Guide to Self Managed Super Fund

Everybody needs to invest in superannuation. Our system of compulsory super is in many respects the envy of the world and forms the cornerstone of our national strategy to fund our ageing population beyond retirement age.

One of the frustrations for many people though is that the performance of some retail and industry super funds does not meet their expectations. That has caused many to look to alternatives and particularly to opening their own Self Managed Super Fund (SMSF).

A SMSF, or a private superannuation fund, is a legal structure regulated by the ATO, and a way for you to take full control of your retirement and future finances. It differs from other super funds in that the members of a SMSF are also the trustees, so they're responsible for complying with superannuation laws.

KEY FEATURES OF A SMSF

• There must be no more than 6 members
• For funds that have more than one member, all the members must be trustees and each trustee must be a member of the super fund or, if the fund has a corporate trustee, all the members must be a director of the corporate trustee and each director of the corporate trustee must be a member of the fund. For single member funds, there must be two trustees and one of the trustees must be a member or, if the fund has a corporate trustee, the fund member must be the sole director or one of two directors
• A member cannot be an employee of another member unless they are relatives or for single member funds, if there are 2 directors and the fund member is an employee of the other director, the fund member and the other director must be relatives.
• The money in the fund can only be used to provide for your retirement

In recent years, the growth in SMSFs has been explosive. As at 30 June 2022, over 605,000 SMSFs in Australia had a combined 1.123 million members, controlling $868.7 billion in assets. This accounts for about 26% of all assets in the super system.

Choosing to start a SMSF is a great way to gain flexibility and control over your retirement. But it's also a big responsibility, and takes a lot of time and effort to make sure it's set up and managed correctly.

SMSF BASICS

Make sure you have all the basics covered before you start because, when setting up a Self Managed Super Fund, there are many things to consider.

You have to decide whether an individual or corporate trustee structure is right for your SMSF. Your SMSF can have up to six members and all members must be trustees, or directors, if you've appointed a corporate trustee.

You need to think about the costs associated with starting and running a SMSF, which generally are fixed. There's no minimum balance required to set up an SMSF, but it usually becomes cost-effective once you have a balance of $250,000 or more.

You will need to pay the annual supervisory levy to the ATO and arrange for an accountant to prepare the financial statements and tax return, and conduct an independent audit. You may also choose to pay for financial advice and insurance for members.

THREE THINGS YOU NEED TO SET UP A SMSF

• First you'll need enough money in the SMSF to make the set up and annual running costs worthwhile. The exact amount of money needed within an SMSF to make it viable is a topic of some contention and will depend on factors including how involved you wish to be in making decisions and also what your future contribution strategy looks like (if you plan to rapidly inject contributions, a lower balance in the early days of the fund can be viable).

• Next you'll need to budget for ongoing costs including accounting, tax, audit and legal fees, as well as the costs of financial advice if you choose to take professional advice on your investment strategy. These costs will eat into your investment returns so you need to ensure your fund is generating sufficient income both to cover the costs and to build up your fund long-term.

• Finally, you'll need the financial skills – or access to others with the financial skills - to be confident that you're making the right investment decisions. You'll need to create an investment strategy that will generate sufficient returns to provide for you in your retirement.

BENEFITS AND RISKS OF SETTING UP A SMSF

There are many benefits to starting a SMSF. You have full control over your finances and future, and can make choices that benefit your specific circumstances to maximise your earnings. You're able to make your own choices about your investments, and can invest in anything provided it's  allowed by the investment strategy prepared by the trustees, and meets the sole purpose test (which means assets must be held ONLY to provide for members in their retirement). You can also derive significant tax benefits.

There are also some risks involved such as penalties for non-compliance, lack of statutory compensation and lack of access to conflict resolution channels if disputes arise.

Deciding if the benefits outweigh the risks is up to you – but be careful as you assess the information and don't be put off by some of the myths surrounding SMSFs.

Some key myths that persist around SMSFs are:

1. You need to be wealthy to have a SMSF. While it is advisable to have a substantial opening balance (around $200k) to ensure a SMSF will be viable, there's no minimum balance needed to open or run a SMSF.

2. SMSFs are too risky. You're in charge so the level of risk depends on how you choose to manage your SMSF. But getting the right professional help and support will ensure you comply with all the rules and minimise the risk factors.

3. SMSFs are a simple way to buy property. There are numerous conditions associated with the purchase of property through a SMSF, so we recommend you research this option thoroughly (check out our Guide to Buying Property through a SMSF) and get professional advice before making any decisions.

BUYING PROPERTY THROUGH YOUR SMSF

The most important thing to know is that buying a property through a SMSF doesn't follow the same procedure as buying a property personally. There are additional restrictions associated with getting a bank loan (including considerations for using a limited resource borrowing arrangement), and tax implications that need to be considered. You should also look at the implications of purchasing a commercial property  or an overseas property  through your SMSF.

YOU SHOULD ALSO KNOW...

• Most SMSFs dont need to register for GST because SMSFs mainly make input-taxed sales, and these don't count towards GST turnover.  Annual GST turnover does not include contributions, interest and dividends, residential rent or income generated outslide Australia. However it does include income from the lease of equipment or commercial propery. Your SMFS will need to register for GST if it owns a commercial property that receives rent of over $75,000 per year.

• It's important that you upgrade your SMSF Trust Deed and review it regularly to make sure you're complying with laws and getting full benefits

• It's possible to invest in cryptocurrencies through SMSF, but there are conditions

LET US HELP WITH YOUR SMSF

Navigating the path to setting up and managing your own SMSF can be challenging, and it really helps to have knowledgeable advisors by your side to avoid making mistakes and running into trouble with the Australian Tax Office.

SMSF Solutions is a specialist division of the H&R Block Group providing administration, compliance, accounting and taxation services for Self-Managed Superannuation Funds (SMSF).

We're experts at what we do, and strongly believe in educating our clients to help them make the very best decisions. Our goal is to help you prepare for your future and to make the most of your money. We're on your side, and we will always advise you with your best interests in mind.