Self Managed Superannuation Funds
What is a Self Managed Superannuation Fund?
A Self Managed Superannuation Fund (SMSF) is essentially a superannuation fund which is controlled by you.
A SMSF can have up to four members, all of whom must be trustees (and all trustees must be members). As members and thus trustees, you make all decisions relating to the operation of the SMSF, including how the SMSF’s assets are invested.
While this gives you added responsibility in relation to your superannuation, the majority of the compliance and administrative tasks can be outsourced to your accountant and financial planner, meaning you can enjoy the flexibility and control that a SMSF provides.
How much do I need to start my own SMSF?
A Self Managed Superannuation Fund is required to lodge a tax return each year and also to have an audit performed each year. The cost for these compliance measures varies between clients, but will generally be in the range of $1,800 - $2,500. With this in mind, we would recommend that a client has a balance of at least $250,000 in their SMSF for it to be cost effective when compared to wholesale or industry superannuation fund offerings.
However, keep in mind that within your SMSF the members account balances are pooled. Therefore partners with $125,000 each in superannuation (or any mix of $250,000), would have sufficient funds to consider establishing their own SMSF.
What are the Advantages of having my own SMSF?
The main advantages of having a SMSF include:
you have greater freedom over how your superannuation benefits are invested. You can decide which assets the SMSF invests in, including direct shares and direct property, unlike a public offer superannuation fund where the investment decisions are made on your behalf
you have greater control over the management of your superannuation benefits. You can actively participate in the administration of the SMSF, including preparation of all required accounts and record keeping (although some tasks can be outsourced to professionals such as your accountant and financial planner)
you can have more certainty in relation to your estate planning arrangements. Many public offer superannuation funds allow you to nominate who you would like to receive your accumulated superannuation benefit on your death, but the ultimate decision is made by the trustee. As trustees of your own SMSF, you can control the distribution of superannuation benefits on the death of a member.
What are the Disadvantages of having my own SMSF?
The main disadvantages of having a SMSF include:
your obligations and responsibilities as trustees. Superannuation legislation imposes significant administrative and compliance tasks on the trustees of SMSF’s, and non-compliance carries severe penalties. However, the majority of these obligations can be met with the assistance of your accountant and/or financial adviser.
Other Matters to Consider
Under the regulations for the operation of self managed superannuation funds a trustee or trustees must be appointed to oversee the operation of the fund. Where individual persons are to be the trustees, there must be two persons. Alternatively, you can elect to have a corporate trustee of your fund, in which case a single person can be appointed as the director of the company acting as trustees. This would be a single director company, which would entail an establishment cost of around $700 and ongoing annual costs of approximately $500.
Should you choose to enlist the help of a financial planner, there will be ongoing advice fees that will be incurred by the fund. These vary from client to client and are dependant on each fund’s particular circumstance. Any charges that you are likely to incur will be clearly spelt out to you in your personalised Statement of Advice (SoA).
A trust deed would also need to be prepared if you elect to start a SMSF. The cost of this deed and the associated compliance paperwork to register the fund with the ATO is estimated at approximately $700. A deed is required regardless of the type of trustees implemented.
Investment options are many and varied within a SMSF. A portfolio of investments will be recommended and tailored to the members of the superannuation fund’s needs. Investments can include, but are not restricted to, shares, property (both direct and through trusts), preference shares, term deposits, cash, international index funds, etc.
Whilst you have a great deal of freedom of the investment choices you can make within your fund, assets purchased for personal use are strictly forbidden from being held within a fund. For example, an investment property down the coast used by the family at Christmas is not allowed.
Finally, under recent rule changes, it is also possible to borrow funds within your fund to gear a property or share portfolio purchase. There are certain conditions that need to be met, but we are more than happy to discuss these with you.
Under existing superannuation laws, there are two contribution caps that must be followed. Amounts contributed above these limits attract significant penalties of around 46.5% of the contributed amount.
The concessional (tax-deductible) contribution cap from 1/7/2012 will be $25,000 for all individuals. Concessional contributions include, but are not limited to, the SGC employer contribution, as well any salary sacrificed employee contributions. These attract a 15% contributions tax, which is paid by the SMSF. The non-concessional (non tax-deductible) cap limit is $150,000 in any one year. There is a bring forward provision, where 3 years worth of contributions can be made in a single payment of $450,000, but this then excludes you from making further non-concessional contributions for the next three years. These contributions do not incur any tax on the contribution, but are generally paid out of after taxation dollars.
Both of these contribution types can be made without restriction, up until the age of 65. After age 65 a person must satisfy a "work test" before they can make additional contributions. To satisfy the work test, a person must work at least 40 hours in any 30 day consecutive period. This test then allows for all contributions for the entire financial year in which the test was satisfied.