An Overview of Self-Managed Super Fund
There is plenty of responsibility in addition to substantial effort and time required when managing your super funds. Perhaps, when trying to figure out the options available in superannuation, you might have come across the terminology ‘Self-Managed Super Fund’ (SMSF) and wondered what it is?
Let us expand more about SMSF for you so that you have a gist of what it entails. If you have extensive and super information about legal and financial matters it involves, you will approach SMSF in a better way.
What is a self-managed super fund (SMSF)?
According to its name, an SMSF is a kind of superannuation fund that allows you to manage by yourself; that why some refer it as DIY super. In simple terms, SMSF allows you as a member to have direct control over your retirement investments and savings.
SMSF mainly differs from other super funds in that all members act as trustees. This implies that the members have the authority to formulate day-to-day decisions of the fund's operation and investment in accordance with the laid down superannuation laws.
Under the Australian Taxation Office (ATO) regulations, SMSF can entail one to four members. The underlying principle for the existence of SMSF is for the provision of necessary retirement benefits to the fund members — trustees have adequate freedom to tailor the fund to cater for individual needs.
How does an SMSF work?
As a form of trust, SMSF entails its Tax File Number (TFN) and Australian Business Number (ABN) and also own bank account. Interestingly, it's the ATO that regulates SMSF rather than the Australian Prudential Regulation Authority (APRA). For trustees to avoid substantial penalties, they need to comply with the SMSF governing rules and superannuation law.
As an SMSF owner, you must do the following:
- Take on the trustee or director role and be aware of the legal obligations it comes with.
- Follow a certain investment strategy that is capable of meeting your retirement needs and displaying your risk tolerance.
- Possess adequate financial skills and experience that enable you to make sound investment decisions.
- Take adequate time to research investments and manage the fund.
- Allocate significant resources from the budget to cater for ongoing expenses, like audit, legal, tax, financial and professional accounting advice.
- Maintain comprehensive records and let an approved SMSF auditor conduct an annual audit.
- Provide insurance for super fund members, such as permanent and total disability cover and income protection cover.
- Utilize the money for retirement benefits provision only.
Who can be a member of an SMSF?
Unless disqualified under a legal disability, any individual over 18 years of age can be a trustee of a particular superannuation fund. Therefore, members of the SMSF must be the trustees. In case a corporate trustee structure, every SMSF member must be a director of the established company.
The following can disqualify an individual from being a Member:
- Having served a conviction for a dishonesty offense
- Insolvency under administration
- Suffered at one time a civil penalty order under the SIS Act
- Undischarged bankrupt
- Disqualified by the regulator
In an SMSF, there are two trustee structure options:
Every member is appointed as a trustee of the fund. Such kinds of SMSF consist of a husband or wife and potentially children.
In case the fund has only one member, a minimum of 2 individuals must act as trustees for the fund. In such a scenario, the member has the privilege to appoint the second person who acts as a trustee.
Individual trustees normally hold the fund’s assets in their name on behalf of the fund. For instance, Jason Barnes & Laine Barnes being Trustees for Barnes Superannuation Fund.
At times, a company can often act as a trustee in a situation where a single member fund exists. Such a scenario occurs where an individual desires to be a member of the fund and sole signatory, but no one wishes to act as the 2nd trustee. The super fund member usually acts as a director of the established company.
SMSF trustees prefer a Company Trustee for ease of administration. Individuals benefit from flexibility in membership and provision of administrative efficiencies as the structure permits simpler registering and recording of assets.
If you decide to go with this structure type, engage an Investment Adviser as setting up a company entails additional costs and additional paperwork.
What are your responsibilities as an SMSF trustee?
Any SMSF trustee has to make investment decisions and implement the fund’s investment strategy. In managing SMSFs, the necessary administrative obligations include maintenance of records, provision of necessary financial statements, conducting an independent audit and completing tax returns. For that matter, even if trustees mainly focus on making decisions and administering the funds, they can as well engage SMSF specialists for auditing, accounting, tax reporting, investment, and financial advice.
Payment of benefits
When it comes to payments, SMSFs usually pay certain super benefits to its members upon meeting some conditions like retirement or attaining a certain ‘preservation age.’ Depending on the prevailing circumstances, payments can be given as a lump sum or an income stream (pension).
When members have not met a prescribed condition of release, the payment will not be treated as super benefits; rather, they will be treated as ordinary income and taxed at the member's marginal tax rate. The investment restrictions, operating standards, and other kinds of rules and regulations applicable to the growth accumulation phase will also be applicable when receiving SMSF pensions.
Contributions and rollovers
When you are an SMSF trustee, you are allowed to accept contributions and rollovers from various sources members possess. However, some restrictions are levied, mainly depending on the contribution caps and the member’s age. There needs to be proper documentation of contributions and rollovers, including the type, amount and breakdown of components. Afterward, they will be allocated to the member’s accounts within 28 days of receiving them.
As discussed above, an SMSF is kind of super fund where you can comfortably manage yourself — as it gives members adequate control of investments of their retirement savings. However, you encounter enormous ongoing legal compliance responsibilities when you set up an SMSF that are time-consuming and costly. Therefore, there is a need for you to engage independent professional advice to gauge whether the prevailing circumstances will allow you to set up and SMSF.