Should I set-up a self-managed super fund? And how?
There has been a lot in the news lately regarding self-managed super funds (SMSF’s) from the Royal Commission into financial planning, and the banks tightening up on lending to SMSF’s some may wonder if it is all still worth it or a viable option. Yes absolutely! However, some of these changes are there to protect members of super funds because a SMSF may not be the most appropriate for everyone.
If you’ve been keeping an eye on your super account, you’re probably aware that investment markets are currently experiencing a lot of volatility. It’s also only natural to review the merits of your super fund when investment returns are weak, or worse, negative.
An underperforming super fund might also spur you to assess the level of fees your fund deducts from your super balance. Odds are you’ll pick up on additional charges like super taxes and life insurance premiums.
Moreover, low or negative investment returns may push you to consider changing super funds in the hopes of securing improved investment performance or a more competitive fee structure.
Alternatively, starting a SMSF, as opposed to switching to another large commercial super fund may be the more appealing option in the instance you have a healthy super account balance.
While establishing an SMSF may be a great idea, remember it’s not an antidote for high fees or bad investments. That said, however, being an SMSF trustee will give you greater control over your fund's running costs and choice of investments.
Before making a final decision about the future of your super fund and committing to an SMSF, there are some key points you should reflect on.
- Do you want to take charge of your fund's investment strategy?
- Are you prepared for the responsibility of ensuring your SMSF operates in accordance with the super, tax, and investment rules?
- Do you believe you can do a better job managing your super fund investments than your existing super fund trustees?
- How does your proposed SMSF fare on the cost front when compared with sizeable super fund options?
Four members only
Another critical consideration when establishing an SMSF is that it can have no more than four members, all of whom must be trustees of the SMSF, or directors of the trustee company if the SMSF is administered by a corporate trust.
Be aware that you may not qualify as an SMSF trustee if you’ve ever been convicted of an offence involving fraudulent behaviour or been declared bankrupt. Under such circumstances, as a disqualified person, you could choose to set up an APRA fund which can also have no more than four members, the difference being that a professional trustee runs the super fund, rather than yourself or the other fund members. An APRA fund is typically also a more expensive option, and therefore not as popular as starting an SMSF.
Bear in mind that all SMSFs are regulated by the Tax Office, meaning you’ll need to file annual returns as well as comply with other regulations, like signing an SMSF trustee declaration, preparing paperwork, and storing fund documents as advised. It is also worth checking that your employer's offers you the choice of having your superannuation guarantee (SG) contributions paid into your SMSF before going ahead.
Once you’ve consulted with your employer, and dealt with the preliminaries, you’re ready to tackle the final administrative hurdles in the establishment of your SMSF. These include drafting a trust deed, appointing the trustees and deciding on the members, and then applying for your fund to be regulated under the Superannuation Industry (Supervision) Act 1993. Lastly, you’ll need to draw up an investment strategy and follow through by investing your super fund monies accordingly.
Another aspect to establishing an SMSF, assuming you have the option, is completing a standard choice form (SCF) which outlines your fund's details for your employer. When submitting the SCF, you’re also obliged to furnish your employer with the ATO letter confirming your SMSF has elected to be a regulated super fund. Your employer then has up to two months to direct your SG contributions to your SMSF.
Then there is your SMSF’s electronic service address (ESA) which allows your employer, or the employers of the other members, to send your SMSF electronic contribution data message. These data messages will state the value of the concessional (pre-tax) and non-concessional (after-tax) contributions, as well as your payment details. The ATO website offers a list of ESA providers for your convenience. An ESA is not required if you and the other SMSF members are self-employed.
You’ll also need to decide what to do regarding the existing super benefits from your previous super fund. You can organise a partial transfer to your SMSF using a form from your last fund or a full transfer using a specific ATO form. Before making your mind up, consider the impact such a transfer may have on your life insurance premiums or your previous fund.
As you might expect, there are pros and cons to self-managing your own super fund. If you need help navigating the world of SMSFs, SMART Business Solutions is available to walk you through the required steps in setting up a compliant regulated super fund. Contact us to register your interest.
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