What’s All The Fuss About Self-Managed Super Funds?

Are you considering joining the ranks of savvy Australians investing in their retirement with a self-managed super fund (SMSF)? You're not alone.

SMSFs have grown in popularity over the past decade because they provide control over assets, taxation flexibility, and the ability to amass more retirement wealth than many other investment options.

In this blog post, we'll unpack why so many people are turning to self-managed funds – from understanding exactly what they are through to exploring compelling reasons why talking about setting one up might be right for you.

Let's dive into it!

What Is A Self-Managed Super Fund?

SMSFs, which stands for self-managed super funds, are private superannuation funds administered by their owners directly.

The Australian Taxation Office is in charge of regulating SMSFs, which can have a maximum of four members, all of whom are required to act in the capacity of trustees and are accountable for choices made and legal adherence.

SMSFs give members various flexible investment options and may provide considerable tax advantages. However, they are expensive to set up and run and need legal and financial expertise.

SMSFs are appropriate for those who are ready to manage their super fund and have a lot of money.

What Are Some Applications of a Self-Managed Super Fund?

SMSFs, like public offer and sector superannuation funds, aim to give members adequate money in retirement.

SMSF members can save money by actively managing their superannuation. This is because SMSFs provide trust funds more control over their assets.

There can be up to six participants in an SMSF. The following options are available to you when you want to create a superannuation fund that has more than six members:

• create more than one self-managed super fund or
• create a small fund under the APRA umbrella.

What Are The Different Superannuation Funds?

Industry funds are pools of money many employers contribute and are administered by employer organisations and/or labour unions. There aren't any shareholders in these funds. Therefore, they are managed entirely for the benefit of the members, in contrast to retail and wholesale funds.

Wholesale Master Trusts are multiemployer funds managed by financial institutions to benefit groups of employees. Accordingly, the APRA also considers these retail funds in their classification.

Financial institutions manage the funds known as retail master trusts and wrap platforms on behalf of individual investors.

Employer Independent of Others Employers typically set aside money in the form of funds for their staff members. Every fund utilises its trust arrangement, which is not always utilised by other businesses.

Funds created for a limited number of individuals (fewer than 7) and regulated by the Australian Taxation Office are called Self Managed Superannuation Funds, or SMSF for short. In most cases, fund members will serve as trustees of the fund (where there is a Corporate Trustee, the members are the company directors).

Small APRA Funds (SAFs) are funds that are established for a small number of individuals (fewer than 7), but in contrast to SMSFs, the Trustee of SAFs is an Approved Trustee rather than the member(s), and APRA governs the funds. Small APRA Funds (SAFs) can only be created for people who are residents of Australia. Members of a superannuation fund who want control over their assets but cannot fulfil the responsibilities of trusteeship in a self-managed superannuation fund sometimes choose this form.

Funds formed by governments for the benefit of their employees are known as public sector personnel funds.

Is It OK For You To Have Your Own Self-Managed Super Fund?

While maintaining your super fund might be tough, SMSFs are only for some. We urge expert help, however, here are some things to remember:

• Does your superannuation account have enough money to justify the initial deposit and annual fees? There will be ongoing charges for accounting, tax, auditing, legal, and financial consultants.

• Do you comprehend finances and adult responsibilities?

• Do you have much free time to research, routinely check your retirement assets, and administer the fund?

• Do you have life insurance, as well as income protection and coverage in the event that you become totally and permanently disabled?

What Is The Function Of Self-Managed Super Funds?

The Australian Taxation Office (ATO) has strict requirements for setting up and managing a super fund.

These regulations include:

• Only one to six people are permitted to be members of an SMSF.

• Every individual participant is required to hold the position of trustee (or director, in the case of a corporate trustee), and they must fulfil the responsibilities associated with those positions. This indicates that every member has substantial legal responsibilities.

• You are restricted to using the cash in the fund solely to provide retirement benefits.

• You can only establish and implement an investment strategy and stick to it that ensures the fund will most likely fulfil your needs in retirement.

• You are required to keep detailed records and to organise an annual audit to be carried out by an SMSF auditor who has been approved.

As a trustee, you and your fellow trustees are personally responsible for fund activities. When the SMSF trustees violate the rules, the ATO will sanction them even if they are following an advisor's advice. In addition to large fines, trustees may have to apologise, pay more taxes, and take seminars.

Features of SMSF - What Are The Perks?

The advantages of getting a Self-Managed Superannuation Fund revolve around autonomy and versatility with investments. Yet, there is also a great deal of administrative and tax benefits that are supplementary to this.

Only an SMSF can invest in direct property, such as a home or commercial investment property. This differs from industrial and retail superannuation funds, which provide a wide range of managed funds, ASX-listed shares, and ETFs.

Self-Managed Superannuation Funds (SMSFs) enable you to choose a bank account, term deposit provider, managed fund, or shareholdings, unlike retail or industry funds, which limit your selections based on their investment menu.

The day-to-day tasks and operations of an SMSF do not experience any delays caused by administrative procedures, functionality, or the reliance on super fund staff members to handle requests. This is due to the fact that an SMSF is governed and administered by the trustees and members of the Fund. As a result, SMSFs can make more strategic decisions, capitalise on opportunities, and react more quickly to changes in legislation or events in the economy.

The other major benefit that no other superannuation funds offer is the opportunity to borrow through a limited recourse borrowing arrangement to invest in assets such as property and shares. This benefit is not accessible anywhere else.

Factors That Have To Be Considered Prior To Establish An SMSF

Before you go ahead and establish a self-managed superannuation fund (SMSF), you should ensure that this option best suits your needs. Also, if SMSF funds are stolen or illegally obtained, you will not be eligible for reimbursement.

Considerations include:

• Have you obtained the necessary experience and education? For instance, are you allowed to modify your SMSF's trust deed and investment plan so that they are more suitable for the fund members? Will you be able to record, disclose, and audit your tax and retirement benefits?

• How much time do you have left?

• Do you have enough cash? To operate an SMSF, you must pay for investing, accounting, and auditing, which may be more than conventional super fund expenses. Because of these fees, you may have less cash saved for retirement.

• Will the fund you self-manage produce better returns on investments than the fund you already have? Before starting a self-managed super fund (SMSF) because you're unhappy with your current super fund, try transferring to a different one or investing alternative.

• Do you prefer one of the other great DIY options? Some super funds provide DIY investments. These choices, including self-managed super funds (SMSFs), let you invest your super in shares, exchange-traded funds, or term deposits. DIY super alternatives provide you with more asset control. Still, you can handle the legal and administrative responsibilities that come with establishing your SMSF.

• Can you remain current on changes to the legislation governing superannuation and taxes?

• Is having another retirement account preferable?

• Will your insurance coverage be affected? If you have a self-managed super fund (SMSF), you are obligated to buy insurance individually, but due to factors such as your age and health, it may not be easy to purchase a new policy. In addition, most super funds provide members with life and disability insurance. It's also possible that this will increase your insurance premiums.

• What happens if your relationship with the other people in the fund shifts? If your SMSF has more than one member, it is in everyone's best interest to have a plan for what will occur if one member becomes ill, dies, loses interest, or their romantic relationship ends.

What Are The Practical Steps To Set Up An SMSF?

1. Check to See if It Fits Your Needs

A self-managed super fund (SMSF) gives you full control over your assets and requires compliance with all rules. You can't blame real estate brokers, fund auditors, financial specialists, or anybody else. You're accountable for everything. The Taxation Office requires trustees to sign an agreement acknowledging their roles and responsibilities.

2. Determine the Organisational Makeup of the Fund

Your fund can have one of these structures:

• Up to six different people may serve as trustees.
• Corporate trustees are firms that act as fund trustees.

If you're alone, you may need to start a firm as the only shareholder and office holder.

A corporate trustee is preferable even if it is not required since the trustee must keep their personal assets separate from the SMFS funds.

3. Get Advice From Professionals and Know the Rules

• Are you in a position to serve as a trustee?
• Verify that the resident status is correct.
• Comprehend the test of the one and only purpose
• Acquaint yourself with the forbidden activities.

4. Draft the Trust Deed for the SMSF

A super fund is a specialised trust established and managed only to pay retirement benefits to the fund members (the beneficiaries).

A trust deed is a legal document laying the guidelines for forming and running your fund. These rules include the fund's goals, who is eligible to be a member, and how rewards will be distributed. Together, the trust deed and the super laws make up what is known as the "governing rules" of the fund.

Because a trust deed is a legal document, you require it to be drafted by an attorney or another qualified professional.

It should be stated in the trust deed of your fund if administered by individual trustees, that the main aim of the fund is to pay retirement benefits.

Every trustee is responsible for reading the trust deed, ensuring that it is correctly executed in accordance with the laws of their state or territory, and signing and dating it.

5. Appoint Your Trustees

New funds choose trustees based on their trust agreement.

Trustee and director declarations must state that they understand their organisational duties. After being appointed as a trustee or director, they must do this within 21 days, and you must keep the declaration for at least ten years if it is no longer relevant.

This declaration must be ready for the Taxation Office upon request. Penalties could be levied against you if you do not even sign and save the declaration or if you don't provide it to the ATO when they ask for it.

Everyone who serves as a trustee is legally obligated to abide by the trust deed and shares equal responsibility for ensuring its provisions are adhered to.

6. Accept Participants and Note Their TFNs

When you establish the fund with the ATO, you will be asked for the TFN of each trustee and director you have.

If a member has not provided their TFN:

• The fund cannot take some types of donations made on their behalf, including personal contributions and contributions from qualified spouses.

• The fund is required to make additional tax payments in relation to certain contributions that were made to the member's account and

• The member may be unable to receive retirement plan co-contributions.

7. Create a Bank Account For Your Financial Support Later On

An SMSF must have assets in order for it to be considered lawfully created. The trustees hold the fund's assets for its members.

A self-managed superannuation fund (SMSF) is usually created by depositing money while the trust deed is completed. Cash or listed shares and equities can be donated.

You need a bank account in its name to administer your fund, collect financial contributions, and roll over rewards from other superannuation plans. After that, the money is invested according to the fund's investment strategy to pay fees and liabilities.

Note that you must retain a "member account" for each member's entitlement but not a bank account for each member.

The fund bank account must be separate from trustee and employer bank accounts.

8. Register Your Business With the ATO

You are required to register your fund with the Taxation Office once it has been legally created, and all trustees have submitted a trustee declaration.

Trustees are able to do the following in addition to registering (it's all done on the same form):

• Choose to have the fund classified as a regulated fund in order to get favourable tax treatment
• Fill out the necessary paperwork to obtain a tax file number (TFN) and an Australian Business Number (ABN)
• Register for the Goods and Services Tax, which is only sometimes needed.

9. Put Together a Plan for Your Investments

It would be best to have a defined investing strategy before making any financial investments.

Your investment plan offers you and the other trustees a framework for making investment choices to enhance members' benefits when they reach retirement age. It must be documented in writing so that you may demonstrate that your investing choices are in accordance with the regulations and the governing laws.

Consider the following while creating your investing plan:

• diversification involves investing in several assets and classifications.

• the potential for loss and gain associated with investments, with the goal of increasing member returns.

• the ease with which a fund's assets may be turned into cash to meet costs, or "liquidity."

• capacity to compensate retiring members and pay other expenditures.

• the necessities and conditions of the members, such as their ages and requirements for retirement, for example.

10. Get an Understanding of the Limitations Placed on Investments

Despite the fact that the law governing superannuation doesn't really tell you what you may or cannot invest in, it does lay out certain investing restrictions that you are required to adhere to.

You should not purchase goods from fund members or give loans to them; instead, you should invest on a commercial, "arm's length" basis (or other related parties). When your SMSF makes an investment, that investment must always be made and managed according to the most stringent business standards.

Many call this "arm's length" investing. The purchase price and selling price of your fund's assets should always represent their real market worth, and the rate of return should always follow the market rate.

Most trustees cannot do the following:

• members and their families can borrow money or get other financial assistance from the fund.
• acquire assets from parties associated with the fund, including the following assets:

• members of the fund and any of their affiliations
• sponsors of the fund who are considered to be the fund's standard employers and their colleagues

• borrowing cash on behalf of the fund is permitted, but only under specified limited recourse borrowing arrangements
• when a fund lends, invests, or leases more than 5% of its total assets to a related party of the fund (including related trusts), the loans, investments, or leases are referred to as "in-house assets" for the fund.

11. Possession and Protection of Assets

As a trustee, you must always protect the fund's assets.

Assets should be documented to preserve fund assets in the case of a creditor dispute, avoid costly legal litigation to determine ownership and protect creditors' rights.

• a key distinction between them and your personal or commercial assets
• demonstrates the fund's legal ownership in a transparent way unmistakably.

The assets of the fund, other than cash, ought to be kept in the name of either:

• each individual trustee in their capacity as trustee for the fund
• the corporate trustee will serve in the capacity of being the fund's trustee.

It is not permissible for the assets to be held in the name of an individual trustee or member of the organisation.

12. Always Keep the Sole Purpose Test in Mind

If you want your SMSF to be qualified for the tax discounts that are often only available to super funds, it must satisfy the sole purpose test. This indicates that your fund must be kept in existence solely to deliver retirement benefits to your members or, if a member passes away before retirement age, to their dependents.

Suppose you or any other party directly or indirectly get a financial benefit while choosing investments and agreements (other than boosting the return to your fund). Your fund will fail to meet the sole purpose test in that case.

When you invest in collectibles like art or wine, you have to be certain that members of the SMSF do not have any access to the assets of the SMSF and have no ability to make use of these assets. The following are some of the most prevalent instances of failing the sole-purpose test:

• investments that provide an early retirement benefit to a member or associate of the organisation
• giving someone financial assistance or a perk related to their pre-retirement that reduces the amount of money available in your fund.

13. Accepting Contributions and Rollovers

A payment given to your fund in cash or an asset other than cash is referred to as an "in-specie" contribution. A contribution can be made in either form. Your self-managed superannuation fund (SMSF) is normally able to accept the following, provided that the governing regulations of your fund permit it:

• employer contributions
• personal contributions
• salary sacrifice contributions
• super co-contributions
• eligible spouse contributions.

Within 28 days of the end of the month, the fund received them; you must accurately record contributions and rollovers, including the sum, kind, and breakdown of components, and distribute them to the fund members' accounts.

14. Choose a Qualified Auditor

As an SMSF trustee, you must hire an approved, independent auditor to review your fund annually at least 30 days before the auditor delivers a report.

This appointment must take place on or before June 30. The trustee must get possession of the auditor's report by the day before the fund is obliged to submit its SMSF annual return. Your auditor is obligated to do the following:

• Have a look at your fund's financial statements.
• Check to see if your fund, on the whole, is following the super law.

15. Criteria for the Keeping of Records

As a trustee of an SMSF, one of your obligations is to maintain tax and super records that are appropriate, correct, and up-to-date in order to oversee your fund successfully.

Keeping detailed minutes of every investment decision, including the following, is smart.

• The rationale behind the selection of a specific investment
• Whether or not all of the trustees endorsed the choice.

Suppose you're an SMSF trustee, and you make a bad investment. If so, the SMSF trustees may sue you for neglecting your duties.

In contrast, if the investment decision was recorded in the meeting minutes and signed by the other trustees, you will have proof that they supported your actions.

When your fund's auditor conducts their yearly audit, you must provide specified papers. Additionally, the ATO may need sufficient recordkeeping.

You have a legal obligation to maintain the following records for a period of at least five years:

• Records of accounting that are accurate and can be accessed easily and which illustrate the transactions and financial status of your SMSF
• An annual report of your SMSF's financial situation, as well as an annual statement of the fund's operations
• Copies of all annual returns for SMSFs that have been lodged
• Copies of any additional reports you must submit to other super funds or lodge with the ATO.

You are required to maintain the following records for a period of at least ten years:

• Minutes from board meetings and judgements made at those sessions (where matters affecting your fund were discussed)
• Documents detailing any and all board member shifts
• Statements made by trustees acknowledge the responsibilities and obligations that come with the position of trustee or director of a corporate trustee.
• Members' verbal approval to be designated as trustees in writing
• Members are provided with copies of every report.

Remember that the rules for keeping records for your income tax return also need your attention, particularly the paperwork pertaining to your deductions, capital gains tax, and losses.

16. Rollover Benefits Statement

When you roll over advantages and contributions from the current year, you are required to fill up a Rollover benefits statement and deliver copies of it to both the receiving fund (or funds) and the member whose benefits are being rolled over.

The Rollover benefits statement grants permission to the recipient fund to carry out the following actions:

• Ensure that the components rolled over receive the appropriate tax treatment.
• Uphold the protection status of the benefits that have been rolled over.
• Report accurately to the Australian Taxation Office (ATO), either on the Member contributions statement or the SMSF annual return, any contributions made during the same financial year as the payment happened and were included in the rollover.

You have an obligation to verify that the rollover will be made to a compliant fund.

17. Create and Submit an Annual Return for Your SMSF

Your accountant will often take care of this for you. An SMSF annual return must be submitted to the Taxation Office by all SMSFs on an annual basis in order to fulfil the following requirements:

• report income tax
• report super regulatory information
• report member contributions
• pay the supervisory levy.

Remember that you will be able to submit your SMSF annual return after the audit of your SMSF has been completed and finalised. This is because the regulatory data, in return, rely on data that can only be obtained from the audit report. Therefore, register your SMSF annual return by the appropriate date to avoid incurring fines and losing the tax benefits associated with your SMSF.

18. Inform the Taxation Office of Any Changes as Soon as Possible

If you are a trustee of an SMSF, you are required to provide the ATO with notification within 28 days of any change in the following factors:

• trustees
• directors of the corporate trustee
• members
• contact details (contact person, phone and fax numbers)
• address (postal, registered or address for service of fund notices) and
• within 28 days if the fund is being wound up.

How To Leave An SMSF

Leaving an SMSF can be challenging; therefore, preparing a plan for quitting the fund is a good idea. This will allow you to reduce the amount of money you are required to pay and the dangers to the retirement savings of the members of the SMSF fund.

To close your SMSF account, you will need to:

• Deal with all of the fund's assets so that the fund is left with nothing and can no longer be called a fund.
• Fulfil your reporting obligations.
• You need to organise a final audit of your fund, which includes submitting the annual return for your SMSF and settling any tax debts that are still outstanding.

Conclusion

Finally, the rise of Self-Managed Super Funds (SMSFs) indicates a major change in retirement planning. These funds give direct investing control and flexibility that traditional superannuation cannot match, appealing to people who want to secure their financial future.

While SMSFs present opportunities for tailored investment strategies and potential tax advantages, they also come with the responsibility of legal compliance and the need for financial acumen. The fuss around SMSFs is not just about their financial benefits but also about the empowerment they offer individuals in managing their retirement savings.

However, this empowerment comes with the caveat that SMSFs are not suitable for everyone. Their suitability depends on individual circumstances, financial expertise, and the willingness to undertake the responsibilities. As such, the decision to manage a super fund independently should be made with careful consideration and, ideally, professional advice.

Content Summary

• SMSFs have grown in popularity over the past decade because they provide control over assets, taxation flexibility, and the ability to amass more retirement wealth than many other investment options.
• SMSFs, which stands for self-managed super funds, are private superannuation funds administered by their owners directly.
• Funds created for a limited number of individuals (fewer than 7) and regulated by the Australian Taxation Office are called Self Managed Superannuation Funds, or SMSF for short.
• Members of a superannuation fund who want control over their assets but cannot fulfil the responsibilities of trusteeship in a self-managed superannuation fund sometimes choose this form.
• While maintaining your super fund might be tough, SMSFs are only for some.
• The advantages of getting a Self-Managed Superannuation Fund revolve around autonomy and versatility with investments.
• This is due to the fact that an SMSF is governed and administered by the trustees and members of the Fund.
• Before you go ahead and establish a self-managed superannuation fund (SMSF), you should ensure that this option best suits your needs.
• Before starting a self-managed super fund (SMSF) because you're unhappy with your current super fund, try transferring to a different one or investing alternative.
• A self-managed super fund (SMSF) gives you full control over your assets and requires compliance with all rules.
• A super fund is a specialised trust established and managed only to pay retirement benefits to the fund members (the beneficiaries). A trust deed is a legal document laying the guidelines for forming and running your fund.
• When you establish the fund with the ATO, you will be asked for the TFN of each trustee and director you have.
• The trustees hold the fund's assets for its members.
• A self-managed superannuation fund (SMSF) is usually created by depositing money while the trust deed is completed.
• It would be best to have a defined investing strategy before making any financial investments.
• Your investment plan offers you and the other trustees a framework for making investment choices to enhance members' benefits when they reach retirement age.
• You should not purchase goods from fund members or give loans to them; instead, you should invest on a commercial, "arm's length" basis (or other related parties).
• The purchase price and selling price of your fund's assets should always represent their real market worth, and the rate of return should always follow the market rate.
• As a trustee, you must always protect the fund's assets.
• If you want your SMSF to be qualified for the tax discounts that are often only available to super funds, it must satisfy the sole purpose test.
• Your fund will fail to meet the sole purpose test in that case.
• As a trustee of an SMSF, one of your obligations is to maintain tax and super records that are appropriate, correct, and up-to-date in order to oversee your fund successfully.
• In contrast, if the investment decision was recorded in the meeting minutes and signed by the other trustees, you will have proof that they supported your actions.
• When you roll over advantages and contributions from the current year, you are required to fill up a Rollover benefits statement and deliver copies of it to both the receiving fund (or funds) and the member whose benefits are being rolled over.
• Remember that you will be able to submit your SMSF annual return after the audit of your SMSF has been completed and finalised.
• Therefore, if you do not register your SMSF annual return by the appropriate date, you risk incurring fines and losing the tax benefits that are associated with your SMSF.
• Leaving an SMSF can be challenging; therefore, preparing a plan for quitting the fund is a good idea.
• This will allow you to reduce the amount of money you are required to pay and the dangers to the retirement savings of the members of the SMSF fund.
• To close your SMSF account, you will need to: Deal with all of the fund's assets so that the fund is left with nothing and can no longer be called a fund.
• Finally, the rise of Self-Managed Super Funds (SMSFs) indicates a major change in retirement planning.
• As such, the decision to manage a super fund independently should be made with careful consideration and, ideally, professional advice.