Menu
Menu
Superannuation could be one of your most valuable assets after your family home, so it’s important to take an interest in how your super savings are managed to help achieve the retirement lifestyle that you desire. While running a self-managed superannuation fund (SMSF) may be appealing, it’s a big commitment that involves additional responsibilities. Let’s consider some SMSF fundamentals that may help determine if one is right for you.
What is an SMSF?
An SMSF is a superannuation fund. However, the key difference between other funds and an SMSF is that in an SMSF the members of the fund are also the trustees. The trustees are responsible for the running of the SMSF including making investment decisions and compliance with legislation.
Why have an SMSF?
There are three key reasons that people establish SMSFs.
- Investment control
If you’re a member of an SMSF, you have greater control over how your super is invested and paid when you retire. With this control, however, is responsibility.
You must establish your own investment strategy and make decisions about how your super is invested. This includes:
- setting investment objectives
- determining how much to invest in different asset classes, and
- selecting specific investments you want your fund to hold.
In addition to the more common investments that you can own in a larger public offer fund (like managed funds and direct shares,) you can choose from a wider range of investments, including:
- some unlisted shares
- residential and business property, and
- collectables such as artwork, stamps and coins.
2. Ability to borrow
SMSFs can borrow using a limited recourse borrowing arrangement to buy assets (such as shares and property). Typically, this occurs when it doesn’t have enough money to purchase the asset outright.
For example, your SMSF could purchase a residential property at arms-length using cash already in the fund and borrow the rest.
3. Greater estate planning certainty and flexibility
Like a public offer fund, you can nominate eligible dependants you’d like to receive your benefit in the event of your death.
An SMSF trust deed can include specific provisions that outline how and to whom death benefits will be distributed.
However, additional care needs to be taken to ensure the trust deed of the SMSF allows you to achieve what you want, is consistent with the legislation and is implemented correctly.
What about the cost?
There are initial and ongoing costs associated with an SMSF. The ATO has indicated that:
- initial set up costs can range from $1,000 to $3,000 which includes setting up the trust structure and associated professional advice, and
- average ongoing fees are around $5,000 which ongoing management and annual returns including auditor fees.
While there is no minimum to commence an SMSF, the balance you have available is one of a range of factors you should consider before setting up an SMSF to ensure the fund is cost effective. Previous research has suggested $200,000 as the minimum balance but this can vary depending on a range of issues including how active you are in the running of your fund or, if commencing with a low balance, if you are implementing strategies to boost your balance.
Still thinking of an SMSF?
One key consideration is whether you have the time, knowledge and skills to manage your SMSF. You and all members are trustees (or directors of the corporate trustee). This means you are all responsible for running the fund and meeting the legal and administrative obligations. While it’s possible to engage professionals to assist in the administration of your fund, you’re still ultimately responsible. Penalties may apply if you don’t perform your duties.
Resources and help
Seek professional advice from a financial planner, accountant and/or solicitor to understand if an SMSF is right for you. Access the FAAA’s Find a Planner directory here. Also, the Australian Taxation Office is the regulator of SMSFs and provides a range of resources on its website to assist in establishing the fund to understanding the obligations of running an SMSF, and can even help you through winding up an SMSF if you no longer want to run one.
The Money & Life website is operated by the Financial Advice Association (FAAA). The views expressed in this article are those of the author and not those of the FAAA. The FAAA does not endorse or otherwise assume responsibility for any financial product advice which may be contained in the article. Nor does it endorse or assume responsibility for the information.
