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Self Managed Super Funds – Part 1: Do it yourself super

Self Managed Super Funds – Part 1

Do it yourself super

Self managed super funds (SMSF) are becoming an increasingly popular alternative to retail or industry superannuation funds.

The difference between an SMSF and other types of fund is that the members of an SMSF are usually also the trustees. This means the members of the SMSF run it for their own benefit and are responsible for complying with the super and tax laws.

SMSFs are established for the sole purpose of providing financial benefits to its members in retirement and must strictly comply with rules regulated by the Australian Taxation Office.

An SMSF needs to be set up correctly so that it’s eligible for tax concessions, can receive contributions and is easy to administer.

If you are considering setting up an SMSF there are some basic things you need to have in place to remain compliant with the rules.

SMSF Trust Deed

An SMSF is a type of trust used to manage retirement savings on behalf of its members.

A trust requires a trustee/s, assets, beneficiaries and the intention to create a trust. The trust deed sets out the rules for establishing and operating your SMSF, including the names of the trustees and the beneficiaries of the fund.

For an SMSF to comply with the rules regarding its structure:

  • It must have 4 (or fewer) members;
  • Each individual trustee must also be a member;
  • Each director of a corporate trustee must also be a member;
  • No member can be an employee of another member – unless the two members are related; and
  • No trustee can receive payment from the fund for their services as trustee.

In setting up your SMSF trust structure you have two options when it comes to appointing the required trustee;

  • Corporate trustee – a company acts as the trustee of the SMSF and each member is a director of the corporate trustee. This structure provides a range of benefits over the individual trustee structure although it usually costs more to establish,
  • Individual trustees – each member of the SMSF is appointed as a trustee of the fund and there must be a minimum of 2 trustees. The main advantage of an individual trustee structure is the low set up costs.

Investment strategy

If you set up an SMSF, you make the investment decisions for the fund and you’re responsible for complying with the law.

How you plan to invest your SMSF assets, ensuring that the fund is likely to meet your retirement needs, must be set out in writing and you must adhere to this strategy to remain compliant.

Financial & Administrative Responsibilities

As a trustee you have a number of financial and administrative obligations.

You need to keep comprehensive records and every year you’ll need to have an accountant prepare financial statements, lodge them with the ATO and organise an independent audit by an approved SMSF auditor.

Failing to meet your obligations may result in the SMSF not complying with the rules and penalties for the trustee.

You can accept contributions for your members from various sources but there are some restrictions, mostly depending on the member’s age and the contribution caps.

You need to manage your fund’s investments in the best interests of fund members and in accordance with the law. The SMSF’s investments must be separate from all personal and business affairs of fund members and used only to provide retirement benefits.

Generally your SMSF can only pay a member’s super when the member reaches their ‘preservation age’ and meets one of the conditions of release, such as retirement. The payment may be an income stream (like a pension) or a lump sum, depending on the circumstances.

There are significant penalties for releasing super benefits without meeting a condition of release.

Estate Planning Strategies

An SMSF can be a very useful tool as part of the estate planning exercise and offers benefits in this respect that are not available with other funds.

If you set up a new SMSF you should review your estate plan to take this into account. In addition, if you update or review the terms of your SMSF Trust Deed you should also ensure that you have legal advice that the changes to the deed are consistent with your will and your general estate plans.

Conclusion

A decision to set up a SMSF is one that should be made in conjunction with your financial advisor and your lawyer at Tetlow Legal. This is a legal process as well as a financial process and all of your advisors should be involved in the process.

For more information regarding Self Managed Super Funds, see our other articles by clicking on these links; Self-Managed Super Funds – Part 2: Buying a Property in a Self-Managed Fund and Self Managed Super Funds – Part 3: Having a Company as a Trustee.

If you are considering the establishment of an SMSF and would like any help or advice please contact Brian Tetlow or Emma Bragg on (02) 6140 3263 or email mail@tetlowlegal.com.au.