What is an SMSF?
An SMSF is a trust where funds or assets are held and managed on behalf of a maximum of four individuals, to provide future retirement benefits. Subject to certain exceptions, all members of an SMSF must be trustees of the fund or directors of the fund’s corporate trustee.
What are the benefits?
The main rationale for establishing your own SMSF is the increased level of control you have, as well as the investment choice and flexibility. You become the trustee of your fund and therefore make decisions on your fund’s investment strategy and the type of assets that are held within your fund. Your SMSF can also invest in almost anything, including investments not usually available in a public super fund (please note, however, that these investments are subject to certain limitations and legal restrictions). This will allow your fund’s investments to be customised to suit the precise requirements of members, before and after retirement. Furthermore, similar to all complying super funds, an SMSF is taxed at a concessional rate. The top tax rate for investment earnings from your SMSF is 15 per cent. This tax concession, however, is only available for complying funds – which are SMSFs that fulfil all the rules set out by the ATO, the Superannuation Industry (Supervision) (SIS) Act 1993 and the SIS Regulations.
Things to consider:
Who are the governing bodies?
The Australian Taxation Office (ATO) is responsible for overseeing the regulation of SMSFs. While the ATO’s regulatory approach to SMSFs has been focused mainly on education and information, it is fast becoming more aggressive in its stance on fund compliance.
Obligations and rules:
As an SMSF investor, you need to consider your fund’s investment philosophy – like any other super investment, you will need to establish what the acceptable rate of return sand how much risk you are willing to take with your retirement savings. These are areas where professional management can be a good idea. As an SMSF trustee, you are required to regularly review the investment strategy of your fund and consider insurance for the members of your fund. Many investors who open an SMSF employ the services of specialist administrators to take on the difficult compliance activities on behalf of their fund. This is beneficial as they can still enjoy the investment control and flexibility without the added burden of administration. Your fund’s compliance with superannuation law is vital and you are legally accountable for ensuring your fund complies with all the rules – even if you pay for professional management.
Sole purpose test:
The foundation of the SMSF regulatory system is the ‘sole purpose test’ – the sole purpose of your fund should be to provide retirement benefits to fund members.