For many, a self-managed super fund (or SMSF for short), is a great way to take control of your finances and your retirement future. But, SMSFs are complicated, and it can be a challenge to manage yourself. If you’ve been thinking about starting an SMSF, check out our short guide explaining the whys and hows of managing an SMSF.
Many people hear the phrase self-managed super fund and don’t really know what it means. To put it simply, an SMSF is an alternative to a retail or industry super fund, and a different way to save for retirement.
You establish all elements of an SMSF yourself. You manage your contributions, investments, payments, legalities and relations with the Australian Tax Office. This sounds like hard work, but it does have its benefits for SMSF members. With more control, you can choose where your investments go and the type of investments you make, with the added benefit of not sacrificing any earnings to retail super fund fees.
An SMSF operates as a trust, where the trustee acts on behalf of the members and beneficiaries of the trust. You can have up to four members (including yourself) in your SMSF. The trustee of a fund is the person who manages the contributions, investments and distributions of funds within the SMSF.
It may sound confusing, but every SMSF member must also be a trustee and vice versa. All members must sign a trustee declaration. This means each member of the fund is equally responsible for its operation and management. Members often elect one person to take a more active role in the fund’s management, but that doesn’t mean they relinquish their own legal responsibilities.
Your SMSF is regulated by the Australian Taxation Office, to which you must submit reports regularly. You also need your fund audited yearly.
Each member makes regular contributions to the fund, and they accumulate whatever percentage of total funds they contribute in earnings from investments.
As mentioned above, there can be a maximum four people within the SMSF. Most SMSFs are set up within family units so members include partners, siblings and other family members. You cannot create a SMSF with an employee unless they are also a family member.
Setting up an SMSF is a complex legal and financial process. Once you have others interested in joining your SMSF, you’ll need to work with a lawyer to establish a trust deed. This will outline the rules and regulations of your SMSF, and give the scope of what each trustee can and cannot do on behalf of the fund.
You will also need to draft an investment strategy, where you consider how and where you will invest the funds. If only one fund trustee writes the investment strategy, it must be reviewed and approved by all trustees for it to go ahead.
From here, you must elect for the SMSF to be regulated within 60 days of signing the trust deed. You’ll need a new tax file number (TFN) for the fund, along with an Australian Business Number (ABN). You may also be required to register the fund for GST.
The fund is held in a bank account, which will be in the SMSF’s name. You can keep all member contributions in the same bank account, but you should keep strict records of contributions. Your chosen bank can help you with the right set up and structure options for your SMSF account.
Not many people have the skills and expertise to set up and manage an SMSF completely by themselves and we highly recommended you seek expert advice and guidance wherever possible, since non-compliance with complex regulations can result in significant penalties from the ATO.
A legal practitioner can help you draft your fund’s trust deed and ensure everything is correct before everyone signs it. This will avoid messy situations down the track if your trust deed is not comprehensive enough.
A good accountant will be your best SMSF friend as they will be able to help you register your fund with the ATO, and continue good book-keeping practices throughout the life of your fund. Similarly, you may like to consult a financial adviser to help you with your investment strategy.
Each year you will need an independent auditor to check out all of your SMSF actions: this is compulsory to remain compliant with the ATO.
You can purchase a range of Life Insurance policies for you and your members through your SMSF. In fact, under Australian law all SMSF trustees must consider Life Insurance for all SMSF members as part of the investment strategy.
Through your SMSF you can purchase Life Cover, Total and Permanent Disability Insurance, and Income Protection. Click here for more details on insurance through your SMSF.
The Australian Taxation Office provides a wealth of resources on SMSFs, all of which make essential reading if you are considering starting an SMSF. Download their comprehensive guide to setting up an SMSF.
Or if you’re looking for more professional advice about connecting your Life Insurance policy to your SMSF, contact one of our expert advisers today.