A self-managed super fund (SMSF) is a way to prepare for retirement that gives you more control and freedom of choice over your investments than other types, such as retail or industry super funds. As an SMSF trustee, you can invest in almost any type of valuable asset, from property to shares or even items like artwork.
Taking this much control of your super usually means devoting a significant amount of time and effort towards managing the fund. For this reason, already-experienced investors who hope to achieve higher returns than professionally managed funds often choose SMSFs.
Here’s a rundown of what you need to consider before setting up your own SMSF, and the key steps involved.
Is an SMSF right for you?
Your first step should be to assess whether an SMSF is the best option for you. You’ll need to be confident you can match or outperform the professional investors who manage retail and industry super funds. You’ll also need to have time and recordkeeping skills – as well as being responsible for choosing and managing your SMSF investments, you’ll have the job of maintaining accurate records of fund returns for tax and auditing purposes.
There are also the costs of an SMSF to consider. A 2013 Rice Warner/ASIC study found that the cost of setting up an SMSF is typically in the $1,000 to $2,000 range, while annual compliance costs can be anywhere from $1,500 to $3,000. So it’s generally recommended that you go in with a starting balance of at least $100,000.
If you’re not quite ready to take full control of your super, many professionally managed funds offer DIY investment options that give you choice over the types of assets going into your super fund.
Setting up an SMSF
Your SMSF needs to be set up so that it’s eligible for tax concessions, can receive contributions and is simple to administer. Here are the basic steps to setting up an SMSF.
Choose your investments
People often choose an SMSF because it allows them to invest in a broader range of assets than other types of funds. As well as shares and property, you can also invest in collectibles such as artwork, jewellery, antiques or wine.
A highly diversified fund has the benefit of spreading investment risk across more items. On the other hand, it may also mean having to pay out higher investing, accounting and auditing costs. For more complex investments, consider securing the services of a fund manager who is an expert in that specific area.
Add members and trustees
When you set up your SMSF, the position of fund trustee can be assigned either to individuals or to a registered corporation. In both cases, the fund may have up to four members. Key differences include:
- membership: a single-member fund must have a minimum of two individual trustees, but if the fund is managed by a corporate trustee, you can act as both the only fund member and its sole company director;
- fees: for a corporate trustee, the Australian Securities and Investment Commission (ASIC) charges the fund a fee to register the company, as well as an annual review fee; these fees don’t apply to individual trustees;
- ownership changes: it’s simpler and less costly to change the ownership of assets in a fund for a corporate trustee compared to individual trustees; and
- separation of assets: having a corporate trustee provides better separation between your personal assets and the fund’s assets, and better legal protections if the trustee is sued for damages.
Also, make sure you give each fund member the option to purchase life and/or total and permanent disability (TPD) insurance.
Register the SMSF
The next step is to register the SMSF with the ATO so that it can start receiving contributions and rollovers. This requires applying for a Tax File Number (TFN) and and Australian Business Number (ABN), and in some cases registering the fund for Goods and Services Tax (GST).
You can also choose whether to make your fund an ATO-regulated SMSF. This will make it eligible to receive tax concessions, and allow fund members to claim deductions for their contributions.
When you open a bank account for the fund, it’s important to keep it separate from trustees’ individual accounts. Multiple members can share the same account, but their entitlements will need to be recorded separately.
Preparing for change
If your SMSF has more than one member, it’s crucial to plan ahead for unexpected events such as ill health, death or relationship breakdown, and how they will affect the fund’s structure and payouts. You should also plan for the possibility that age-related cognitive impairment may make you unable to manage the fund properly in the future. Your contingency plan could involve transferring SMSF assets to a managed fund, or nominating a person to take over your trustee responsibilities.
While an SMSF is more complex to manage than other types of super funds, it can be a good option for the smart investor who wants more control over their super savings. These steps can help to ensure that your fund is both profitable and compliant.
Contact us today if you’d like to discuss your super strategy.