Setting up a self-managed super fund?
Thinking of setting up a self-managed super fund (SMSF)? Here's a list of pros and cons to help decide whether a SMSF is for you.
Since the government allowed self-managed funds to borrow to buy property, property promoters and other advisers have been quick to jump on the bandwagon. I almost fell off my lounge chair recently when confronted by a TV advertising campaign offering free holidays if you set up a self-managed fund.
The company, Wollongong-based Laura Dean Financial Solutions, made it seem easy. Sign up now, get your free holiday and enjoy the good life. Its website stressed all the benefits of an SMSF, including pictures of ritzy properties you could buy, but made no mention of the responsibilities that come with the job.
Before you start packing your bags, it's worth asking if you've got what it takes to run your own super fund.
The pros and cons
On the plus side, running your own super fund can be a great way to take charge of your retirement savings and ensure they're working for you. You have the power to decide where and how your money is invested. You can tailor the investments to suit your needs and manage the fund's tax situation to get maximum benefits - such as deferring capital gains until you're taking a pension from the fund when you can realise those gains tax free.
But, as the 2009 collapse of Trio Capital funds proved, self-managed funds are not for amateurs. While the government compensated Trio investors who lost their money through super funds regulated by the Australian Prudential Regulation Authority, self-managed fund investors missed out. The rationale was that they were responsible for their own investment decisions.
DO: Take responsibility for your investment decisions if you're running an SMSF. No matter who is helping you, it's your money down the drain if something goes wrong.
The rules
The reason the government differentiates between self-managed and public super funds is simple. Self-managed funds are set up by people looking after their own money, not someone else's. This means they don't need all the rules and regulations that public funds need, and the tax office rather than APRA regulates them.
However many of the super rules that apply to the big funds also apply to self-managed funds and there are strict rules in place to ensure you don't rort the system. The Australian Securities and Investments Commission says the responsibilities of running your own fund include:
● Acting as a trustee or director, which imposes important legal duties on you. You're responsible for ensuring your fund follows the laws, acts in the best interests of all members, and is managed in accordance with the trust deed. ● Setting and following an investment strategy that ensures the fund is likely to meet your retirement needs. ● Keeping comprehensive records and arranging an annual audit by an approved auditor. ● Using the money to provide retirement benefits only. One of the most important parts of the super rules is the "sole purpose test", which says super must be managed for the sole purpose of providing retirement benefits. So forget any ideas about using your super to improve your lifestyle now.
There are also restrictions on doing business with related parties and in-house investments. Transactions must be made on a commercial arm's length basis and, with a few limited exceptions, you can't buy assets from, or lend money to, fund members or other related parties.
If you fall foul of any of these rules, penalties can include disqualifying you as a trustee, freezing the fund's assets and, in severe cases, deeming the fund to be non-complying, which means it is taxed on all its assets at the top marginal rate.
DON'T: Allow your fund's assets to get mixed up with your own. The fund must be maintained totally separately from your business and personal money.
Investing
Do you have the time, knowledge and interest to manage your own investments? If not, why even consider a self-managed fund? If you do, formulate a written investment strategy that takes into consideration things such as diversification, risk and likely returns, liquidity, how it will pay benefits, and the age and circumstances of fund members. The fund must then be managed in accordance with this strategy.
If you like the idea of using a self-managed fund to buy art, or borrow to buy property, also be aware that this isn't as simple as buying these assets yourself. That sole purpose test, for example, prohibits you from displaying art or collectables in your home or office. And if the fund borrows, it must be under a limited recourse loan (which means the lender can't claim any of the fund's other assets) and meet other criteria - such as not being able to borrow to improve the property. See the tax office's ruling SMSFR 2012/1.
DO: Complete the Joint Accounting Bodies' Self-Managed Superannuation Fund Trustee Education Program, which is free to complete online
● Take time to understand your legal and administrative responsibilities. No matter how much advice you're getting, the buck stops with you. ● Understand that super is for your retirement. If you're seeking earlier benefits, you're asking for trouble. ● Manage your investments to suit your own needs and circumstances - not what someone is trying to sell you.
Nicola Field is a freelance journalist.
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