Self-Managed Super Funds are hardly a new trend; however they have gained some traction lately, with the government allowing SMSFs to borrow to purchase property. Everybody from property advisers to your next door neighbor seems to be raving on about this option. However, before you conform to this newest wrinkle, it’s well worth considering whether you have what it takes to run your own super fund.
Advantages and Disadvantages
An appealing aspect of self-managed funds is the way you are able to take charge of your retirement savings and ensure that they are working for you. You have the power to decide where and how your money is invested. You’re able to tailor the investments to suit your needs and manage the tax situation to obtain maximum benefits such as deferring capital gains until you’ve taken a pension from the fund.
However, SMSFs do take a lot of time and effort and come with strict compliance legislation that must be adhered to.
Rules, rules, rules!
Whilst most of us are sticklers for obeying the law, there are still a great many SMSF trustees that bend or break the rules whether they know it or not. The government differentiates between self-managed super funds and public funds through the simple definition that self-managed funds are set up by people looking after their own money and not somebody else’s. Therefore, whilst SMSFs may not need all the rules and regulations that the public funds do, they are still many strict rules in place to ensure one doesn’t rort the system.
The Australian Securities and Investments Commissions (ASIC) list these responsibilities when running your own fund:
• Acting as a trustee or director, which includes certain legal duties such as ensuring your fund follows the laws and acts in the best interest of all members and is managed in accordance with the trust deed
• Setting and following an investment strategy that ensures the fund is likely to meet your retirement needs
• Keeping comprehensive records and arranging an annual audit by an approved auditor
• Using the money only to provide retirement benefits; one of the most important parts of the super rules is something called the sole purpose test, which says super must be used for the sole purpose of providing retirement benefits
Furthermore, you can forget about using your super to improve your lifestyle now or do business with related parties and in-house investments. All transactions must be kept at an arm’s length and you can not buy or lend money to fund members or other related parties.
If you’re found guilty of breaking any or all of these rules, the penalties are severe, resulting in disqualifying you as a trustee, freezing the fund’s assets and /or deeming the fund to be non-complying, which means it is taxed on all its assets at the top marginal rate.
SMSFs need to have a proper investment strategy in place. Have you asked yourself whether you have the time, knowledge and interest to manage your own investments? Have you created a strategy that takes into consideration things such as diversification, risk and likely returns, liquidity, how it will pay benefits and the age and circumstances of fund members? If so, the fund must then be managed in accordance with this strategy.
You also need to ensure that you choose your investments wisely and not just on the back of what somebody is trying to sell you. If you’re thinking of opening a SMSF mainly because you like the idea of using this fund to buy assets such as art or property, you need to be aware that this isn’t as simple as buying these assets for yourself. The sole purpose test, for example, prohibits you from displaying art or collectables in your home or office. And if the fund borrows money, it must be under a limited recourse loan.
To find out whether a SMSF is right for you or for more information and an assessment of your current situation, contact one of our trusted expert accountants or financial planners on 02 9299 7044.
Important note: this information is of a general nature and has been prepared without taking account of anyone’s financial situation, objectives or needs. Before making any financial decisions based on the contents you should obtain professional advice.