Many people pay little attention to their super fund, letting it simply tick along in the background, trusting the investment strategies of their chosen fund. And that’s fine. However, there are some people who want more control over how their super is invested. And that’s where a self managed super fund (SMSF) comes in.
A SMSF is run for the sole purpose of building retirement savings for the fund’s members, which are also its trustees, and their dependants. This means that the members of the fund are in charge of making the investment decisions and are also responsible for complying with the applicable super and tax laws. All decisions you make as trustee of your SMSF must be in the best financial interests of the members.
While there are several benefits to having a SMSF, it can be a major financial undertaking that requires a relatively high degree of financial literacy and a substantial time investment. If you don’t have the time and financial know-how, you will have to pay financial professionals to manage it for you.
So before you dive into setting up a SMSF, let’s have a look at what’s involved in setting up and running a SMSF and what are some of the benefits.
Setting up a SMSF
There is quite a bit you need to think about and take care of when setting up a SMSF. These are the just some of the initial steps:
When you first set up you need to:
- Consider appointing professionals to help
- Decide on fund members and trustees
- Establish the trust and trust deed
- Set up a bank account
- Register with the ATO and get an ABN
- Create an investment strategy
- Include a plan for when the SMSF ends
Once the fund is set up, there are some other actions to consider including:
- Rolling over existing super
- Organising employer contributions
- Accepting contributions (within limits)
- Making investments
- Regularly reviewing investment strategy
- Documenting and maintaining records
Once the fund is operating, each year you will need to:
- Value assets
- Prepare accounts and financial statements
- Appoint a registered SMSF auditor
- Lodge an annual return
- Pay the SMSF levy
- Pay any tax that’s due
It’s vital to remember that it’s the fund members that are ultimately responsible for managing the fund and ensuring that all super and tax laws are adhered to.
As you can see, there is quite a bit involved in setting up and managing a SMSF. But the good news is that a well-managed SMSF can offer a range of benefits including complete investment control, tax benefits and more.
Investment control & flexibility
With a SMSF you have complete control over your investment portfolio. Compared with managed funds, you have a wider selection of investment assets including residential and commercial property, physical commodities (like gold), collectables (like artworks) and managed portfolios.
With a SMSF, you also have more control and greater flexibility over when you can acquire and sell your investments. This hands-on approach allows you to make quicker changes to your portfolio to take advantage of market conditions.
Effective tax management
A SMSF can be extremely beneficial when it comes to managing tax. Tax rates on earnings within a super fund are capped at 15% (up to certain limits). Fund earnings when an SMSF is in pension mode are tax free, as are benefits received after the age of 60. Having a good tax accountant can take the stress out of tax time and ensure your finances are in order all year round. Here is the list of the best small business accounting firms in Melbourne & Sydney.
SMSFs all allow for greater flexibility for using tax strategies like effective disposal of assets, reducing or eliminating capital gains tax liabilities, taxable income or franking credits.
Pool your super
With a SMSF, you can pool your resources with up to three other fund members. This can help to increase your access to investment opportunities, improving returns for all fund members.
Estate management & planning
SMSF can be useful when it comes to estate management and planning. They can provide greater flexibility with member death benefits than public funds. With an SMSF you can usually specify how death benefits are to be paid to members. For example, benefits may be paid as a pension rather than a lump sum, allowing the SMSF to continue operating.
Furthermore, in some cases, non-cash assets (such as property or shares) can be transferred directly to a beneficiary.
By managing your own investments, you have a greater control over the risk that your fund incurs. If you choose to pursue a more aggressive investment strategy, you could expose your fund to greater risk, while increasing the potential for greater returns. Depending on your comfort with risk exposure, you could potentially increase your investment at a faster rate than public funds.
It’s important to remember that there are strict superannuation and tax laws that govern investments and SMSFs. As a trustee of your own super fund you’re held responsible for your investments and complying with these laws. Make sure you’re aware of the risks to consider before setting up an SMSF.