Self-Managed Super Funds (SMSF)
A Self-Managed Super Fund (SMSF) is exactly what the name says – a super fund you manage yourself. The funds you would normally put in a retail or industry fund you put into your own SMSF and then you choose the investments and the insurance.
Now, before everyone gets excited and thinks this sounds like a good idea – there are very strict rules in relation to SMSFs and it’s a lot of work and risk and can also be quite costly to administer. An SMSF must be run for the sole purpose of providing retirement benefits for members and their dependents. They are not to get early access to your super or to buy a holiday home or golf buggy (that’s illegal!).
SMSF can have no more than 6 members and all members must be trustees of the fund or you can get a corporate trustee (of which all members must be directors).
All members of the SMSF are responsible for making the decisions of the fund and most importantly complying with the law. There are many risks that come with this responsibility:
- As a trustee/member you are liable for the decisions of the fund, even if you get help from a professional.
- The investments may not bring the returns you expect – you don’t have the expertise of the fund managers or the millions of dollars to spread your investments. On average, SMSFs have not beaten retail or industry fund returns.
- You must continue to manage the fund even if your circumstances change (or you must wind it up which depending on the investments may not be so easy).
- Relationship breakdowns between members or the death of a member can have a negative impact on the SMSF.
- There is no compensation scheme for SMSF as there is for the retail and industry funds in the case of fraud or theft.
- You need to be careful if you have insurance in a retail or industry fund and you want to move to an SMSF. You may not be able to replicate the cover in an SMSF.
- Each year financial statements of the fund must be audited and the tax return lodged on time.
- There are significant penalties for breaches of the law.
There are costs to set up a SMSF and every year there are ongoing costs for investing, accounting, auditing, tax advice, legal advice and financial advice. According to Moneysmart.gov.au the average cost of running an SMSF was $6,450 per annum.
You must ensure you comply with tax, super and investment regulations and laws. This includes:
- knowing who and how much members can contribute.
- what type of investments an SMSF can hold (there are some restrictions eg the SMSF cannot buy a house for yourself or any relatives to rent).
- everything must be done on commercial terms (so if you have business property you want to hold in the SMSF you must sell it to the SMSF at the same price as you would sell it to someone else).
- knowing when and how much members can withdraw – there are very strict conditions when it comes to taking money out of super and SMSFs are no different. Just because you are managing it doesn’t mean you can take it whenever you feel like it or any earlier than if you had it in a retail or industry fund. Be wary of anyone who offers to set up an SMSF to enable you to withdraw your super to pay off debts or use personally.
Having gone through a lot of negatives, there are definitely some positives. An SMSF does give you control over your investments and can be particularly useful for investments not able to be purchased in a retail or industry fund. One very good example of this is business real property – so land and buildings used in your business. Other examples include rental properties (just not rented to related parties), art and collectibles (with very stringent rules) and even gold and silver.
The bottom line is an SMSF is not for everyone, but they do have their place and can be an effective tool in managing your savings for retirement.
The above information is only general in nature and should not be considered specific advice. Each individual’s circumstances needs to be assessed. If you have questions in relation to the above, or any other matters, please do not hesitate to contact our office on 1300 620 345.