A Self-managed superannuation fund (SMSF) is a private super fund that you manage yourself for the purpose of providing retirement benefits. It can have up to four* related or unrelated members who are also the trustees of the fund.
Managing own SMSF provides the Trustees control over the choice of the investments and insurances, as well as the responsibility for the funds’ compliance. While having control over your own super can be appealing, there are strict and complex rules to follow and comes with risk.
SMSFs are regulated by the Australian Taxation Office (ATO) and governed under different provisions, regulations and legislation. The overriding legislation is the Superannuation Industry (Supervision) Act 1993 (SIS Act), while the payment of taxes is governed under the Income Tax Assessment Act 1997 (ITAA 97). In addition, as an SMSF is a trust, the general law of trusts will apply. Lastly, if the fund has a corporate trustee, then the Corporations Act 2001 also needs to be considered.
The legislation and regulations surrounding SMSF can be very complex and perplexing, and trustees’ duties and responsibilities cannot be waived due to ignorance. The ATO can take the following actions if SMSF fail to comply:
- Education direction
- Enforceable undertaking
- Rectification direction
- Administrative penalties
- Disqualification of a trustee
- Civil and criminal penalties
- Allowing the SMSF to wind up
- Notice of non-compliance
- Freezing an SMSF’s assets
(ATO – How we deal with non-compliance – QC42478)
Before deciding to manage your funds in an SMSF, you should consider the setting-up fees, annual administration, accounting and auditing fees, as well as the time you need to manage your fund, understanding the share market mechanisms, how to buy and manage property inside the fund, how to invest in global markets, analyse your investments, manage legal documents, and meet ongoing compliance.
Benefits
- Tax strategies: Conforming superannuation funds are subject to the lowest rate of income and capital gains tax of any entity structure in Australia.
- Investment control: Possible intergenerational transmission of assets through to family members subject to strict rules.
- Flexibility: An income producing investment property can be purchased through the SMSF, with the ability to finance through Limited Recourse Borrowing Arrangements (LRBA), for example purchasing your own business real property through your SMSF while paying rent to your own SMSF. More so, the range of possible investments iswider, an SMSF can invest in art, bullion and collectables, gold, managed portfolios. However, the ATO requires sufficient diversification of investments.
- Tax control: The benefits you will receive after your preservation age, as a lump sum or pension, as well as most personal insurances can be tax deductible.
- Cost control: Members can choose to manage their fund’s investments, thus saving brokerage, planning, and other fees. Annual fees will be shared among the members, therefore reducing the cost per member
- Asset Protection: In the unfortunate event of bankruptcy, assets belonging to SMSF Members are generally protected from creditors while under pension age.
- Tailor your trust deed and investment strategy to suit your members.
Risks
- Being in charge of a fund management means being legally responsible. The ultimate responsibility lies with you, the trustee. You must keep informed of taxation rules and regulations and will need time to establish and follow an investment plan, keep records of accounts and organise a yearly audit by an approved SMSF auditor. If you fail to comply, the ATO can levy a range of penalties which vary depending on the severity of the breach.
- If one trustee becomes disqualified, ATO may wind up the fund, in which case assets will need to be transferred to another fund.
- Inexperienced and misinformed investments can go wrong. There is no safety net nor any access to any special compensation schemes or to the Superannuation Complaints Tribunal. Unlike APRA-regulated superannuation funds, SMSFs are not subject to the same government protections, such as statutory compensation in the event of theft or fraud.
- The penalty is levied at the trustee level and the trustee cannot be reimbursed from the fund. For corporate trustees, the penalty is levied on the company with the directors jointly and severally liable for the penalty. For individual trustees, the penalty is levied on each trustee. This means for a two-member fund, a doubling of the penalty for individual trustees.
- Liquidity can be an issue, such as property’s lack of liquidity. Unlike shares, selling a property takes time so if there is an unforeseen circumstance, such as the early death of a member or a divorce, which can cause complications.
In Part 2 of THINKING SMSF – DOS AND DON’TS, we will cover the common mistakes we see, with a summary of trustees most common do’s and don’ts.
* A bill has been introduced, the Treasury Laws Amendment (Self Managed Superannuation Funds) Bill 2020, partially implementing the measure to allow an increase in the maximum number of allowable members in self-managed superannuation funds and small APRA funds from four to six. This bill was first floated in the 2018-19 Federal Budget.
By Gregory Atamian – JJN Associates Accountants and Tax Advisors.
The content and the references made in this article are correct as at the publication date and are for general information and should not be relied upon as an advice. If you wish to seek particular advice, call us on 02 9997 4000.