A Brief But Super Guide to SMSFs
For Australians looking to invest in trusts with a high degree of control, there are SMSFs — a “self-managed superannuation fund”. A useful tool to save and grow savings from regular income into retirement, it’s party mandatory and certainly promoted by tax incentives from the government.
If you work full-time in a company that provides wages or salaries, you probably already have a superannuation funds portfolio that you’re a part of. The government has made it compulsory for employers to contribute starting at 9.5%, set to rise to 12% by 2025.
Over and above this, you as an individual can make contributions. These are voluntary contributions done by you. But, if you can strategize and use your contributions to do more than just saving income for retirement, then you’ll be able to reap greater rewards in the future.
So what are SMSFs and how do you take full advantage of them? We’ve put together a brief but “super” primer to superannuation funds.
What is a SMSF?
SMSFs also go by the name “DIY Super Fund” because trustees of the fund exercise granular control over the direction and growth strategy. Whereas decisions about retail and industry superfunds are based on collective interests, SMSFs are limited to between one and four members known as “trustees” and only these individuals may control the fund.
Though quite a few individuals have used (and continue to) SMSFs to tax shield income, there is a limit or cap set to these contributions by the government. Contributions over and above these caps are allowed but are then taxed at the top marginal rate.
Members of an SMSF are trustees of the fund but they cannot receive compensation for management of the fund or for performing trusteeship. Another strict rule is that no member of an SMSF may be an employee of another member in the same SMSF.
There are two structures that trustees follow:
- Individual trusteeship is where there is a minimum of two trustees and each is appointed as such
- Corporate trusteeship, where the company as a single entity is marked as the “trustee” and each member is a director. There are fees associated with this structure but it’s beneficial for companies to register under this umbrella because there is a greater degree of flexibility when it comes to recording assets or performing administration
The profile of individuals investing using SMSFs are changing rapidly. The incidence of trustees who are members who are younger as well as middle- to upper-middle income earners are much higher today than ever before.
This speaks to the number of individuals both choosing to educate themselves and benefit from SMSFs, the viability of a successful SMSF and the number of individuals who can today choose to turn to financial advisors and specialist accountants to help in the ongoing administration of SMSFs.
Generally, SMSFs are so attractive for a number of reasons:
- They allow members a much wider array of investment options
- Trustees know they are committed to the success of the fund and usually have investment experience themselves so they can administer and manage the superannuation fund’s portfolio at a lower cost and with greater control
- There are definite tax advantages to SMSFs that are provided by the government
- A flexibility as to when and how you fund your retirement as well as pre-retirement goals
- As a more secure and well-controlled method of estate planning (example: death benefits paid to dependents through the fund are tax-free)
Setting Up a SMSF — Costs & Administration
Individuals who set up a SMSF enjoy a greater choice of direct investments that can be made through the fund, including: direct property, works of art, Australian and international shares, preference shares, debt securities, derivatives, cash and term deposits and property trusts, whether listed or unlisted.
Basically, nearly the whole gamut is your oyster.
There is quite a bit of paperwork involved in setting up and insuring compliance when it comes to establishing an SMSF. Trustees must also ensure that they can receive communication on daily, quarterly and annual reports of the fund, as well as in preparation for annual reporting of the funds for auditing.
Set up of the SMSF usually involves paperwork about: trust deeds, minutes of first trustee meeting, member applications, tax file number applications, ABN applications, Trustee Declaration and Consent to Act as Trustee forms, investment strategy, Death Benefit Beneficiary Nomination forms, the fund’s bank account application and rollover documentation.
There is, of course, ongoing administration and review, over and above any reviews to investment strategy. These administrative tasks should be performed on a regular basis to avoid overwhelming any one trustee:
- depositing, banking and recording transactions related to the fund
- recording income
- organising annual tax returns and auditing of fund accounts
- paperwork regarding super pensions
- drafting of trustee meeting minutes
- completing and lodging Business Activity & Instalment Activity Statements
Benefits of having an SMSF Specialist On Your Side
The role of an accountant specialising in SMSF cannot be overstated: these knowledgable individuals don’t necessarily direct strategy (unless trustees are looking for that and the accountants themselves are licensed to do so), but they certainly support strategy, as well as actually accounting services related to the management of the SMSF.
Accountants and financial advisors who work in the SMSF sector usually provide “end to end” service. They have extensive experience dealing with the legislative and operational requirements of set up as well as investment management of these funds.
Compliance is a rather tricky part of SMSFs. Even with a solid background or experience in SMSFs, individuals who are trustees choose to have these specialised accountants work with them on these funds because there are constant changes made to keep investments in general more transparent and regulated.
Investment management and accountant specialists in SMSFs usually also analyse a fund’s existing structure, giving comprehensive recommendations for changes, based on the long-term retirement and pre-retirement goals of the trustees.
As a rule of thumb, general accountants or those that are unlicensed can offer information as to the consequences of decisions made by the trustees but they cannot guide the trustee in investment strategy. Many general, unlicensed accountants still do this under the shield of “taxation advice”, but know that it’s not lawful.
Accountants who don’t specialise in SMSFs, in other words, can only speak about the following in regards to an SMSF: taxation advice and services, accounting and admin services, information regarding laws and regulation (as well as how best to comply with these) for the SMSF.