A Practical Guide to SMSFs Guide
Nowadays, the habits and ways of living of retired Australians are more varied than ever before. What most people think of retirement as days spent with the golf coach, walking along golden beaches, even if still true for a few folks, are not the norm anymore.
Going on a trip all around Australia or abroad, watching over grandchildren, undergoing through further schooling, undertaking voluntary work, and even beginning a new business or working on the side are all usual activities when people retire nowadays.
No matter what your retirement plans are, you want to retire worry-free and in absolute comfort. Your super is among the most significant, if not the most tax efficient, ways of saving for this highly rewarding phase in your life.
The sad part is, about half of Australians between ages 45 and 64 are not feeling confident that they have enough funds to do whatever they want when they retire.
To have the correct plans in the right spot to grow and manage your superannuation can really create a noticeable difference to your goals for retirement. For a few people, this is tantamount to managing their own superannuation independently by way of an SMSF or self managed superannuation fund.
A Self Managed Superannuation Fund is your very own personal superannuation fund which grants you the right to create the essential decisions on how your superannuation is spent. Handling your own superannuation by way of a Self Managed Super Fund could really be fulfilling, yet they are not for everybody since you would need to give your dedication and close attention.
Self Managed Super Fund As Opposed To Conventional Superannuation
Lately, Australians have become more conscious of the significance of superannuation and the options that are available to them.
Differentiated because of an elderly population, Australia has a growing percentage of citizens who are reaching old age and retiring earlier. Because of this, there is a greater importance being placed on making plans for the financial needs of your future financial, mainly by way of superannuation.
With most of the employed Australians investing their superannuation through the usual superannuation funds, as a country we are ever-changing towards opting for a more customized and personal approach to our superannuation through Self Managed Superannuation Funds.
At the close of 2011 there around more than 400,000 Australian Self Managed Superannuation Funds that were operational. During 2011 more than 33,000 new Self Managed Superannuation Funds were instituted – a gain of over 5% in comparison with the past year – with total Self Managed Superannuation Fund assets going above $400 billion.
Even if most conventional superannuation funds let you choose the way your money is invested, choices are typically limited to direct shares, cash/fixed interest and managed funds.
Self Managed Superannuation Funds, alternatively, let you (within certain boundaries) have almost as much variation of investment choices as a direct investor.
The most familiar reasons for planning to start an SMSF are access to a broader selection of investments and control over making decisions.
Self Managed Super Funds provide total manipulation as to how and where your money is going to be invested, but that control goes along with heavier administrative burden and extra responsibility.
The next section reveals a few of the central differences between Self Managed Superannuation Funds and conventional superannuation.
Self Managed Superannuation Fund
Controlled by the Australian Tax Office
• The members of the fund are all directors of a corporate trustee or trustees themselves.
• Every trustee is committed to ensuring that the necessary administrative tasks are being undertaken.
• Conventional Superannuation
APRA or Australian Prudential Regulation Authority
• The fund elects a trustee who will act on the members' behalf.
• Members do not have any participation in the management of the fund. Wide investment options, which include assets and direct property, are not accessible to other types of superannuation fund.
Constrained Investment Option
Expenses in general such as Self Managed Superannuation Funds with a high balance on the account are more cost-effective when compared to the usual superannuation accounts with the same value. Usually, conventional superannuation accounts that have a high balance on the account are more costly in comparison to Self Managed Superannuation Funds with the same value.
• Wind-up, it may need to be wound up early if members abandon the fund.
• Trustees are accountable for organizing the finalization of tax returns, financial statements as well as other compliance and tax accountabilities.
• Might have to organize the sale of the assets of the fund to give privileges to members who are leaving.
• Members give instructions to the fund to give advantages as a lump sum or as a pension.
• The fund takes care of all administration and subtracts expenses from advantages
Considerations of Compliance
Think wisely regarding your judgment because Self Managed Superannuation Funds are not for everybody, and you need to be doubly sure that you have understood your responsibilities before going straight ahead and setting one up.
Even if the rewards are going to be great, the administrative burden alone is not ignorable – not to mention the complicated requirements for compliance. As a trustee, you are responsible legally for the legitimate operation of your fund.
Bear in mind that the only purpose of any super fund is to give its members with one or more of these things:
• Benefits for retirement –
given to members when they reach retirement from profitable work
• Benefits specific to age –
given to persons when they reach a recommended age (at present the age is 65)
• Death benefits before retirement –
paying advantages upon the death of a member. This usually means that the privileges are transferred to a member's dependent/s or legal proxy.
Even though they could realize other ancillary privileges from their fund, Self Managed Superannuation Fund trustees have to be always conscious that the fund is being managed with the above central aims in consideration. This is going to guide most of your decision-making.
Remaining in compliance, Self Managed Superannuation Funds are among the more heavily controlled investment structures in Australia. The Australian Tax Office takes offenses very seriously. The regulator could remove or suspend trustees, declare the fund to be non-compliant, freeze the assets of the fund and thereby getting rid of the super fund's tax concessions.
Being a trustee who is not compliant, you could be facing at least years of civil action or imprisonment by the regulator or the other members.
A lot of Self Managed Superannuation Fund trustees utilize the professional services of solicitors, auditors, super fund administrators and accountants, to help them stay above the complicated requirements of compliance.
This could raise the relative expense of managing a Self Managed Superannuation Fund when you compare it to a retail fund.
Even with the support of expert advisers, you remain ultimately responsible for your fund's compliance.
Your responsibilities as trustee encompass:
• Legal responsibilities –
you have to operate the fund in compliance with the provisions of the SISA or Superannuation Industry (Supervision) Act, the trust deed, and within trust legislation, tax, family and corporations.
• Superannuation Industry Supervision Act covenants –
these covenants are considered to be part of the trust deed of each fund. Among other factors, they need trustees to:
- act in total honesty in many matters that affect the fund
- act towards the best interests of the members
- make sure that fund assets are segregated from your business and personal assets
- review, develop and regularly implement an investment technique
- have members updated and grant access to details.
• Keeping the house –
you have to keep the proceedings of financial records and trustee meetings of the cash flow and the funds' activities, have the accounts of the funds audited annually and lodge and prepare yearl returns with the ATO or Australian Tax Office (ATO).
Freedom within limits: Investments
Even if a Self Managed Superannuation Fund provides a lot of flexibility in comparison to other super funds when it comes to investments, the Australian Tax Office has applied a number of limits to help protect the retirement privileges of members of Self Managed Superannuation Fund.
In general, trustees of Self Managed Super Funds have to:
• Make sure the fund has, and constantly goes through, a proper investment technique
• Avoid lending cash from the fund or give financial aid to members or their closest of kin with the use of assets of the fund
• Avoid giving a fee over assets of the fund
• Avoid investing too much in particular assets.
Is a Self Managed Superannuation Fund correct for You?
Being a trustee of Self Managed Super Funds you need to be certain that you possess the skills, or access to the details, that would allow you to properly handle your fund.
A study by Macquarie bank discovered that present trustees of Self Managed Superannuation Funds treat investment skills and ideas as the main necessities of information for trustees, followed by details about death and planning of estates, as well as compliance with Self Managed Superannuation Funds.
The Australian Tax Office suggests that you make the succeeding six steps in order to figure to if a Self Managed Super Fund is correct for you
1. Go through your choices and get expert advice.
2. Make sure that you have adequate skills, assets and time to handle your own fund.
3. Follow the tax rules and the superannuation and know the dangers.
4. Customize your trust deed and your investment technique to become suitable with the fund members.
5. Make sure that you are capable of meeting the keeping of your records and the reporting of duties.
6. Be sure that you understand your yearly auditing tasks.
Discussion points of trustees
Before you make the decision to prepare a Self Managed Superannuation Fund, we suggest that you talk about the following factors with the other potential fund members:
• Turning into a trustee of your own fund puts on essential legal responsibilities upon you
• The investment technique of your fund has to make sure that the fund will most likely meet the needs of the retirement for every member; hence, you must have the required investment skill to research and make decisions about appropriate investments
• You have to keep thorough and careful records, organize a yearly audit by an eligible auditor and submit a yearly tax return for the fund
• You are accountable for making sure that your fund follows the complicated regulatory necessities for Self Managed Superannuation Funds
• Based on the overall value of the assets of your fund, the expense of managing the fund could overwhelm the privileges.
If you are certain that you have the time, skill and knowledge to handle your Self Managed Superannuation Fund well, and that a Self Managed Super Fund is the best super choice to fulfil your personal situations and goals for retirement, it is now time to consider Self Managed Superannuation Funds more closely.
Legal Structure of a Self Managed Superannuation Fund
Important requirements for a Self Managed Superannuation Fund
Under the super law of Australia, every Self Managed Super Fund has to meet the corresponding necessary conditions:
• A Self Managed Super Fund has to have below five members
• Every individual director/trustee is also considered a member (special policies are implemented for single member funds)
• Every member is also a director/trustee
• No member is the employee of a fellow member, except if those members have a relationship
• No fund member gets remuneration for his or her trustee services.
Corporate trustee versus individual: Structures
Self Managed Superannuation Funds are organized as trusts; this means that the trustees of the fund are accountable for all the fund's activities. The trust can be prepared in one of two ways.
Structure of Individual Trustee
In general, all trustees have to be fund members and all members have to be trustees. This lets all members put in and regulate the investment decisions and administration of the fund.
Structure of Corporate Trustee
Based on this structure a company is the trustee of the Self Managed Superannuation Fund.
In general, all directors of the company need to be members of the fund and all members have to be directors of the company.
This promotes the formula that members take an interest in the decision-making and administration of the fund.
Individual Member Funds and Unique Policies
Unique polices are applied to the trustee structure of an individual member Self Managed Superannuation Fund since an individual member could not be the lone trustee and dependent of a trust – because this would require no relationship of 'trust'.
The member could either:
• Apply a corporate trustee structure, in which the individual member is either the lone director or one of only two directors of a company who becomes the fund's trustee. In general, the director who is a non-member could be anybody who is not eligible or disabled legally. Although, the member director could be a worker of the non-member director except if the directors are related
• Share the state of being a trustee with a single 'non-member trustee', who could be anybody who is eligible or disabled legally. The trustee member could not be a worker of the non-member trustee except if they are related.
Key differences: Trustee and Corporate Structure
Requirements for Trustees
The trustee could work as a lone company director or add new members/directors.
• Must have at least two trustees.
• If a member is deceased or abandons the fund for divorce as a reason, the fund should elect a trustee as replacement.
Administration Less impact of administration if a trustee/member abandons the fund while records of investment stay unchanged.
More impact of administration if a trustee/member abandons the fund since you have to change all records of investment in order to reflect the new composition of the trustee.
• Expenses are at play in instituting a company for the trustee (corporate).
• Yearly charge payable to the ASIC or Australian Securities and Investments Commission.
• No extra expense
Steps to institute a Self Managed Superannuation Fund
There are many legislative and legal qualifications at play in instituting a Self Managed Superannuation Fund. The four main steps are:
1. You institute the Trust (as either a corporate or an individual trustee structure) by way of a Trust Deed, which comprises of all the necessities that are related to your fund. The Trust Deed declares what kind of activities is allowed by your fund, like binding death privilege nominations, particular borrowing or investments.
2. Choose to be regulated by the Australian Tax Office by securing a TFN or tax file number and ABN or Australian business number for the fund and (if relevant) get registered for GST.
3. Your investment technique outlines the investment of your fund's goals and your method of achieving them. This is the outline trustees are going to use when they make investment decisions that are made to raise member privileges.
4. The bank account of your fund is a way to keep your Self Managed Superannuation Fund's assets segregated from your personal assets. Through the account of your fund's bank, you manage all expenses, earnings, investments and contributions.
A lot of management tasks could be worked out by a Self Managed Super Fund administrator, accountant or the members themselves. It is very essential that you take the time and skill to finish the required management tasks, or be eager to deal with an expert to oversee all or some of these for you.
You are going to be required to pick an elected auditor to make sure that you keep the legal compliance of your Self Managed Superannuation Fund. Your auditor is going to identify and report (to the Australian Tax Office) related matters linked with the compliant handling of your Self Managed Superannuation Fund.
As a Self Managed Superannuation Fund member, there are many important tasks that you may have to take part in (based on the extent to which you depend on an expert to help you manage the fund). Whether you deal with an expert, or go through the task on your own, you as trustee are going to stay absolutely accountable – therefore the selection of an eligible expert is very important.
A few of the tasks in administration needed to manage a Self Managed Super Fund includes:
• Issuing a mixed fund income tax and regulatory return with the Australian Tax Office every year. To finish the annual return, the Self Managed Super Fund member, accountant or a different group is going to make preparations for a statement of financial position and an operating statement and your auditor is going to perform a financial audit of the fund
• Putting great value into your fund's assets at market value, as the law requires. This is going to aid you in calculating the performance of your investment and create major decisions about investing, and will also be covered in your fund's yearly statement of financial position
• Making sure that the Self Managed Superannuation Fund is capable of accepting specific donations from the members. The Australian Tax Office could apply a large penalty if the super donation limit is gone over then it is the accountability of the members to follow these policies. It is also the trustee's accountability to ensure individual donations do not go beyond fund limits on donations
• Notifying the Australian Tax Office of any variation in the details of the fund within a period of 28 days within the change
Having correct and precise tax and superannuation records (particular records have to be kept for at least 10 years).
The technique of your Self Managed Super Fund's investment has to create a framework for the objectives of investment of the Self Managed Super Fund as well as the approach of the investment the fund is going to take to reach them.
The technique of investment has to be reviewed on a regular basis and the succeeding concerns have to be taken into consideration:
• The personal situation of all the members of the fund:
attitudes to risks of investment, risk tolerance and age
• The likely return of investments and the risks:
taking into consideration the objectives of the fund and the requirements of expected cash flow
• Variety of assets:
investing throughout a wide range of classes of assets to minimize risk
the ability of the fund to pay privileges and other expenses as they become due.
The technique of investment is going to influence the decision-making about the assets you invest in as well as the amount of money you distribute to each. You need to review your technique of investment on a regular basis to make sure that it stays correct.
Being a trustee, you have to make sure that all decisions on investment are aligned with the style of investment and must find advice on investment or pick a manager of investment if you don't have the knowledge or time to create a style.
If you do appoint a manager of investment, you stay wholly accountable for all decisions on investment.
All decisions on management of investment as well as any outside advice have to be put into writing. The Australian Tax Office recommends that you document the style of investment to give protection legally if a decision on investment that was aligned with the style of the fund goes wrong.
It is a legal necessity for Self Managed Super Fund trustees to review regularly and apply your style of investment. You cannot belittle the significance of this – the comfort of your retirement and your lifestyle is what we're talking about here.
The objectives of your investment
Even if the members of every Self Managed Super Fund have a tendency to be as close as possible as a group, like families or business partners, the needs of investment of every member could change. A style of investment made for elder members may not make possible the permanent growth of capital required by members who are still years away from retiring.
Objectives of investment of your fund that are clearly defined are going to help to make sure that all of the needs of the members are satisfied.
As soon as you have instituted the objectives of investment of the fund you have to make a decision on who is going to manage the cash. Many members of Self Managed Super Funds express their wish for independence and control by having this role.
If you make a decision to play the role you have to ensure that you have the training, time and tools for investment (e.g. broker relationships, accounting and investment systems and management of cash flow).
If you are not going to, you might have to get expert advice or help in choosing investments that need less labor-intensive management daily. It is very important to take into consideration the extra expenses involved in getting expert assistance and the charges that are needed with every kind of investment.
The pressure that is placed on members because of factors that include the expense, time and effort needed in investment management have to be all taken into account.
Selection of Security and Distribution of Assets
The asset distribution and selection of security form an investment portfolio. You have to make sure that your fund's asset distribution – how your fund's cash is invested throughout the main asset groups like bonds, cash, property, shares, and others – meet the objectives of investment of your fund.
If the fund is going to invest too much cash in one kind of investment it could limit potential returns or have the members exposed to excess risk.
As soon as your asset distribution is finalized you have to choose certain investments inside those asset groups. The potency of these decisions influences the fund's returns naturally.
What your Self Managed Super Fund invests in
Among the many advantages of selecting a Self Managed Super Fund over regular superannuation is the range of choice of investment that might be present, based on the style and objectives of your members. Your Self Managed Super Fund could invest in the following usual investments:
• Residential or commercial investment property
• Funds that are managed
• Bonds both corporate and/or government
• Interest securities that are fixed
• Unlisted or listed property trusts
Other, less common, investments include:
• Commodities and/or Forex trading.
• Precious metals (for example silver and gold)
• Art as well as other collectibles
The investments mentioned are covered under a few particular policies that you have to be conscious of as a trustee of a Self Managed Super Fund.
These particular policies include such things like:
• The asset giving only members' privileges for retirement (i.e. no present personal enjoyment or use).
• The insurance and valuation of particular assets
• Restrictions on the Self Managed Superannuation Fund buying assets from fund members
Your Self Managed Superannuation Fund has the capacity to also borrow to invest, granted the organization fulfils certain borrowing specifications mentioned in the legislation of super.
This wide array of selections could appear overwhelming to a few, but be certain that the Australian Tax Office has placed limits in place as a protection to safeguard members from unnecessary risk and to make sure that investments are for the main purpose of producing privileges for retirement.
These limits do not include all possibilities however, so you need to communicate with an expert adviser to make sure that your risk is effectively managed.
Winding up a Self Managed Superannuation Fund
For any reason, the time comes that you have to close your Self Managed Super Fund. This stage needs close management by all involved parties - if it is not correctly wound up it could legally stay open and you might have to pay for extra financial statements, audit and issuance of annual returns.
Your Self Managed Super Fund trust deed could include the qualifications for winding up your fund, but in general the following steps are going to be applicable
1. Agreement to the fund's closure
• Think of situations that are applicable to whatever payments in lump sum.
• Every member has to confirm the way their privileges are going to be paid.
• Every member has to confirm their agreement for the fund's closure.
• Make a framework for the income expected to be acquired past the time the draft financial statements are finished and before the fund's winding up.
• Statements need to include all costs and earnings to date and consider estimated as well as expenses.
• Complete all previous year tax returns, financial statements, as well as other compliance and tax accountabilities.
3. Transfer/Sale of assets
• The member acquiring the privilege have to include potential stamp duty implications.
• Include capital gains tax implications of transferring assets.
• Organize in unique assets transfer to members or other funds as proper and arrange the corresponding change of ownership documentation.
• Sell assets to help in the transfer of privileges from the Self Managed Superannuation Funds.
4. Give information to the Australian Tax Office about the winding up
• As soon as you have fulfilled all tax and compliance responsibilities the Australian Tax Office is going to write to the previous trustees verifying the cancellation of the Self Managed Super Fund's Australian Business Number. The Australian Tax Office is also going to confirm their records to reveal that the fund has been closed.
• As soon as the Self Managed Super Fund is wound up, you have to inform the Australian Tax Office through a written document within 28 days.
Professionals of Self Managed Super Funds
There are several sources of expert help and recommendation on handling your Self Managed Super Fund.
Stockbrokers manage, sell and buy any stocks that comprise part of the Self Managed Super Fund's style of investment. They could also provide stock advice.
Solicitors could be compelled when it comes to drafting trust deeds and other fund documentation, and also when finding estate planning recommendation.
Fund administrators provide important support in handling the various administrative and compliance tasks linked with Self Managed Super Funds. These comprise of keeping track of all member and fund transactions, issuing all compulsory returns, giving yearly accounts for the auditor and making statements of members.
Every year an eligible accountant has to audit the fund. An auditor has to also make sure that the fund satisfies the compliance and legal responsibilities. The auditor needs to be independent. An accountant cannot be both adviser and auditor or administrator to the fund.
Accountants can provide suggestions on estate and tax planning and help with tax returns and other tax duties. They can also provide suggestions on asset distribution at a wide level, however, if they are not licensed to do so, specific investment product suggestions are not going to be provided. The services provided are going to be based on the accountant's certain skill as well as specialization area.
Financial planners -
Licensed financial planners could assist with instituting an investment style, setting the correct asset distribution, regulating flows of cash and choosing and handling investments. They are most of the time also givers of recommendation on the planning of property and tax.
For more detailed information on Self-Managed Super Funds please visit AustralianSuperFinder.com.au
If you are thinking about having control of your superannuation by setting up a Self Managed Superannuation Fund, you need to think about all the regulations and the policies as well as the expenses involved. You can arrange a free consultation with us by calling - 1300 252 167
Disclaimer: All information on this website is of a general nature only. We have not taken into account your financial situation, needs or objectives. You need to make up your own mind and ascertain yourself if it is right for you. We recommend you read the product disclosure statement(s) and the financial services guide before making any financial decision.