Some people want to manage their own super and elect to have a self managed super fund (SMSF) rather than invest via a public offer fund or industry fund. As owner of an SMSF, you are the fund trustee. An SMSF must have less than five members.
An SMSF offers greater control over investments, and a wider choice of assets to choose from. But the sole purpose of an SMSF must be to provide funds for retirement.
According to the Australian Taxation Office, there are four key steps to setting up an SMSF.
- Establish the trust
- Elect to be a regulated fund, obtain a tax file number and an Australian business number
- Prepare an investment strategy
- Open a bank account
SMSFs are popular with investors who want greater control over their super investments. There are many more investment strategies and products available through an SMSF than a public offer fund.
No two SMSFs are ever the same in the way they invest.
It is critical that SMSF trustees ensure that the nature of the fund assets are complying according to Australian Taxation Office (ATO) rules. For example, it is a complying transaction for a SMSF to purchase a residential investment property though the local estate agent that is up for sale, but it is completely non-complying to purchase a residential property from your uncle. Nor can you rent out an investment property owned by the SMSF to your kids, or use fund cash to finance a property purchase.
And while more unusual investments, such as valuable artwork, vintage cars and crates of Hermitage aren’t on the banned list, these types of assets must meet the ATO’s sole purpose test. This states that members of the fund cannot enjoy a direct or indirect benefit from the investment. So hanging that Van Gogh on your wall isn’t going to pass muster.
It is also important to remember that trustees have defined legal responsibilities. These include:
- Lodging an annual income tax return and superannuation fund annual return
- Lodging member contribution statements
- Reporting payments of member benefits for reasonable benefit limit (RBL) purposes
- Appointing an approved auditor to complete the annual audit
- Maintaining records for up to ten years, and
- Complying with investment restrictions.
SMSFs can be time consuming; selecting, managing and maintaining an investment portfolio takes time. While some people may have the confidence and experience to invest directly, others pay for expert advice from financial planners, accountants and stock brokers.
According to IFSA, almost 90 per cent of SMSFs hold shares, with an average share portfolio of around $180,000. Sixty per cent of SMSFs hold property of some kind (residential, commercial or listed property trust), and 58 per cent have managed fund investments.
But ultimately, being your own super boss can be as complex or as simply as you like. It depends on how you, as trustee, want to run the fund, and how you wish to invest. Obviously, a buy and hold approach requires very little effort on a day-to-day basis; a more active portfolio may take a couple of hours a day. For some trustees, running a SMSF is a retirement job.
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