Executive Manager, SMSF Technical and Private Wealth
In the right hands, a self-managed superannuation fund (SMSF) can be a beneficial way to build wealth for retirement. Whilst they are not for everyone, it is important that when thinking of starting an SMSF, individuals need to understand the benefits and responsibilities they take on by having an SMSF.
What is an SMSF?
An SMSF is a superannuation fund which is established as a trust that is controlled by its members and can offer a number of advantages, such as investment flexibility. However, it should be remembered that an SMSF, as an investment vehicle, brings with it a number of obligations.
Superannuation is really a taxation structure which has its income in accumulation phase and taxed at a concessional rate of 15%, given the SMSF is entitled to a capital gains tax discount of one-third if the relevant assets are held for more than 12 months. Once a fund member commences drawing a pension from the SMSF, there is no tax on all income and taxable capital gains on investments that support the pension.
Setting up an SMSF
The general process of setting up an SMSF involves putting in place a trust deed, appointing trustees, completing ATO forms, setting up a bank account, rolling over member’s benefits from other funds, setting an investment strategy and so on.
How does an SMSF work?
The SMSF can have up to four people, however the government is proposing to increase this to a maximum of six members. Whilst individual and their spouse can be members of an SMSF, as a general rule all members must become an individual trustee or directors of a company, which can act as trustee of the SMSF. The role of the trustee is to have the capacity to ’control’ the fund and make all the investment decisions on behalf of the SMSF.
The real control that trustees have is over their financial future and the building of retirement savings for themselves or, upon their death, for their dependants. The trustees are also responsible for complying with all legal obligations and are entrusted to care for the fund investments. This is not an obligation that should be taken lightly as there are rules and regulations that need to be adhered to.
Risk and responsibility
As mentioned, there are significant risks and responsibilities with managing an SMSF. Some government resources are helpful tools in assessing and understanding what these risks are, such as this guide from moneysmart.gov.au
What are the features of SMSFs?
A trustee has responsibility over the management, investment and administration of the SMSF and have the following features:
- The fund can have up to four members, possibly to be increased to six members;
- If the trustees of the fund are individuals, each member is an individual trustee;
- If the trustee of the fund is a company, each member is a director of the company;
- No member can be an employee of another member, unless they are relatives;
- No trustee of the fund is paid for any trustee duties or services performed by the trustee in relation to the fund, except for some limited exceptions; and
- No director of the corporate trustee is paid for their duties as trustee or services as director in relation to the fund.
SMSF structures can be quite sophisticated depending on the member’s needs. There’s a lot to consider, but a trustee can outsource some functions, such as administration, which can save time and free up their focus on other more important tasks.
What are the benefits of having an SMSF?
Key decisions are made by the trustees, including where to invest the contributions made to the SMSF.
Flexibility and choice
The SMSF’s investment strategy, and the choice of investments is broader than most super arrangements. It is possible to invest in property, direct shares, cash, term deposits and much more.
In an SMSF, the trustees can control the services required and their cost.
SMSFs have potential tax savings options depending on the personal circumstances of the members and trustee’s investment decisions.
It is possible to include insurance in an SMSF to protect the member’s income and assets, for example life insurance, total and permanent disability (TPD) and income protection.
Estate planning can be an important part of having an SMSF in deciding who should benefit in the event of the member’s death.
In the right situation, it is possible to hand down investments of the fund in a tax effective way to other family members.
What type of investments can an SMSF make?
SMSFs can invest in a broad range of assets. Regulations require the trustee/s to establish and implement an investment strategy taking into account such matters as risk, return, diversification, cash flow and liquidity for the ’sole purpose’ of generating benefits for the members while adhering to proper commercial standards, as well as the consideration of insurance for members.
Common types of investments in SMSFs are:
- Shares and other listed securities, including exchange traded funds (ETFs).
- Separately managed accounts – where a share portfolio is constructed and managed by a professional investment manager based on the member’s needs.
- Managed funds – covering most asset classes including: Australian and international shares, property, alternative assets, fixed interest and cash.
- Term deposits.
- Direct property – including business, residential, commercial and retail property.
- Other assets such as derivatives, unlisted shares and collectables (for example artworks).
An SMSF is suited to individuals who like to get involved with the investing of their retirement savings and wish to have control over those investments. The investment structure is not for everyone and it is worthwhile to have a discussion on the use of an SMSF with someone who already has one, a financial adviser or tax adviser.