensuring SMSF money is kept separate from private funds)
-accepting contributions and pay benefits (pension and lump sum) in accordance with super and tax laws
3. Obtain a trust deed: Once you’ve decided who will be the trustees in your SMSF, you need to sign a declaration and have a trust deed prepared. The deed evidences the existence of the trust and establishes the rules of operation for the fund. The declaration must meet all legal requirements and be properly dated and signed by all trustees to ensure that they are aware of their duties and responsibilities under the super laws.
The trust deed will need to set out many aspects, including:
-details of who the trustees are
-how trustees may be appointed (or removed)
-the powers of trustees
-eligibility for membership
-conditions relating to acceptance of contributions
-conditions for payment of benefits to members
-procedures for winding up the fund and provisions relating to valuation of assets etc
You must ensure your deed is tailored to meet the individual needs of your fund, so having an independent legal professional guide you through this process is highly advisable.
4. Register your SMSF with the ATO: Once your fund is legally established and all trustees have signed a trustee declaration, you need to register your fund with the ATO so as to be recognised as a regulated fund (and made eligible for that great concessional tax rate).
You will also need to obtain an Australian Business Number (ABN) and Tax File Number (TFN) for the fund. If the annual turnover of the fund is greater than $75,000 you will also need to register for GST. This must be done within 60 days of establishing the fund.
Once a trustee has elected to become regulated, the decision cannot be reversed without winding up the fund and you’ll be legally required to:
-lodge an SMSF annual tax return
-pay the supervisory levy of $45 per year
-have an annual audit report prepared
ABN registration for superannuation entities (NAT 2944) forms can be obtained by calling the Australian taxation Office on 1300 720 092 or visiting the Australian Taxation Office website www.ato.gov.au.
5. Open a dedicated bank account: In order to keep it simple, it pays to keep it separate. It’s absolutely essential that you open a separate bank account dedicated to your SMSF as this will keep your super fund assets well away from your personal assets and simplify account-keeping and administration.
You can then use this account to receive any new contributions and/or rollovers from other super funds, pay all fund-related bills and loan payments, and keep track of benefits paid to members. You won’t need to open a separate bank account for each member, but you will need to keep a separate record of their entitlement, called a ‘member account’. Each member account will record member contributions, fund earnings and benefit payments made.
6. Invest: For some high-net-worth individuals the SMSF structure has proved to be the best thing since sliced bread – or at least one of the best tax-reduction strategies since the invention of negative gearing. Within certain guidelines you can borrow to invest in shares, property and other assets, leverage off their existing capital to multiply their growth, and pay a great deal less away to the tax man when you come to realise those gains.
When you come to develop and document your SMSF investment strategy it is important to consider the whole circumstances of the fund and the respective needs of the members. An SMSF strategy document is like a mini-business plan for the fund and should account for the:
-relative risk and rewards of your chosen investments
-degree of diversification across different asset types and markets
-liquidity of the fund with regards to the demands on its cash resources
-ability of the fund to discharge its existing and prospective liabilities and debt
Each SMSF has an investment strategy as unique as the needs of its members and seeking professional advice is highly recommended – at least at the set-up stage. It is also essential that you keep records of your decisions or ‘minutes’ so that an independent party can assess whether your investment adhered to your funds investment strategy.
According to a recent Multiport survey of 1000 SMSFs, a combination of Australian shares, property and cash is favoured by most SMSF investors. “Property and shares are capital growth investments and tend to be more tax-effective, meaning that the value of your investment should grow faster than inﬂation, creating real wealth,” says the ATO.
Shares: About 40% of SMSF assets are invested in Australian shares. Many SMSF investors favour shares for their liquidity and tax-effective dividend payments. Shares will particularly suit you if you’re interested in actively monitoring the market or you have an advisor to help you develop an appropriately diversified portfolio. SMSF owners also have the option to leverage their assets using margin loans to help their investments grow faster.
Property: Since 2007, SMSFs have been able to borrow to invest in property, although lending limitations do apply. The most they can borrow (LVR) is 80% of the property value and, in the case of warrants, one year’s interest is payable in advance. Usually properties must be geared in such a way that they provide a positive cash-flow. The benefits are a maximum of 10% capital gains tax (CGT) payable on the sale of the property as long as the fund has held it for at least 12 months, and potentially no CGT bill if the property is sold after you retire and the SMSF has moved into ‘pension phase’.
Cash: Better interest rates and volatile markets recently have seen many SMSF investors opting for the safety of cash. There is no doubt that when markets crash, cash is king; but the opportunity cost of relying solely on cash and fixed interest for your retirement is a risk in itself if you miss the rebound in other markets.