And so, it begins… the ultimate guide to a self-managed super fund for trustees. Let’s be honest; twelve hundred words won’t be enough to provide you with all the super fund answers you’re likely looking for. However, it should provide you with enough information to ask the right questions and get started with understanding more about your self-managed super fund.
We’ve broken the ultimate SMSF trustees guide into three distinct parts. Part one focuses on what might motivate you to establish an SMSF. Part two describes what an SMSF is and addresses the rules and regulations you must comply with after establishing it. The third and final part of the SMSF guide summarises the steps required to wind up a self-managed super fund if your circumstances change.
Part One: Why Set Up A SMSF?
There are many reasons why you might choose to set up a self-managed super fund, but they generally fall into a few categories, as outlined below.
The first category is control. Control can take many forms, but in relation to superannuation, it generally refers to having the flexibility to decide:
- What, when and how much to invest in an asset.
- What, when and how much to invest in an asset class (cash, bonds, property, shares etc.)
- When to sell the asset.
Financial control can be empowering and shifts the accountability and responsibility for investment returns to you.
The second thing to consider is investment choice. A self-managed super fund can invest in shares in unlisted companies and units in unlisted trusts. Your Super Fund can also borrow to invest directly in property or shares and units. This strategy is referred to as gearing and is often used to maximise investment returns in the medium to long term.
The third and final item to consider is cost. A self-managed super fund can be a cost-effective way of accumulating retirement savings. The cost-effectiveness of a SMSF will generally depend on the value of your superannuation balances.
There is a lot of misinformation about how much superannuation one should have before considering setting up a self-managed super fund. But in all truth, there is no such thing as the right amount, as what is right is highly dependent on personal circumstances. However, as a general rule, it’s unlikely to be cost-effective to set up a self-managed super fund if the total superannuation balance, including all members, is less than $200,000.
According to the Australian Taxation Office (ATO), the average operating expenses (audit, accounting and tax compliance, management and administration, ATO supervisory levy) of an SMSF with a total superannuation balance of between $200,000 and $500,000 expressed as a percentage of the total value of the assets is 1.2%*.
*self-managed super fund profile | Australian Taxation Office (ato.gov.au).
Part Two: What Is A SMSF, And What Are The Key Rules And Regulations?
At this point, you’ve read part one of the ultimate SMSF trustees guide, and you’ve decided if an SMSF could be right for you. But before you make the final decision, it’s good to know what a SMSF entails.
What is A SMSF?
To qualify as a SMSF, the fund must have less than six members. In broad terms, if the trustees of the SMSF are individuals, each trustee must also be a member. If the trustee is a company, each member must be a director of the trustee company. No member of the SMSF can be an employee of the other member unless the members are related, and the SMSF can’t pay the trustee for their services acting as trustee.
What Are the Rules and Regulations Around A SMSF?
Many of the rules and regulations are highlighted in the ATO’s ‘self-managed super fund trustee declaration’. This declaration is published by the ATO and must be executed within 21 days of becoming a trustee or a director of a corporate trustee. A copy of the declaration can be accessed by following the link. Trustee declaration (ato.gov.au).
This declaration sets out the core areas of responsibility under various sub-headings. We’ll explore each of these briefly in turn below.
Super Fund Sole Purpose Test
The SMSF must be maintained solely for the purpose of providing benefits to members in retirement or their beneficiaries if a member dies.
What are the trustee’s duties?
The trustee must implement and review an investment strategy that considers risk, return, diversification, liquidity, and whether insurance is appropriate for the members. The trustee must ensure that the assets of the SMSF are kept separate from their personal assets and take action to protect the assets (evidence and insurance).
Super Fund Investment restrictions
The trustee (acting in this capacity on behalf of the SMSF) must not:
- Give financial assistance to a member or relative.
- Buy assets from a member or their associate (note, there are exceptions for business property, listed securities and certain in-house assets).
- Borrow money on behalf of the SMSF (unless the borrowing is permitted by law).
- Buy in-house assets where the asset’s value is greater than 5% of the market value of all of the assets of the SMSF. An in-house asset includes loans to or investments in related parties of the SMSF.
- Enter into non-commercial investments.
The trustee must prepare and retain a statement of financial position, operating statement and an annual return. They must also retain records that support the preparation of these documents for at least 5 years. The trustee is required to appoint an approved SMSF auditor each year and lodge the annual return. This must be done before the due date each year.
Why Is Following The Rules And Regulations Important?
The ATO has been given the power to ensure that SMSFs are complying with their obligations. There is a number of penalties that can be imposed for failing to comply, ranging from:
- A specific direction to rectify a breach or undertake education.
- Imposing a fine or penalty.
- Making the SMSF non-complying.
The best way to avoid penalties for failing to comply is to be aware of the rules and to work closely with your adviser before making any critical decisions.
Part 3: Self Managed Super Fund Guide
Winding up the SMSF
The third and final part of the ultimate SMSF trustees guide provides guidance in relation to winding up a fund. There are many reasons why an SMSF may need to be wound up, but most of the time, it’s due to the death of the members or because of a change in circumstances (relationship breakdown or members relocating overseas).
Before commencing the wind-up process, the first step will be to review the trust deed. Whilst there is a standard framework for winding up the super fund according to regulations and law, the trust deed may impose specific requirements, and these must be followed.
Once you know the requirements set out in the trust deed, the process is mainly procedural. Assets are generally sold, and income tax and other outstanding liabilities must be paid.
Each member’s superannuation balance must be calculated and either rolled over to another complying superannuation fund or paid out of the SMSF if a condition of release has been satisfied. A final audit and income tax return must also be completed and lodged.
More information relating to winding up your SMSF can be found on the ATO’s website; Winding up | Australian Taxation Office (ato.gov.au).
There you have it – the ultimate SMSF trustees guide in less than 1,200 words. Use this guide as a reference point whether you’re setting up, running, or winding down an SMSF and always aim to seek professional guidance.