What Is A Self Managed Super Fund?
A Self Managed Super Fund, often referred to as an SMSF or DIY Super, is a private superannuation fund whose members are also the Trustees of the fund. This means that the management and control of the fund is in the hands of the members. It is for this reason that it’s a viable option for many Australians who want more control over their retirement balances.
An SMSF gives members full autonomy over how their retirement savings are invested. They are often an attractive option as a result of poor performance in a retail or industry fund or in order to take advantage of the multiple investment options that exist within a self-managed fund that are not available in other fund types.
What's The Difference between An SMSF and Public Offer Fund?
The biggest difference between an SMSF and a Public Offer Fund, such as an Industry or Retail funds, are that an SMSF’s trustees are also its members. This means that members of SMSF’s have total control over how and where their Super balance is invested, but also total responsibility to ensure all of the legal obligations of the fund are met. On the other hand, members of Public Offer funds have very little say over how their Super balances are invested. This also means members have no strategic or management responsibilities. All Superannuation fund types have their advantages and disadvantages and the needs of the individual should be taken into account before deciding upon a specific option.
Other key differences between funds include which asset classes can be invested and whether you can borrow money through your fund. Public Offer funds are relatively limited as far as how your contributions are invested with most funds not offering property investment or unlisted assets. This is a large reason many Australians look to SMSF’s for more diverse investment options. That being said some funds do offer varied options, so investigating more thoroughly before settling in a fund will ensure you pick the right fund for your goals.
Another attractive feature of an SMSF is being able to borrow to purchase assets. Whilst some Public Offer funds may offer internally geared assets, trustees of such funds do not borrow on behalf of members. It’s important to seek legal advice if looking to borrow within an SMSF to ensure all legal requirements and regulations are followed.
Setting Up An SMSF
Although you can set up an SMSF yourself, it’s advisable to seek professional assistance if you aren’t experienced in all the required elements. Experienced professionals such as a Financial Planner, Lawyer, Accountant and Property Advisor are recommended team members to ensure your fund performs as well as possible.
Here is an overview of nine basic steps to setting up an SMSF.
- Decide on your SMSF members;
- Decide on the structure of your SMSF, whether an individual or corporate trustee;
- Create the trust deed for your SMSF;
- Apply for your ABN and register your SMSF with the ATO;
- Set up the SMSF bank account;
- Arrange an electronic service address and organise member contributions and rollovers;
- Develop an investment strategy and execute initial investments;
- Develop an exit strategy;
- Appoint an Auditor, Administrator and Actuary as Required.
It’s extremely important that your SMSF is set up correctly as the legal responsibility falls onto the members.
What Performs Better SMSF or Public Offer Fund?
Based on the most recent stats from the ATO (current as of 2016) SMSFs had an average return of 5.7% after fees and taxes were paid whilst APRA regulated funds over the same period returned 5.3%. This data is arguably skewed by the fact that SMSFs with very low balances do not perform anywhere near as well as funds with larger balances. Therefore, the type of fund that will bring you the best performance comes down to your Super balance and how the fund is run.
Who Can Benefit From An SMSF?
An SMSF can offer some great benefits to its members, including asset protection against bankruptcy or creditor claims, increased tax flexibility, and more control over where the funds balance is invested. Not everyone is going to be able to, or have the need to take advantage of these features of an SMSF. That comes down to your current circumstances and objectives. To find out if an SMSF is the right option for your retirement savings, it’s recommended to speak with a licensed and experienced professional who can assist you in determining the right play.
Is An SMSF Right For You?
A licensed professional should be involved before deciding whether or not an SMSF is right for you. Whilst there are many advantages in setting up an SMSF, it also comes with increased responsibility and isn’t going to be the right option for everybody. You should ask yourself what you’re hoping to achieve and if your current option can’t do that it may be worthwhile speaking to someone who can help you to develop an appropriate strategy.
An SMSF comes with a number of responsibilities that do not exist in Public Offer funds. For an SMSF you must develop an investment strategy, you need to have arrangements in place if anything happens to the members and you are responsible for organising your own insurances.
How Much Do You Need to Set Up An SMSF?
This is a contentious issue and although this has been keenly analysed by both the ATO and ASIC, there is still no concrete answer. The most important question to ask when considering if it’s the right option is whether the benefits will outweigh the costs of setting up an SMSF. The higher the balance of the SMSF, the lower the % put towards expenses. For larger balances an SMSF is very often in the members best interest, but for funds with smaller balances the benefits need to be able to be justified to cover the higher expense ratio. ASIC’s recommendation is for Financial Advisors to not recommend an SMSF for balances below $200,000.
SMSFs Investment Guide
When starting an SMSF it’s a legal requirement to have an investment strategy in place. Like any investment, qualified professionals with relevant experience should be consulted in the creation of your strategy, unless you are sufficiently experienced yourself.
Investing through an SMSF can be a very attractive retirement vehicle but large penalties exist for not following legislation requirements correctly. All investments within an SMSF need to pass the Sole Purpose test, meaning they are for the sole purpose of providing retirement benefits for members.
When investing in assets for the fund, you need to make sure it is done through the fund and not in your own name or another member’s name. This is both a legal requirement and also protects the assets in the case of member bankruptcy or creditor claims.
There are some restrictions on what your fund can invest in and breaches can lead to financial penalties or your fund losing its concessional tax treatment. This would see tax rates increase from 15% to the highest marginal rate of 45%. Since 2011, rules around the purchasing of collectables or personal use assets cannot be stored in the private residence of any related party of the fund.
Investing in property and exotic investments such as Crypto-currencies, foreign currencies and commodities are allowed, but have specific guidelines that need to be followed.
You can also borrow within an SMSF for the purpose of purchasing assets that pass the sole purpose test. Once again, there are specific legal requirements and regulations that must be adhered to.
For more information on investing within your SMSF we recommend speaking to a licensed professional with experience in SMSF investing.