Self Managed Super Funds

What is a SMSF?

A Self Managed Superannuation Fund (SMSF) is a scaled-down version of the typical public offer funds sold by companies such as AMP and Norwich. Like all funds, SMSFs have a set of regulations they must follow. SMSFs are regulated by the Australian Taxation Office (ATO).

• SMSFs are a tool for investment management, risk management, retirement planning and estate planning.
• There are a few points that you should note about SMSFs:
  • They have fewer than 5 members.
  • An employee cannot be a member of a SMSF unless they are related to the employer.
  • In most instances all members of the fund are also Trustees.

Who can have a SMSF?

The simple answer is just about anyone. This includes

• Anyone under 70 years of age employed for more than 10 hours a week and earning income from that employment.
• Anyone who has funds in another superannuation fund or rollover investment that can be rolled over into a SMSF.
• A non-working spouse.

You can be either:

• A director of a private company;
• An employee or self-employed:
• About to receive a redundancy or retirement package;
• Already retired with funds in a rollover fund; or
• Retired and already receiving a pension from a private superannuation fund.

Why start a SMSF?

Control

• SMSFs are ideal for people who want control over their portfolio.
• SMSFs are also exempt from some of the investment restrictions which apply to other superannuation funds
• SMSFs can be structured to meet your personal and family needs.

Tax Effective Investments

SMSF's can be used as a tax structure to hold assets such as shares and property which would normally be subject to higher levels of tax.

Comparative Tax rates;

• SMSFs 15.0%
• Companies 30.0%
• Top Marginal Rate 48.5%

Cost

The cost comparison of a SMSF and a managed fund can save you money. Managed funds can charge up to 5% of contributions and annual management fees which are 1.5% of total assets.

A SMSF can cost $500 to set up and $1000+ for your compliance requirements.

SMSFs allow you the choice of whether to use a service provider or do it yourself and you can negotiate what fees you pay and the quality of service you receive.

Flexibility

FafdsaSMSFs allow a greater degree of flexibility. You control the operation and investment strategy of the fund within the boundaries of the regulations.

SMSFs are not a one-size-fits-all approach; they can be tailored to suit your exact needs. You can link your fund with your overall financial plan.

When you retire, there's no need to wind up the fund; as you can then start to pay yourself a pension.

SMSF Statistics

There are 267,066 SMSFs in Australia
They hold assets of $109.1billion
Average balance is over $400,000
The projected total of all superannuation assets by 2020 is $1,699 billion (and currently $533.9 billion).
(APRA Bulletin July 2003 + RIM Taskforce 1999)

Some Disadvantages

Lack of Diversification

Diversification in investment can be used to reduce volatility and lessen the risk of owning only one or two asset classes. In SMSFs, diversification can sometimes be difficult to obtain and/or maintain. Establishing a well-defined investment strategy can overcome this disadvantage.

Time

SMSFs do require the time to operate and make decisions. This is especially so when considering the timing of your investments, this can be overcome by the use of an investment advisor.

Skill and Knowledge

Managing investment within a SMSF does require knowledge of the investment market to ensure to appropriate decisions are made and not left to chance. Again, the use of an investment advisor can overcome this potential problem.

Investing your funds

Investment Strategy

A strategy is required to let members of the fund know the decisions of the Trustees and the reasoning behind them. There is a legal requirement to document your strategy. If you require you can get the assistance of a professional adviser.

Some basic rules that must be followed by Trustees are:

• You must adopt a prudent and diversified approach
• The fund must be for the sole purpose of providing retirement income.
• Your strategy must reflect the attitude of the fund in taking an aggressive, middle of the road or conservative approach. Each person's definition of these approaches will differ.

Risk and Return

With every investment there is a mixture of risk (the likelihood of success versus failure) and return (the amount of money you get back from your investment).

Generally, the higher the return - the higher the risk.

The inherent risk and return of a particular investment can be determined by investigating the actual asset, what goes into making it up and what assumptions have been made in the forecasting models.

Diversification

We've all heard the saying 'Don't put all your eggs in one basket'. In investment, the same advice applies.

It is considered a prudent strategy to spread your investment across a number of different assets.

What you can not do:

• The fund cannot borrow money directly.
• The fund can not lend money to a member or any relative of a member.
• The fund can not acquire assets from a member or related party. (There are some exceptions to this rule and professional advice should be sought.)
• The fund must limit investments in - or loans to - related parties to 5% of the fund value.