What is a Self Managed Superannuation Fund (SMSF) - Overview

[Andrew from Vista Financial]

 

What is an SMSF?

A Self Managed Superannuation Fund (SMSF) is a superannuation fund controlled by its members. The primary goal is to provide retirement benefits for its members.

Key Responsibilities

• Trustees: Make all decisions regarding the operation and investment of the SMSF’s assets.
• Compliance: Must follow strict rules to ensure the SMSF operates correctly.
• Trust Deed: Establishes the fund and outlines operational rules.
• Investment Strategy: A written strategy is required for investment decisions.

Failure to Comply

Non-compliance can result in fines, loss of tax benefits, and criminal charges.

 

SMSF vs. Mainstream Superannuation Funds

Feature	Mainstream Funds (Retail, Industry, Public Offer)	SMSF
Investment Options	Limited, determined by the fund	Broad, includes direct property, art, etc.
Number of Members	Unlimited	Up to 6 members
Fund Management	Fund manages administration and compliance	Trustees manage all aspects; some tasks can be outsourced
Control	Fund makes administration and investment decisions	Greater control by trustees
Licensing	Regulated by APRA	Compliance-based regulation by ATO
Insurance	Group cover at lower premiums, default levels of cover	Retail insurance only, must document insurance considerations
Investment Strategy	No documentation required	Must have a written and regularly reviewed strategy
Costs	Combination of fixed and percentage fees	Mostly fixed costs; economies of scale with larger funds
Time Commitment	Minimal involvement	Time-consuming; requires active decision-making and meeting documentation
Estate Planning	Trustee makes the final decision	Trustees control distribution of benefits
Winding Up/Exit	Easy to roll out, costs vary	Complex and costly, includes various fees
Compensation	Eligible for fraud/theft compensation	Not eligible for compensation
Complaints	Access to independent complaints service	Must resolve complaints internally, may require legal assistance

 

Establishing an SMSF

Steps to Set Up a Trust and Trust Deed:

• Appoint Trustees: Either individual or corporate.
• Admit Members: Determine who will be part of the fund.
• Appoint Advisers: Such as administrators and auditors.
• Trustee Meetings: Establish guidelines for meetings and documentation.
• Investment Objective: Set and document the fund's investment strategy.
• Insurance Needs: Assess and document the insurance needs of members.
• Member Accounts: Establish individual accounts for members.
• Regular Reviews: Implement a routine for reviewing the fund's performance and strategy.

 

Ongoing Costs of an SMSF

Annual Costs	Other Costs
ATO supervisory levy	Investment management fees
Financial statement and tax return	Accounting and book-keeping fees
Professional investment advice fees	SMSF establishment costs
Annual independent audit fees	Corporate trustee set-up and annual fees
Actuarial certification fees	Ongoing administration costs

 

Investment Strategy

Trustees must create a written investment strategy that considers:

• Diversification: Ensure a mix of different types of investments.
• Risk and Return: Assess the potential risks and returns of investments.
• Cash Flow: Plan for cash flow needs to cover benefits and expenses.
• Insurance: Determine if personal insurance is necessary.
• Member Needs: Reflect the circumstances of the fund's members.

 

Sole Purpose Test

SMSFs must be established to:

• Provide benefits for members upon retirement.
• Provide death or ancillary benefits to dependents upon the member's death.

 

Related Party Transactions

Permissible Investments from Members:

• Listed securities.
• Units in widely held unit trusts.
• Business real property used for business.

 

Gearing (Borrowing to Invest)

SMSFs can borrow under a Limited Recourse Borrowing Arrangement (LRBA) to invest in eligible assets like property and shares, with specific rules.

Important Considerations:

• Ensure the trust deed allows borrowing.
• Check the fund's cash flow capability.
• Comply with Superannuation Act and ATO requirements.
• Consider insurance needs and contribution caps.
• Understand the implications of the investment strategy and associated costs.

 

Publications and Resources

• Online Videos: Step-by-step guides available at ATO SMSF.

 

 

 

 

 

Disclaimer

This information is for general understanding and not personal financial advice. Laws may change, so consult a professional for current advice.