Many people are choosing to set up self-managed superannuation funds (SMSFs) and are taking greater control over their super savings, investments, taxation, insurance and retirement income. It has been estimated there is more than $245 billion in super funds is held in self-managed superannuation structures – with an average account balance of over $344,000 per member.1
How is an SMSF defined?
An SMSF is generally defined as a fund which:
• comprises four or less members, each of whom must be a trustee or director of the corporate trustee
• has a trust deed, and
• meets the definition provided in Section 17A of the Superannuation Industry (Supervision) Act 1993.
Trustees must ensure their SMSF meets the legal definition of an SMSF and upholds its legal requirements at all times.
What’s changed recently?
With the introduction of new superannuation legislation on 1 July 2007, SMSFs have new obligations. For example, any trustee or director of the corporate trustee appointed after 30 June 2007 must sign a declaration, in the approved form, within 21 days of becoming a trustee or director of the corporate trustee.
In addition, the Australian Taxation Office (ATO) has expanded powers to manage instances where a fund is found to be in breach of the regulations.
Serving as a trustee
With the wealth of potential advantages provided by SMSFs comes increased accountability and responsibility. SMSFs are governed by stringent legislation and guidelines that cover every aspect of fund establishment and ongoing management.
Furthermore, although professional advisers—such as lawyers, accountants and tax consultants—may be involved in the running of an SMSF, the compliance of the fund is the sole responsibility of the trustees. The trustees will be held accountable if any of the regulations are breached.
In some instances, a person cannot be a trustee—for example, those who have been declared bankrupt are prohibited from serving as trustee of an SMSF.
Benefits of managing your own fund
Investing through an SMSF has the potential to provide, among other benefits, increased choice and flexibility over the investment assets of the SMSF. In addition, greater control over taxation events, insurance options, and retirement income choices may be possible with an SMSF.
Flexibility over wealth potential
As a trustee of an SMSF, you have the privilege of being able to alter your fund’s investment strategy and direct assets into a wide range of investments. This provides the opportunity to manage the fund’s potential to achieve higher returns.
Control
SMSFs are generally able to provide members with greater control. For example, when it comes to taxation, trustees are able to determine the timing of taxation events, such as investment purchases and sales, potentially resulting in higher returns.
Cost savings
With up to four members in one fund, economies of scale have the potential to reduce the fees and expenses associated with fund administration, accounting costs, investment management and insurance.
Tax-effective insurance
Subject to the provisions of the SMSF’s trust deed, trustees can purchase life insurance and other cover tax-effectively through the fund.
Restrictions
Legal parameters define many aspects of the running of an SMSF, for example:
• the types of investments permitted
• trustee taxation reporting
• the fund’s annual auditing obligations, and
• timeframes in which paperwork must be lodged with the ATO.
Severe penalties apply to trustees who do not comply with the governing legislation or who misuse a fund’s super benefits.
Investment rules
SMSF investments must adhere to specific guidelines and restrictions. The investment rules are some of the most important requirements under superannuation laws.
For example, trustees must ensure the fund has a documented investment strategy which covers liquidity, diversification, risk and return.
Significantly, the trustees are responsible for ensuring that the fund’s assets are kept separate from the assets of the individual trustees.
Of particular importance is the fact that trustees of an SMSF are required to ensure the fund is managed for the sole purpose of providing retirement benefits for its members. If the fund’s investments do not comply with the sole purpose test, the fund may become ineligible for tax concessions and may be liable for tax penalties.
It is important to note that as the investment rules are integral to the law governing SMSFs, failure to comply with them could result in trustees being fined, sued and/or the superannuation fund losing its status as a complying fund.
Further information
Managing an SMSF can be demanding and is not for everyone, however, with the right support and financial advice, the establishment and ongoing management of an SMSF can be simplified. If you are interested in taking control of your super assets or you have questions about your existing SMSF and the new super legislation, please contact ipac on 1800 626 881 to speak to a professional financial adviser.
1 Quarterly Superannuation Performance, Australian Prudential Regulation Authority (APRA), March 2007 (issued 28 June 2007).
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