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Table of Contents
Chapter 1: Is an SMSF right for you?
What is an SMSF?
What are the benefits of self managed super?
More investment options
Investment control
Fee transparency
General flexibility
Do you need to be a superannuation expert to run an SMSF?
How do SMSFs compare with other funds on fees?
What are the other funds charging?
How do SMSFs compare?
Is it worth swapping your current super solution for an SMSF?
Does an SMSF suit your stage in life?
You think an SMSF might be for you?
In summary
Chapter 2: SMSF pre-setup checklist
Step 1: identify the members of your SMSF
Who will be members of your SMSF?
Who can be members of the same SMSF?
Do all members share the same investment philosophy?
Should your children be members?
Step 2: select a trustee or trustees for your SMSF
Will all members be eligible to be trustees?
Should you have a corporate trustee or individual trustees?
Step 3: consider your overseas travel plans
Step 4: familiarise yourself with the roles and responsibilities of trustees
What are the penalties if you get it wrong?
Step 5: decide who will help establish and administer your SMSF
What options are available to set up your SMSF?
What options are available to administer your SMSF?
What services will an SMSF administrator provide?
How do you compare SMSF administrator fees?
What services will an accountant provide and how do they charge?
Step 6: decide if you need investment advice
Do you have the knowledge to manage your investment portfolio?
How much time do you have to manage your investment portfolio?
How do investment fees work?
Should you seek professional investment advice?
Step 7: decide if you need financial advice
Will you need financial advice when managing your SMSF?
What is the cost of getting financial advice?
Where to now?
SMSF pre-setup checklist
In summary
Chapter 3: The SMSF setup phase
Steps to set up your SMSF
Step 1: obtain a trust deed
Step 2: appoint the trustee(s) of your fund
Step 3: register your fund
Step 4: open a bank account in your fund’s name
Step 5: prepare an investment strategy
The rollover process
Make sure your personal details are up to date
Consider market volatility
Implement all outstanding strategies involving your existing fund
Review and take steps to retain your existing insurance
Investigate the cost of your existing super fund
Consider starting a pension in your existing super fund
Submit correct documentation and identification
In summary
Chapter 4: Making contributions to your SMSF
Are you eligible to make contributions?
What types of contributions can you make?
Concessional contributions
What is the limit on concessional contributions?
Employer super guarantee contributions
Salary sacrificing to super
Personal deductible super contributions
Which should it be: salary sacrifice or personal deductible contributions?
Non-concessional contributions
What is the limit on non-concessional contributions?
Triggering the bring-forward provisions
What is the benefit of making a personal non-concessional contribution?
When should you contribute?
Other types of contributions and strategies
Government superannuation co-contribution
Spouse contribution
Personal injury
Proceeds from the sale of small business assets
Contribution splitting
How do you make a personal contribution to super?
In summary
Chapter 5: How to construct your SMSF investment portfolio
Step 1: determine what type of investor you are
Determine your objectives and needs
Tolerance to risk
Capacity for loss
Investment timeframe
Income requirements
Step 2: determine your risk profile
Step 3: work out your asset allocation
Defensive assets
Growth assets
Resources
International shares
Step 4: build your portfolio
Diversifying within each asset class
Investing through funds versus stock picking
Investing through funds
Picking stocks
Step 5: manage your portfolio
Take an active approach to your portfolio
Other investment strategies
In summary
Chapter 6: Investment rules
Prepare a written investment strategy
You must invest for a sole purpose
Keep your SMSF and personal affairs separate
Naming of assets
Paying expenses from the fund
Banking income into personal accounts
Be careful when acquiring assets from related parties
Listed securities
Business real property
In-house assets
Keep things at arm’s length
Don’t provide financial assistance
Don’t give a charge over fund assets
Don’t borrow, unless you’re allowed
Improvements
Repairs and maintenance
Investment in artwork, cars, jewellery and wine
Storage and use
Insurance
Sale of a collectable to a related party
Commencement of rules
Be careful when using derivatives
In summary
Chapter 7: Accessing your SMSF benefits
Preservation status of benefits
Conditions of release
Reaching your preservation age
Retirement
Reaching age 65
How can you access your super within your SMSF?
How do you take a lump sum from your SMSF?
How do you take a pension from your SMSF?
What are the tax implications of withdrawing your super?
Starting multiple pension accounts
Starting a pension in the SMSF setup phase after each rollover is received
Starting a pension once the balance in your accumulation account reaches $40 000 to $50 000
Starting a pension before and after making a non-concessional contribution
Limiting the number of pensions
Tax-effective pension strategies
Between ages 55 and 59
How do pensions and lump sums affect your Age Pension?
In summary
Chapter 8: Insurance in your SMSF
Types of personal insurance you should consider
SMSFs and personal insurance
Benefits of holding insurance within super
Drawbacks of holding insurance in super
In summary
Chapter 9: Estate planning and protecting your SMSF
Who can receive your super benefits?
Your spouse
Your child
Financial dependants
Interdependants
Legal personal representative
What happens if you don’t have superannuation dependants or a legal personal representative?
How can benefits be paid?
Who decides who gets your super benefits?
Non-binding death benefit nominations
Binding death benefit nominations
Reversionary pensions
Death and taxes on super
Beneficiaries
The SMSF
Time limits
Does an SMSF continue after a member’s death?
Anti-detriment payments
How is the contributions tax reclaimed?
Where does my fund find the extra money to pay the anti-detriment amount?
Should every fund be prepared to make an anti-detriment payment?
What happens to your SMSF if you become bankrupt?
Are your SMSF assets protected?
Are your lump sum and pension payments protected?
What happens to your SMSF if you divorce?
What is your super worth?
Decide the method of dividing your super
How much of your super will be split?
How will your splitting agreement or order be effected?
Can you transfer assets subject to a split to another superannuation fund?
Are there any taxation implications?
Does the SMSF need to be restructured after the super split?
What happens to your SMSF if you lose capacity?
Who should be your attorney?
When can your attorney step in?
In summary
Daryl Dixon
First published in 2012 by Wrightbooks an imprint of John Wiley & Sons Australia, Ltd 42 McDougall St, Milton Qld 4064
Office also in Melbourne
Typeset in Times Regular 11.5/13.5
© Daryl Dixon 2012
The moral rights of the author have been asserted
National Library of Australia Cataloguing-in-Publication data:
Author: Dixon, Daryl.
Title: Securing your superannuation future: how to start and run a self managed super fund / Daryl Dixon.
ISBN: 9780730377788 (pbk.)
Notes: Includes index.
Subjects: Pension trusts – Australia.
Retirement income – Australia.
Retirement – Planning.
Dewey Number: 332.67254
All rights reserved. Except as permitted under theAustralian Copyright Act 1968(for example, a fair dealing for the purposes of study, research, criticism or review), no part of this book may be reproduced, stored in a retrieval system, communicated or transmitted in any form or by any means without prior written permission. All inquiries should be made to the publisher at the address above.
Cover design by Punch Bowl Design
Printed in Singapore by Markono Print Media Pte Ltd
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Disclaimer
The material in this publication is of the nature of general comment only, and does not represent professional advice. It is not intended to provide specific guidance for particular circumstances and it should not be relied on as the basis for any decision to take action or not take action on any matter which it covers. Readers should obtain professional advice where appropriate, before making any such decision. To the maximum extent permitted by law, the author and publisher disclaim all responsibility and liability to any person, arising directly or indirectly from any person taking or not taking action based on the information in this publication.
About the author
Daryl Dixon is the executive chairman of Dixon Advisory. Daryl is one of Australia’s foremost investment experts and a well-known writer and consultant. He has provided trusted advice to thousands of personal clients for more than 25 years and is an acknowledged expert in the areas of tax, superannuation (including public sector superannuation), social security and investments. He has also been a successful investor for more than 40 years.
Daryl is the author of numerous newspaper articles on investment and superannuation and writes regularly forThe Canberra Times, thePublic Sector Informant, Smart Investormagazine and theAustralian Financial Review Investor(inThe Sunday AgeandSun Herald). He has written a number of books and consults on personal and business finance strategies.
Before establishing his own consulting firm, Daryl worked in the International Monetary Fund, the Treasury, the Department of Finance and as head of the former Social Welfare Policy Secretariat on major policy issues. He has worked as a consultant for a variety of government bodies and undertaken a large number of consultancies for diverse organisations covering the public, private and voluntary not-for-profit sections of the economy.
Daryl has a bachelor of arts degree with first class honours, majoring in economics from the University of Queensland. He won the Shell Scholarship, allowing him to complete a master of arts, majoring in economics, also with first class honours, from Cambridge University in the United Kingdom. Daryl has lectured in economics, public finance and taxation theory at the Australian National University and the University of Calgary, Canada.
Acknowledgements
Over my career I have had the privilege of working with many intelligent and dedicated people. To prepare a book like this, I have learnt that if you are going to do it properly you need the assistance and support of a strong technical team. I wish to acknowledge the following individuals who made such valuable contributions to the creation of this book:
Main technical writers/coordinators
Alan Dixon
Damien Kennedy
Linda Wilson
Tina Wilson
Contributing technical writers
Edward Chan
Frank Li
Alex MacLachlan
Copywriter
Natalie Laharnar
Throughout the book a number of individuals have shared their personal experiences of how an SMSF has helped them manage their own super. I wish to thank them for their contributions.
Preface
Over my long and diverse professional career, being fully informed and undertaking detailed research have been essential in achieving successful outcomes. This applies without doubt to making savings and investment decisions, my major area of interest after leaving academia and employment with the International Monetary Fund and the Australian Government to start my own business.
My first book,25 Tax and Investment Strategies, demonstrated the benefits of paying as much, or even more, attention to strategies, including choosing the most suitable structure for owning an investment rather than individual investments. The success of this publication in helping small investors was such that chapter 13, ‘Never pay tax on a dividend’, resulted in legislation to close off the strategy.
This, my latest book, continues the tradition of all my books by providing comprehensive information to help ordinary Australians make sound decisions for managing their money. Many of my newspaper and magazine articles, including those inThe Canberra TimesandSmart Investoras well as several books on superannuation strategies, have detailed the advantages, both for tax purposes and personal goals, of using super as a retirement savings vehicle.
Together with a large and growing number of other Australians, my family chose to use a DIY or self managed super fund (SMSF) to own the largest part of our investment assets. From both tax and social security aspects, there are compelling reasons to do so.
It is possible to obtain the same advantages using public offer retail, industry and some employer-sponsored funds. However, you may be surprised to know that many of the trustees and managers of these funds use an SMSF for their own super. One key reason they do so is the greater flexibility and control provided by using an SMSF, even when all the investment decisions are farmed out to professional managers.
In investigating the alternatives, don’t be scared off by criticism of the high costs of establishing and running an SMSF. Do your own research. In many cases, especially where small amounts are involved, the costs of running an SMSF will definitely be higher than those of using a public offer fund. Nevertheless, coming to a decision about whether to use an SMSF also involves a consideration of the additional benefits of doing so.
After many years’ experience helping clients, I can assure you that the benefits are often substantial and offset any higher costs incurred from using an SMSF. I specifically refer you to chapters 8 and 9 of this book, dealing with insurance and estate planning, which outline the substantial benefits of using an SMSF. Even though I have had one client threaten to sue me for not forcing her to take my advice, I leave it to you to come to your own decision after researching the benefits and costs of establishing or running an SMSF for your own superannuation.
This book, prepared with the assistance of a great technical team (credited in the acknowledgements) holds nothing back and considers all the issues relevant to establishing and running an SMSF. The great thing is that over the period since I established the Dixon Family Super Fund, the advice and services available to assist with the fund operation have improved greatly and are now much more affordable.
As with other important decisions, obtaining professional advice will help you make a decision. Even if you don’t want to master all of the detail provided in the following chapters, this book will help you prepare a checklist of all the items you need to consider. Read on.
Chapter 1: Is an SMSF right for you?
If you’re reading this book, you’re probably wondering whether a self managed super fund (SMSF) can offer you benefits your current super fund can’t. You may have heard about the growth of the SMSF sector and be wondering why so many Australians have a self managed super fund. But how do you know if an SMSF is right for you?
What is an SMSF?
An SMSF is a special entity that holds your superannuation savings. Compared with other super funds, an SMSF is a small super fund that you run yourself. You can have up to three other people in the fund with you and, together, the four of you look after your own retirement savings.
What are the benefits of self managed super?
An SMSF offers many benefits. By offering unparalleled investment choice, control, transparency and flexibility, SMSFs can provide a big boost to your retirement savings.
More investment options
As the name suggests, with an SMSF you manage your own investments, and the options are nearly endless. You choose your cash accounts, select the individual shares you want to invest in or purchase the investment property you want. You take control of the investment strategy for your super.
In an industry fund, you might be limited to 10 to 15 options, ranging from investing in 100 per cent cash to a highly aggressive option, with higher risk, like 100 per cent shares. Retail funds offer a similar range of investment types to industry funds, but significantly more options within that scope. In either type you simply choose an investment option by ticking a box on a form. Although you may know broadly what you are invested in, such as 100 per cent shares, you have no say over the underlying investments, such as what companies the money is invested in, or whether the money is invested directly in shares or through managed funds. Your self managed fund will give you this transparency and control.
Investment control
The control offered by an SMSF has many advantages. You’re able to adapt your investment strategy to suit your circumstances and your preferences.
If market conditions change, you will be able to quickly make investment decisions in response. You can change your SMSF’s share portfolio immediately by selling or buying shares on the stock exchange. The additional administrative requirements of other funds mean this process may take much longer and may expose you to a greater amount of risk as the market moves.
If you need to free up some cash in your SMSF for tax or investment purposes, you will be able to select the most appropriate assets to sell. You can defer selling investments until a time when it may be more tax effective, such as after starting a pension in retirement. Working out the long-term potential of each investment is still very important. Considering the tax implications will help you with investment decisions.
Retail or industry super funds generally don’t give you this flexibility. The underlying investments in their investment options are usually pooled together so you don’t have the scope to select specific investments and manage your tax liabilities in this way.
Fee transparency
Transparency is also evident in the fees. You will know exactly what your SMSF administrator or accountant charges to prepare the fund’s tax return and financial statements. If you get help with investment advice, you will know what the brokerage costs or your adviser’s annual fees are. You won’t have to search through account statements or call up your fund to work out all the hidden costs. Your fund doesn’t have to be subject to fees based on the size of your super balance. You can pay set fees, even if your balance grows.
General flexibility
Self managed funds are flexible. You’re able to quickly amend your fund’s trust deed if the government changes the superannuation rules. Larger funds find it more cumbersome to change and adapt their procedures.
How about insurance? Why be limited to the one insurer and one fee structure offered through your existing fund? Within your SMSF, you can compare premiums and types of cover across all insurers in the marketplace and choose the best option for you (see chapter 8).
Did you know?
Life insurance is commonly held inside an SMSF as the premiums are tax deductible (see chapter 8 for a more detailed discussion).
Once you reach pension age the benefits of an SMSF only get better. Starting a pension account is generally very tax effective. What if you need to start another pension account? And then another shortly after? With other types of funds, this can mean selling and re-buying assets several times. You will need new account numbers, and there may be countless forms to fill in. It could take weeks to finalise each pension account. For an SMSF, this involves some simple paperwork that can be completed very quickly.
The whole family can benefit from an SMSF. Your children can be members. You may also find they become more interested in super or investing due to their involvement. Passing your wealth to your loved ones in the most tax-effective way and other estate planning strategies can also be easily managed.
These are just some of the benefits of self managed super, and we’ll explore them in more detail throughout this book.
Why I have an SMSF
The more you learn about investing the more you realise that it’s not a one-size-fits-all proposition. Every investor has a different set of requirements and these are not constant.
With an SMSF you are in control and you have a responsive investment vehicle. You can adjust your investing strategies according to your own changing circumstances.
You can access and adjust your portfolio at any time. No other form of superannuation can match these advantages.
Max Walsh
Leading business, economics and political commentator
Deputy Chairman of Dixon Advisory
Do you need to be a superannuation expert to run an SMSF?
This is one of the most commonly asked questions. The simple answer is ‘No’. Look at the numbers. According to APRA, in January 2011 about 32 per cent of Australia’s total superannuation assets were held in SMSFs, which now represent the largest sector of the market. In June 2011, the ATO reported that the number of self managed super funds grew by 7.7 per cent during 2010–11, and SMSFs have more than 867 000 members. Would you expect all of these people to be super experts? It’s unlikely.
Becoming the controller, or trustee, of an SMSF brings additional roles and responsibilities. In an industry or retail fund, a board of trustees generally controls the fund. They are responsible for monitoring investment decisions, ensuring legal compliance, meeting reporting requirements and the general operations of the fund. In your SMSF, you become that board, on a smaller scale. It’s your responsibility as a trustee to take on these roles and comply with all the requirements of running a superannuation fund.
So how can so many people handle this level of responsibility?
Some try to go it alone, but most people who run SMSFs rely on professional assistance. Some of the service providers available to help you run an SMSF include accountants, dedicated self managed super administration firms, and financial and investment advisers.
Identifying the services you need and paying only for these is the key to good management. Perhaps you have the knowledge and skills to manage your fund’s investment portfolio, but you need help to complete the paperwork and end-of-year tax return. Maybe you don’t have the time to run your own SMSF, and want an administrator to take care of all the details for you.
Is there extra work involved? Yes, but the real question is how much extra work is involved. And that depends on who is helping you.
Only a handful of Australians would have self managed super funds if they had to draw up all the legal documents, complete the end-of-year tax return and financial statements, make all the investment decisions and implement all the tax-planning strategies on their own.
That’s where your choice of service provider can make a real difference. No matter which provider you use or what level of assistance you receive, you will still be involved in the decisions in all these matters and that will generally give you greater overall control of your super than you would have with an industry or retail fund.
For most people, superannuation is the largest, or second largest asset, behind the family home. So if you’re attracted by the possible benefits of an SMSF, the extra work may be worth it.
How do SMSFs compare with other funds on fees?
Comparing fees within the superannuation industry is not an easy matter. Administration fees, contribution fees, management expense ratios, adviser commissions and entry/exit fees are some of the expenses that may be difficult to identify, let alone compare.
Tip
Phone your existing super funds and ask them to list all the fees that apply to your account. The member statements you receive are unlikely to outline all the fees you are currently paying.
What are the other funds charging?
Industry funds boast a simple fee structure. They’re able to keep their fees low by limiting their investment options, reducing reporting facilities and streamlining a lot of their processes. You will probably be looking at a fee range of between 0.5 per cent and 1 per cent of your total balance each year, depending on the investment option you choose.
Understanding retail fund fees is generally more difficult. There may be underlying commissions, costs in switching between investment options and performance fees. But you usually have extra benefits in a retail fund over an industry fund, including more diversity of investment options, better reporting facilities, potentially greater access to insurance options and the support of a financial adviser. The fees will generally be significantly higher than an industry fund for these added benefits. You might be looking at an annual fee range of 1 per cent to 2.5 per cent of your super balance. Your investment option will again be a significant factor.
Employer-sponsored funds sit between industry and retail funds. They’re generally set up by organisations that want to help their employees manage their superannuation while improving the efficiency of their internal payroll processes. They can offer the advantages of a retail fund at a cost similar to an industry fund, as they’re usually established by an agreement between the employer and a large fund operator. That’s until the employee leaves the company, and then the fund operator’s normal fees and options will usually apply.
Defined benefit funds, which are less common and mostly closed to new members, were set up by governments or large organisations, and generally have low in-built fees. Fees are not easily comparable because the employee’s benefit is calculated using a set formula rather than being based on contributions and earnings. If you have defined benefit super, it’s unlikely you would be better off changing funds. However, if you want to salary sacrifice and start pensions, it may be worthwhile considering an SMSF in addition to your defined benefit fund to assist you with these strategies.
How do SMSFs compare?
Answering this question depends on the size of your super balance and what services you need from SMSF professionals.
It’s generally advisable to have a minimum balance of between $150 000 and $200 000 to start a self managed super fund. If you’re paying a set fee for professional services, your overall costs as a percentage will reduce as your super balance grows. Say you are being charged $5000 by a service provider to administer your fund. If your balance was $500 000 this would represent a 1 per cent fee. If your balance increased to $625 000, your fee as a percentage of your balance would reduce to 0.8 per cent. This often makes SMSFs more favourable than other types of funds that charge fees on the basis of a percentage of assets managed.
But it’s not the only factor to consider. Self managed super funds can have up to four members. Your overall fees may be reduced significantly if you’re pooling your family’s super balances. You may also save on insurance fees by being able to choose from a range of providers. Depending on your knowledge and expertise, you may also be able to reduce the level of professional assistance you need. Alternatively, the benefits to your returns of using expert advisers may actually outweigh the higher annual cost. We will discuss these issues at length later on.
Is it worth swapping your current super solution for an SMSF?
You don’t need to have a complicated financial situation to benefit from self managed super. Even people with the simplest financial affairs can benefit from an SMSF.
Consider a common strategy of investing either a proportion or the entire balance of your super in cash. An SMSF will allow you to do this with greater choice and flexibility. You can select the highest yielding term deposit or at-call cash account you can find, and you will know exactly what it will earn. This return is likely to be much higher than you would get on the cash option chosen for you by an industry or retail fund. As a test, compare the cash return of your current fund over the past year with term deposit rates over the same time period.
Perhaps you’re living off a small to medium-sized pension from your super fund as well as a partial Age Pension. Managing your super fund withdrawals and your partner’s situation within an SMSF in a strategic way can help you increase your fortnightly government benefit. We will look at this further in chapter 7.
You may feel comfortable in your current superannuation fund and not see the need to change. Just because your current super choice is familiar or appears cost-effective, don’t discount other alternatives that may provide a better result. A benefit of a self managed super fund is the many tax-saving strategies available. It’s possible you’re missing out on these.
Are you over pension age, making additional contributions to super or wanting to protect your wealth for beneficiaries? If you fall into any or all of these categories, your current super solution may not be working hard enough for you, and an SMSF may offer you strategies that will improve your situation.
Does an SMSF suit your stage in life?
Your age and working status are significant in reaping the benefits of a self managed super fund.
Superannuation should form an important part of your overall financial objectives in your 40s and 50s. An SMSF at this age offers you the opportunity to take greater control of your super and start investing for the long term. If you want to invest in direct shares or property to be held for the next 10 to 20 years, you can do this within the tax-effective super environment. If protecting yourself against death or disability is important, a self managed fund offers you a choice of insurers and policy options. You will feel more secure in meeting your retirement goals the earlier you take an interest in, and take control of, your super.
The advantages of an SMSF increase once you reach pension age. If you’re still working but want the tax benefits of starting pension accounts (see chapter 7), a self managed fund is the easiest way to achieve this. Say you salary sacrifice wages to your fund and then draw a pension payment to assist with your cash flow. You won’t have to sell any investments because the cash that goes into the fund can come straight back out. You can easily start multiple pensions when your account balance grows, which will save your fund tax on earnings. While you will need to keep appropriate records, you don’t have to fill in complex forms or wait extended periods for the super fund to process your request. Pension drawings are as simple as writing a cheque or electronically transferring money from your SMSF bank account.
If you have reached age 60, all your super withdrawals are tax-free. Although you may think there are no further tax savings to be made, in fact there are significant opportunities to reduce the amount of tax paid by your beneficiaries who will receive any remaining super after your death. The ability to manage several pension accounts and super withdrawals easily can lead to larger tax savings. Using your SMSF for strategies such as withdrawing and re-contributing funds or allocating excess pension drawings in the most tax-effective way (see chapter 7), could save your beneficiaries thousands of dollars in tax.
You think an SMSF might be for you?
So you’re interested in the flexibility and control offered by self managed super. Over the coming chapters you will get a clear picture of what’s involved in setting up and managing an SMSF, and read some testimonials from real people in a broad range of situations who are successfully controlling their own super.
Find out as much as you can about your current super fund(s). By being informed about the fees, strategies and options in your current fund(s), you will be in a much better position to determine if an SMSF is more suitable for your situation.
Rushing the setup of your SMSF is not recommended. Asking the right questions and knowing the rules will be critical to the long-term success of your fund. Chapter 2 explores other important characteristics of SMSFs, and I have included a handy checklist to ensure you cover all the bases before taking the first steps towards managing your own super.
In summary
• A self managed super fund (SMSF) is a special entity for holding your superannuation savings that you run yourself.
• SMSFs offer unparalleled investment choice, control over your super, transparent fees and more flexibility than other super funds.
• SMSF providers are available to help with all aspects of your fund’s administration, accounting and compliance.
• It is advisable to start an SMSF with a minimum balance of between $150 000 and $200 000.
• SMSFs can have up to four members and give you the chance to pool super funds with other family members — and reduce overall fees.
• Set administration fees can make SMSFs more favourable than other super funds that charge a straight percentage fee.
• If you are in your 40s or 50s and want to invest in direct shares or property to be held for the next 10 to 20 years, an SMSF will give you a tax-effective environment for those investments.
• The advantages of having self managed super, especially the tax benefits, increase when you reach pension age.
Chapter 2: SMSF pre-setup checklist
Getting the structure of your self managed fund right is vital. You will need to be sure you can work with the other members, can fulfil your responsibilities as a trustee and know the kind of professional assistance you will need.
By working through the following seven steps (summarised in the checklist at the end of the chapter) you will be able to address the essentials necessary to get your SMSF in the best possible shape from the start.
Step 1: identify the members of your SMSF
If you establish an SMSF, you will effectively wear two hats — as a trustee and as a member.
It’s important to clarify the difference between trustees and members. Trustees are responsible for running the SMSF and holding assets for the benefit of members. Members have their superannuation savings invested within the fund. You may currently be a member of an industry or retail fund, but not a trustee. The trustee of your current super fund is likely to be an unrelated company controlled by a board of directors.
Who will be members of your SMSF?
If you are setting up an SMSF, you must first decide how many members you want in your fund. You can be the sole member or have up to four members in the one SMSF. The ATO’s statistical report of June 2011 stated that most SMSFs (68.8 per cent in June 2010) have only two members, with those members being spouses.
Having the right members in your SMSF is essential for ensuring your fund runs smoothly.
Who can be members of the same SMSF?
With a few exceptions, almost anyone can be a member of an SMSF, including children and people in the final stages of retirement. You can also open an SMSF with a wide variety of people including family, friends and business associates.
One important restriction, however, relates to employees and employers. Broadly speaking, neither your employer nor your employee can be a member of your self managed super fund unless they are related to you. Another restriction relates to disqualified persons (see p. 19). If you’re one of these, such as an undischarged bankrupt, you won’t be able to be a member of an SMSF.
Did you know?
According to the ATO, a relative of an individual means:
• a parent, child, grandparent, grandchild, sibling, aunt, uncle, great aunt, great uncle, niece, nephew, first cousin or second cousin of the individual or their spouse or former spouse
• a spouse or former spouse of the individual, or of an individual referred to above.
Do all members share the same investment philosophy?
If you will be the only member of your fund, you can move on to the next step. If you’re going to have several members in your fund, each person’s attitudes to investment becomes an important issue.
The fund’s investment strategy (which every SMSF must have) must benefit all members. If every member has a different investment approach, it may be difficult to agree on an investment strategy in the first place.
Imagine a scenario where you want to invest primarily in direct property, while another member wants to invest in a portfolio of shares, or you have a high appetite for risk while one of the other members is very conservative. How can you sort out these differences? You may go with a consensus approach and construct a portfolio that accommodates investment traits of all members. If you go this way, each member will ultimately have to be comfortable with this approach over the long term.
Setting up an SMSF is intended to give you more control over your investments. If you have to compromise too much in this important area, it’s possible a self managed super fund will not produce the benefits you’re counting on.
The simplest option may be to start a self managed fund on your own or keep it to just you and your spouse. Others, such as your children, might be best to do the same. You each may pay a little more, but you will all get the control and flexibility you want.
Alternatively, you may consider setting up one fund and allocating specific and separate investments to each member. If you adopt this approach, your administrator or accountant will use the allocated method of accounting for your fund’s assets. In this case, you each have an account (or accounts if you have pensions) that hold your choice of investments.
There are downsides to this approach. Setting up, managing and continually keeping your assets and transactions separate will require extra care. Also, your SMSF administrator or accountant will probably charge a higher fee for the additional work. Ask about fees before going ahead with this arrangement.
Should your children be members?
As an SMSF can have up to four members, it may be possible to include children in your fund. Keeping your family’s retirement savings under the one roof is quite appealing but there are a number of things to consider before making this decision.
Given your retirement date will be much sooner than your children’s, you may want to take on less risk with your fund’s investments. This difference in investment philosophy is one of the most common reasons for not including children as members of your fund.
If your children are 18 or above, they will form part of your fund’s trustee body and have equal say over all of the fund’s strategies. They will also need to sign off on paperwork as required. You may find this difficult for a variety of reasons. Your relationship with them may not always be stable; they may have their own wishes for the fund; or there may be practical issues, such as finding time to meet with them and sign documents.
Your family’s relationship will be very important in this decision. Disagreements are always a risk, but you may find the chance is increased when families are involved in an SMSF. It may also be difficult for you to discuss your financial situation with your children. Alternatively, you may find it useful to discuss your finances openly and make your children aware of your overall position. In later years, when you may need aged care or are considering how to pass on your estate, their knowledge of your finances could be very helpful.
There are other benefits of having your children as members. It’s possible your children’s small super balances are currently being eaten away by fees and insurance premiums. Consolidating your family’s super into one structure may help you all save on administrative costs. You may also be able to reduce your insurance costs by using the one provider inside your fund, and you could build a more comprehensive protection package.
Your children don’t need to be members for life. They aren’t locked into your fund forever. They may want to start their own SMSF once their balance grows or they start a family of their own.
Why I have an SMSF
We established a self managed super fund for our family in January 2003. We wanted to take greater control of our own destiny and to have more control over what we invested. As a family of four we also knew that a self managed superannuation fund would give us more flexibility as a family unit and that this would be far more cost-effective than using retail or industry funds.
It has been a very effective vehicle for us. It has brought the family closer together and led to a greater collective understanding of our finances and of financial markets. We enjoy being personally involved in decision making about our future. Our self managed super fund has also been an excellent vehicle to assist us with estate planning.
While I am still some years from retirement, our self managed super fund has provided my family with financial stability and given us far more financial independence than we would otherwise have had. It has given us the confidence to make choices in our lives that otherwise would not have been available.
Jeff Whalan AO
Former CEO of Centrelink and Medicare
Step 2: select a trustee or trustees for your SMSF
Once you have decided who the members of your SMSF will be, the next thing to consider is who the trustees will be.
Trustees can be either individuals or a company. The benefits and disadvantages of both trustee structures are discussed later in this chapter.
Super legislation generally requires all members to be either individual trustees or directors of a corporate trustee, though there are a few notable exceptions to this standard rule.
The first exception relates to single-member funds. If you intend to be the only member of your SMSF, you have two options:
• Set up a corporate trustee. You can be the sole director or choose to appoint a second director (non-member) who is not your employer (unless you’re related).
• Find another individual who will be appointed as the second individual trustee of your SMSF. Again, this individual must not be your employer unless you’re related.
The second exception relates to members who are under 18 years of age and do not have a legal personal representative. In such cases, the child is unable to act as trustee or director of the corporate trustee and, as a result, the parent or guardian can act in their place. (In late 2011 this exception applies only to funds with individual trustees. However, the government has proposed this should also apply when the fund has a corporate trustee.) When the child turns 18, they will become a trustee or director of the corporate trustee in their own right.
Did you know?
Legal personal representative means the executor of the will or administrator of the estate of a deceased person, the trustee of the estate of a person under a legal disability (such as a person who is mentally incapacitated), or a person who holds an enduring power of attorney granted by an individual.
A further exception relates to members who have appointed a legal personal representative by way of an enduring power of attorney (see chapter 9). In this circumstance, the person who holds an enduring power of attorney granted by a member may be appointed as a trustee or director in place of the member. This exception can be useful where a member loses the capacity to make decisions, for example in the event of a serious illness, or where a member intends to travel overseas and won’t be able to undertake their trustee duties.
Finally, if a member passes away, their legal personal representative will generally step in as trustee on their behalf until their benefits are paid from the super fund. If a member dies without a will, the person appointed to administer their estate will commonly stand in as trustee.
Will all members be eligible to be trustees?
As noted earlier, you must be over the age of 18 to act as trustee or director and have full legal capacity.
Also, you cannot be a disqualified person. According to the Australian Taxation Office (ATO), you will fall into this category if you:
• have ever been convicted of an offence involving dishonesty
• have ever been subject to a civil penalty order under the superannuation laws
• are an insolvent under administration
• are an undischarged bankrupt
• have been disqualified by a regulator (such as the ATO).
If you’re setting up a corporate trustee, your company must be eligible. According to the ATO, a corporate trustee will not be eligible if:
• a responsible officer of the company (such as a director, secretary or executive officer) is a disqualified person
• a receiver, official manager or provisional liquidator has been appointed to the company
• action has been started to wind up the company.
If you’re a disqualified person, you can’t be a trustee or director of a corporate trustee of an SMSF, which also means you can’t be a member of an SMSF. If you fall into this category, you will have to give a self managed super fund a miss and stick with your existing super arrangements.
Should you have a corporate trustee or individual trustees?
There are both advantages and disadvantages to having either individuals or a company act as trustee of your SMSF.
When it comes to fees, individual trustees will initially be the cheaper option. With a corporate trustee you will face an additional cost to set up the company of between $700 and $1000. You will also incur an annual review fee from the Australian Securities and Investments Commission (ASIC). This fee is currently $42 if the company is not being used for other purposes.
Even though you can use an existing company to act as your fund’s trustee, it’s generally not advisable. If the company were to be pursued by creditors or go into liquidation due to its other trading activities, your fund’s assets could be at risk. In particular, not keeping SMSF assets separate from other company assets could prove costly. A trustee company must also make sure it complies with the SMSF directorship rules, which restrict who can be a director. This may limit future business flexibility, as generally only fund members can be added as directors of the company.
Your reporting obligations will be higher with a corporate trustee. Each year you will have to ensure the company completes an annual statement for ASIC. You must also make sure you keep ASIC informed of any changes to the company. In reality, though, these tasks aren’t too onerous and your accountant or administrator will normally help you manage them.
What is an annual statement?
Each year ASIC will send you an annual statement for your company. Once you receive this statement you will be required to:
• check the details of your company to ensure they are still accurate (for example, check if the address and director details are still the same). If any changes need to be made, you must inform ASIC within 28 days of the date of issue of the annual statement
• pay the annual review fee within two months
• pass a solvency resolution within two months (Australian Securities and Investments Commission, Annual statements and solvency resolutions, 2011 www.asic.gov.au).
Despite the higher upfront cost and ongoing reporting requirements, a corporate trustee is likely to save you money in the future by simplifying your fund’s administration. For example, if your fund has individual trustees, every time a member comes or goes, you will need to vary the fund’s trust deed. The names on all of your fund’s investments must also be updated to reflect the changed composition of the trustee body. This is because all SMSF investments must be held in the name(s) of the trustee(s) on behalf of the fund. Making these changes can be time consuming, and you’re likely to incur additional fees if you have professional help in running your fund. If members change with a corporate trustee, no deed of variation is required and you will need to update only the names of the directors of the company and inform ASIC of the change, rather than updating the names of your fund’s investments. The corporate trustee structure offers a great administrative advantage.
In the case of a standard two-member fund comprising husband and wife, the SMSF is often left with one member if one member passes away. If the fund has a corporate trustee, the SMSF can continue to exist without the need to find a replacement or second director. If your fund has individual trustees, you would need to find another trustee or set up a corporate trustee. This is not necessarily difficult and you will have saved on the cost of a corporate trustee until this point, but it may not be something you want to be worrying about when you are grieving.
It’s easier to keep the assets of your SMSF separate from your personal assets if you have a corporate trustee. Because the trustee holds assets in their name on behalf of the fund, it can be easy to mix up assets held personally with those held on behalf of the fund. By using a corporate trustee, the distinction between personal and SMSF assets will be easy to identify and maintain.
A corporate trustee could also provide you with an extra level of protection in the event of litigation involving the fund. If an individual suffers any liability as trustee, their personal assets are potentially at risk. With a corporate trustee, liability is limited to the company’s assets and not those of its directors. For example, if a contractor is injured while making repairs on an SMSF property, they may sue the trustee(s) for damages. If a corporate trustee is in place, damages will be sought from the limited liability company (and a sole purpose company may have no assets) rather than from the individual directors.
Individual trustees and corporate trustees can be liable to penalties if the super legislation is breached. While penalties vary depending on the nature of the breach, those imposed on individuals and companies are not always the same. In fact, the penalty regime can often impose higher penalties on companies than on individuals.
If you’re thinking about setting up an SMSF on your own, and you don’t want anyone else involved with your fund, your best option is probably to have a company act as trustee. You will be the sole director and the only person required to make decisions and sign documents for the fund. Otherwise, you will have to ask another individual to be an individual trustee. This additional person would have equal decision-making power and responsibility for your fund. You would have to be confident that they would act appropriately in the role and be easily accessible to help with the fund’s management.
Step 3: consider your overseas travel plans
Do you intend to live overseas? Answering yes doesn’t mean you can’t set up an SMSF, it just means you will need to consider the SMSF residency rules. If your fund doesn’t satisfy these rules it will not be considered an Australian superannuation fund under theIncome Tax Assessment Act 1997and will lose its concessional tax status, which can result in severe tax consequences.
To be considered an Australian superannuation fund, your SMSF needs to meet the following three tests at all times throughout the year:
1 Your fund was established in Australia or any asset of the fund was situated in Australia at that time.
2 Your fund’s central management and control is ordinarily in Australia.
3 Your fund either has no active members (no member is contributing to the fund) or at least half of the fund’s assets attributable to active members belong to active members who are Australian tax residents.
Your ability to meet test 1 is rather straightforward and shouldn’t be a problem if you set up your fund appropriately.
Test 2 is the vital one if you intend to go overseas. Central management and control generally refers to making the key decisions for your fund. This includes managing your fund’s investment strategy, monitoring its performance and deciding how fund assets will be used to fund member benefits.
If more than half the individual trustees or directors are overseas permanently and making these decisions, then your fund will not satisfy this test. Having said this, a temporary absence of up to two years will be tolerated. Whether your absence is temporary or permanent will be assessed on a case-by-case basis. If you are arguing it’s temporary, you should have evidence such as a fixed term job contract, a return flight date and ongoing commitments in Australia to show your intention to return.
Generally, you will be an active member under test 3 if you are making contributions to your fund or someone else is making them on your behalf. This test ensures your fund is primarily being used to increase the super benefits of Australian tax residents. You’re only likely to encounter problems with this test if you leave the country permanently and are considered a non-resident for Australian taxation purposes.
If you’re uncertain about your ability to satisfy any of the residency tests, seek further advice. Whether appointing new members or using an enduring power of attorney — there may be a way of protecting the residency status of your fund.
Tip
If you’re overseas, the easiest way to satisfy the active member test is not to contribute to your fund.
Step 4: familiarise yourself with the roles and responsibilities of trustees
Are you familiar with the roles and responsibilities you have as trustee of your SMSF or as director of its corporate trustee?
As trustee or director of a fund’s corporate trustee, you will have full control over how the fund is run. You will also have full responsibility for making sure the fund complies with all relevant rules. But keep in mind you don’t get paid for this.
According to the ATO, as trustee or director, you must act in accordance with:
• the trust deed of your fund — the deed sets out the rules of the fund
• superannuation laws — for example, theSuperannuation Industry (Supervision) Act 1993and theSuperannuation Industry (Supervision) Regulations 1994
• tax laws, such as theIncome Tax Assessment Act 1997and theTax Administration Act 1953
• other general laws that may be applicable — for example, theCorporations Act 2001(for a corporate trustee).
Generally, these rules require trustees or directors to follow basic principles, which include:
• maintaining the fund for the sole purpose of providing retirement benefits to members
• always acting in the best interest of the fund’s members
• giving members access to information when requested
• carrying out all tasks with honesty and integrity
• skilfully and diligently managing the fund
• creating and implementing an investment strategy for the fund
• investing fund assets in accordance with the investment strategy and various investment rules
• keeping personal and fund assets separate
• allowing members to access their super only when they meet a condition of release, such as retirement or total and permanent disability
• keeping and retaining complete and accurate records, including records of all decisions affecting the fund
• preparing financial statements and lodging an annual tax return with the ATO
• arranging for the fund to be audited annually
• informing the ATO of key changes affecting the fund within 28 days.
Did you know?
All SMSFs must lodge an annual tax return with the ATO each year to continue receiving concessional tax treatment. They must also get their fund’s financial statements audited each year by an approved auditor before lodging the annual return.
The ATO uses the annual tax return to collect information about the fund’s income tax position, member contribution details, and whether the fund has complied with important super regulations. It’s also a way for the ATO to collect the annual ATO supervisory levy (currently $180).
Your SMSF administrator, accountant, financial or other professional adviser can provide useful advice regarding the rules, but it’s you, as trustee or director, who has ultimate responsibility and accountability for your fund’s compliance.
What are the penalties if you get it wrong?
The ATO is responsible for administering the legislation and enforcing compliance with the law. If your SMSF doesn’t comply with the rules, the ATO may take a variety of actions, which include:
• imposing administrative penalties on trustees
• entering into an agreement requiring trustees to rectify a contravention
• prosecuting trustees under the law, which can result in fines or imprisonment
• declaring an SMSF to be non-complying, which results in severe tax penalties for the fund
• disqualifying, suspending or removing trustees
• directing trustees to dispose or deal with specific fund investments.
These penalties highlight the importance of following the super rules. Remember also that you have a responsibility to your fellow members and trustees. Like the ATO, they can take action against you if you haven’t followed the rules set out in the fund’s trust deed.
Step 5: decide who will help establish and administer your SMSF
A quick search online or scan of the financial pages in your favourite newspaper will reveal many organisations offering to help set up and run your SMSF. Be aware they do not all offer the same service — there are many differences and options to consider.
What options are available to set up your SMSF?
There are three main options to choose from — using an SMSF administrator, accountant or lawyer. An SMSF administrator or accountant will generally provide you with full assistance in setting up your fund. They will coordinate preparation of the fund’s trust deed and help you sign off on all the other required paperwork.
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Securing Your Superannuation Future; How to Start and Run a Self Managed Super Fund
Find Out if an SMSF is Right for YouAre you thinking about setting up a self managed superannuation fund but unsure where to start? Are you worried that you're not maximising all the benefits an SMSF…
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