Self managed super funds (SMSFs) continue to be the fastest growing area within the superannuation industry.
Many people are still eager to enter this segment of the superannuation market. We look at 5 questions you should ask yourself to determine whether setting up a SMSF may be right for you.
1. Why are you looking to establish an SMSF?
Historically, many prospective SMSF members have used the terms control and choice as reasons to establish a SMSF. This is not necessarily a feature confined to SMSFs. The ability to choose underlying investments (often thought of as also giving control by some) is a feature that is today available in a number of other types of superannuation funds.
In general, the only asset classes that SMSF Trustees will potentially look to invest in that can't be achieved through a retail fund are direct property investments and investments in collectibles.
2. How much money do you have to start your SMSF?
You can start your SMSF with less, but the industry recommended investment is around $200,000. This makes the cost of running the fund more competitive with other funds with a similar amount of money invested.
There are incidental costs to running your SMSF fund which should be taken into account when deciding whether it is a cost effective option with the balance you have. There are costs in moving monies from one fund to another, such as realising Capital Gains Tax on the sale of existing investments, and time out of the market until investments are re-purchased. Any potential loss of insurance coverage (and the loss of possible benefits around group insurance arrangements) also needs to be considered.
3. What Trustee structure will you utilise?
As a Trustee you have two choices here; individual or corporate. Most SMSFs have been established with an individual Trustee structure, on the basis that it is initially cheaper and easier.
However, the benefits of a corporate structure should not be ignored. It has future benefits for the efficient running of the fund. For example, any direct shareholdings of a SMSF need to be registered in the name of the Trustees. With individual Trustees, when new members are added or removed, changes are required to the share register. If held via a Corporate Trustee, however, any changes in membership of the fund doesn't require share registry changes, as it is only the directors of the CorporateTrustee that change, not the trustee itself.
4. Have you thought about the fund's investment strategy?
A cornerstone requirement for the operation of a SMSF is to have a sound investment strategy for the fund, which complies with the sole purpose test requirements, and assists the members in managing and growing their savings for future retirement needs. This should include considering diversification, risk and return.
It is also important for Trustees to be aware that as a result of recent amendments to the superannuation law, SMSF Trustees are also required to review their investment strategy regularly (we would suggest annually) and to consider the insurance needs for the fund. This doesn't mean that insurance needs to be taken out if members are adequately covered through other means, but the considerations should be documented for future reference.
5. Do you understand your obligations and responsibilities as a SMSF Trustee?
One of the most common comments from new Trustees is that it takes more time than they anticipated running their own fund. All new SMSF Trustees are required to sign a standard Trustee Declaration issued by the ATO. Whilst this document does a great job of summarising many of the requirements of being a Trustee and the responsibilities associated with running a SMSF, the question still remains whether Trustees truly understand this or are just signing it as a matter of course for establishing the fund.
In the event that something goes wrong, ignorance won't be an excuse for Trustees who have signed the form.
A SMSF should never be equated to a DIY fund. If you decide to start your own fund you should consider choosing experienced service providers to assist with the efficient and compliant running of your fund. This includes administrators or accountants to ensure the accounts are maintained, a lawyer for the appropriate drafting of the terms of the SMSF's Deed, a tax agent for completion of annual tax returns, and a financial planner to assist with strategy and investment decisions.
This information is current as at 24/04/2014.
It is general information only and should not be considered a comprehensive statement on any matter and should not be relied upon as such. It has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. The tax position described is a general statement and is for guidance only. It has not been prepared by a registered tax agent. It does not constitute tax advice and is based on current tax laws and our interpretation. Your individual situation may differ and you should seek independent professional tax advice. These projections are predictive. Whilst we have used every effort to ensure that the assumptions on which the projections are based are reasonable, the projections may be based on incorrect assumptions or may not take into account known or unknown risks and uncertainties. The actual results may differ materially from these projections. Past performance is not a reliable indicator of future performance.