Self-managed superannuation guide
DIY super – how to take control of your retirement savings.
Should you do it yourself?
You repainted your own house, installed your own dishwasher and you've even been known to do your own taxes, so why not give managing your own super a shot?
The number of 'DIY' super funds has increased rapidly since self-managed super funds (SMSF) became an option. You might be considering switching because you've done the maths and figured out you're not getting back as much as you could, or maybe your financial adviser has advised you to strike out alone.
An SMSF could make you more money, but it isn't the best option for everyone.
If you're new to the SMSF game, here's where things could get tricky for you.
- SMSFs can be expensive to run.
- You need a lot of money to make an SMSF work well.
- You need to really know the rules.
Do I have what it takes to manage my own super?
Self-managed super isn't for everyone. Ideally you'll:
- have at least $1 million in your account – this is where an SMSF provides economies of scale; below that amount fees will eat into your returns
- have investment expertise and understand the importance of proper investment strategies
- have the time and interest to be involved with your fund
- be disciplined and understand the responsibilities of being a trustee
- be in a position where your mandatory employer super contributions can be paid or rolled over into the fund.
Heads up – self-managed super is regulated by the ATO
SMSFs are regulated by the Australian Taxation Office (ATO) and perform the same role as other super funds: collecting and investing your contributions and making them available to you when you retire.
The difference is that as a fund member you're also a trustee who controls how to invest your contributions and pay your own benefits. An SMSF can have up to four members. They will almost always be family or close business associates.
That means you're responsible
As a trustee you're ultimately responsible for running the fund. You need to know the legal requirements and administrative responsibilities.
The ATO will take a "firm approach" with trustees who don't comply with its rules.
Each fund needs to be independently audited annually. The audit includes an assessment of the fund's overall compliance with the rules and a financial audit. Auditors report problems and breaches to the trustees who can take appropriate action, but they must also report them directly to the ATO, which means the ATO may prosecute you.
Penalties can range from asking the trustees to offer an undertaking to the ATO to correct the problems, to civil and criminal actions with high financial penalties and/or imprisonment.
The ATO can also make the fund non-complying, which has dire financial consequences for members as it means that the fund's assets and income may be taxed at a penalty rate instead of the concessional super tax rate of 15%.
The pros and cons of self-managed super
- Self-managed super gives you control to choose your own investments. As long as you follow the rules and the fund's investment strategy, you have a lot of flexibility.
- It can be more cost effective than other types of super, but this depends on how much you have to invest and how much professional advice and administrative assistance you need.
- It can act as a tool to minimise tax on your other investments. For example, you may be able to integrate your share portfolio into the fund. However, you won't be able to access the funds until retirement and access may be affected by changes in legislation.
- You can also decide when to buy or sell investments and thereby minimise Capital Gains Tax.
- Under some circumstances an SMSF may help you to raise debt to invest in property.
- Self-managed super needs continuous attention - you'll need to be able to devote at least a few hours to the fund each week.
- High costs - in comparison with industry or even retail funds, a DIY fund can be expensive. And ATO figures show SMSFs on average perform below regular funds.
- It's only worthwhile if you have a large sum to invest.
- If you consult professional advisers, make sure the fees don't eat up your returns.
- There's no guarantee you'll have better returns than other super funds. It can be extremely difficult to beat the market, as you'll still be selecting from the same investments and dealing with the same market ups and downs as every other super fund.
- If something goes wrong you can't use the Superannuation Complaints Tribunal.
- You may also have problems finding redress if you receive inappropriate advice from an accountant. That's because accountants were granted an exemption from licensing requirements of the Financial Services Reform Act (FSRA) when they advise consumers on certain aspects of SMSFs such as establishment or operation and not on the underlying investments. This means accountants don't need to fulfil the disclosure requirements under FSRA and don't need to belong to an approved external dispute resolution scheme.
- You won't be eligible for compensation under super law in case of fraud or theft.
- A retail or industry super fund may offer cheaper life insurance cover because their large membership numbers enable them to negotiate low premiums. But you can still take out life cover and the premiums are tax deductible.
Setting up a self-managed super fund
- Each member must be a trustee.
- Trustees can't receive payment for performing their duties.
- A member of the fund can be an employee of another member only if they're related. For example, if you've got a small business that employs your son, he can be a member of your SMSF; however another employee who isn't related to you can't join the fund.
- As a trustee, you're responsible for the fund complying with the regulations.
- The fund is a separate entity and needs to be separated from your own assets.
- You need proper administrative procedures to comply with all requirements, for example, keep records of all meetings and decisions, prepare financial statements and lodge all required paperwork with the ATO.
What you need to do:
- Appoint trustees. This can be a private company of which the members are the directors, or all the individual members of the SMSF. If there's only one member, there must either be a second individual trustee (you can appoint someone else such as a relative) or you can set up a private company of which you're the sole director, which can act as the trustee of your fund. There are conditions about who can become a trustee, for example an undischarged bankrupt or anyone who has been convicted of an offence involving dishonesty can't become a trustee.
- Get a trust deed — a legally binding document setting out the governing rules of the fund.
- Apply to the ATO to become a regulated fund within 60 days of setting up the fund, in order to obtain concessional tax treatment.
- Obtain a tax file number and ABN.
- Open a separate bank account in the fund's name.
- Develop an investment strategy.
Keep in mind:
- Decide whether life or disability insurance should be taken out.
- Each member needs to nominate a dependent to receive their benefits if they die.
- Proper records must be kept, some for up to 10 years.
- SMSFs are prohibited from borrowing money other than in very limited circumstances.
- There are rules for buying assets from related parties.
- SMSFs are in general prohibited from lending money to members or their relatives.
Be wary of advisers who:
- make the process seem easy
- look after only a handful of SMSFs
- don't have proper industry qualifications
- haven't kept their knowledge up to date
- have worked with DIY super for only a short time.
A large range of professionals are offering DIY super services and their qualifications and charges vary widely. Look at whether they're licensed to give you financial advice and whether their advice is appropriate for your specific circumstances.
Spread your risk
A basic investment principle is to spread risk over different asset classes. Research by the ATO indicates that SMSFs, especially those with smaller amounts invested, have a tendency to concentrate their investments in only one asset class.
Arms-length provision: Any investments or leasing arrangements with related parties (see below) must be entered into under normal commercial terms.
In-house assets: Loans to, investments in, and leases with a related party. These are restricted to 5% of the fund's assets. For example, if the fund owns a holiday home, members can only use it if its value isn't more than 5% of the total value of the fund's assets. Business property owned by the fund and leased to a member is exempt from this rule.
Related parties: A member of the fund or a person somehow related to a member, including family, friends and business associates. Generally a fund is not allowed to buy assets from related parties. Exceptions are assets such as listed securities (shares, bonds etc) traded at market price, a business property bought at market value or 'in-house assets' (see above).
Sole purpose test: This must be met in order for the fund to receive concessional tax treatment. The fund (and its assets) must be seen to have as its 'core purpose' paying benefits when members retire, or after their death. Generally, you can't receive any other benefit from the assets owned by the fund. For example, if the fund owns shares, you wouldn't be allowed to receive any shareholder discounts you'd receive if you owned them personally.