Self managed super funds ("SMSF")
are very popular and any proprietor of a business ought to consider it at some stage.
Contributions to a super fund are compulsory on behalf of employees but not for
the self employed who need to fend for themselves and make their own arrangements
for their future in retirement.
It is important to do some research
before deciding a self managed fund is best for you. You can choose as an alternative
to simply make contributions to an independently managed fund. The Australian Taxation
Office advises 20 percent of all super assets are in SMSFs, with well over 300,000
such funds and growing at a rapid pace of over 2,500 new funds a month. Clearly,
there must be great advantages and benefits associated with SMSFs that are attracting
a significant number of people to set up their own SMSFs. An overview of SMSF requirements
may assist you in deciding whether to join the movement. The question then is do
you have the time, knowledge and inclination to be personally supervising your investments?
A SMSF is established by a trust
deed and must have four members or less, with each member being a trustee and no
trustee receives payment for their services. As a trustee you are ultimately responsible
for the running of your fund and must meet the regulatory and administrative obligations
imposed on super funds. There are heavy penalties and fines for trustees who do
not do so. That means complying with the Superannuation Industry (Supervision) Act
1993 and regulations, and the income tax, GST, PAYG and reasonable benefit limits
When running a fund a trustee must
meet what is called the sole purpose test; that is the fund must be maintained only
for the purpose of providing benefits in retirement to members. An activity which
gives a benefit to a member prior to retirement is a breach of the Act unless it
falls within other ancillary purposes as prescribed by legislation. For example
a property purchased by a SMSF could not be occupied by a member of the SMSF. Nor
could your SMSF buy a painting as an investment and hang it on your wall. There
has been a significant increase in SMSFs audit activities by the ATO to ensure that
trustees are operating their funds properly and this trend appears to continue as
more SMSFs are set up.
Any investments must also conform
to an investment strategy which is considered, recorded and implemented and regularly
reviewed. Trustees will arrive at a strategy having considered goals, the risks
involved in certain investments and the diversification of investments desirable
for the SMSF. Strategy can and should change with review where appropriate to continue
to meet members retirement requirements. An obvious reason would be that as a member
approaches retirement the investment strategy would be inclined to become more conservative
as the time left to recover from a bad investment diminishes.
Proper record keeping of fund decisions
and activities is essential both for accounting and tax purposes as well as regulatory
It would be good practice to:
- Keep minutes
of investment considerations and decisions (and their compliance with superannuation
- Record all
- Keep annual
operating and financial statements.
- Throw out
documents even after returns have been lodged;
- Fail to create
Rules require that accounting records
be kept for five years and administrative records for ten years.
Other fundamentals are:
- Keep your
super fund money and assets separate from your own;
- Never use
super funds for your own or business purposes;
- Don’t lend
super fund money or assets to members or their relatives;
- Don’t have
your super fund borrow money;
- Don’t acquire
assets from a related party (unless permitted by law);
- Buy and sell
assets on the market and at market value (all transactions must be on a commercial
and arms length basis).
Trustees of a super fund are required
to have an approved auditor to audit the operations of the fund each year and file
an income tax return. The cost of administering a fund can therefore be considerable.
This means, unless one can achieve economy of scale with sufficient capital in the
fund, the SMSF option may be more expensive than other superannuation options.
There are many advantages of running
you own SMSF, and provided that you are not daunted by documentation, like the idea
of controlling your own destiny, have a genuine desire to create a fund for your
future and are willing to research and determine appropriate investments then a
SMSF may be for you.
A final note of caution:
Beware of schemes, particularly
those offering ways and means of accessing funds before retirement- these are simply
illegal and not workable and the ATO in the last few months has moved to close these
schemes. With the complexities of running SMSFss, coupled with potential benefits
that could be generated through SMSFs, it is essential that you seek advice from
an appropriately licensed person with SMSFs expertise.