What you need to know before setting up a SMSF

What you need to know before setting up a SMSF

A self-managed superannuation fund (also known as a SMSF) can be a great way to take control of the dollars you're saving for retirement by putting you in the driver's seat when it comes to all decisions - investments, insurances, management - in relation to your fund. For some this can be brilliant, for others it can be ... less than ideal.

There are many great reasons for setting up a SMSF, but there are some things you should be aware of before taking the plunge. Here are our top 5 things that you should understand before setting up your very own self-managed superannuation fund.

ONE. Setting up and running a SMSF costs money and like most things in life you get what you pay for. Initial start-up fees can vary between $500 and skys-the-limit, but expect to pay around $2,000 if you're getting a company to act as trustee. Ongoing accounting and audit fees will vary, but for a basic fund expect to pay $3,000 as a starting point. For some people these costs are just part of doing business and are happy to pay them for the control they get, for others they are simply a cost to be resented. What would they be for you?

TWO. Ensure you have the time to manage it properly! Trustees are responsible for making investment decisions in accordance with the agreed-upon investment strategy and ensuring the fund is run in compliance with the relevant rules. Superannuation can be a tricky area if you don't have the time, interest levels and technical advice at hand to do the job right.

THREE. Record keeping needs to be kept up to date and tidy. There are loads of rules when it comes to SMSF and record keeping is definitely one of them. Auditors will require documentation to back up every transaction undertaken by the fund so you'll need to keep tidy and complete records. Financial statements, tax returns and any other document that need lodging with the ATO must be kept for 5 years. Minutes of meetings, trustee declarations etc must be kept for 10 years. 

FOUR. Know your related party transactions! There are rules around how a SMSF can deal with related parties, most of which either rule them out altogether or require the dealing be at arm’s length or on a commercial basis. A popular example is when a SMSF owns a commercial property and leases it to a member's business in which case there must be a proper lease in place and rent needs to be paid at market value - just the same if an unrelated party was renting the property. Members and their associates cannot borrow money from the super fund. Super funds also cannot acquire assets from members, however there are two notable exceptions, those being business real property and listed securities. Either of these must be acquired at market value and on an arm’s length basis.

FIVE. You need to ensure your super fund meets the “sole purpose test”. This states that SMSF funds are maintained for the sole purpose of providing retirement benefits to members, or their dependents. This means there are restrictions and rules as to what a SMSF can invest in. For example, if investing in collectables such as artworks the SMSF members cannot have access to this - that means no hanging the piece in the living room for all to enjoy pre-retirement!

As you can see, whilst they are great for some, some of us are simply not cut out to manage a SMSF and should steer clear. If you'd like to have a bit of control over your investments without having the complete responsibility that comes with a SMSF you could try one of the various managed funds that let you choose the way the money is invested, some will even let you buy and sell certain shares and other financial assets via an online trading platform.

Or you might decide that a SMSF is definitely the way to go for you and your family. We've seen lots of SMSF success in particular with small business owners who have a strong interest in managing their own investments and that includes commercial property which they typically rent back to their own business. As you've seen above, they aren't for everyone, but for those who are a good fit it can be a brilliant vehicle for wealth creation and tax savings. Whatever you choose, make sure you're informed!

If you'd like to speak with someone about your options when it comes to your superannuation why not get in touch today? We'd love to help and are able to advise on establishing super funds as well as the ongoing management and compliance.

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