The chief reasons for SMSFs’ popularity include control over assets, tax benefits associated with superannuation, flexibility in funding retirement, potential cost savings by eliminating trustee and portfolio fees, and estate planning opportunities.
Despite these advantages, SMSFs also carry certain responsibilities for trustees, which should be taken seriously. These include:
- Staying up-to-date with superannuation legislation to ensure the fund does not breach any legal requirements.
- Managing the day-to-day administration of the fund.
- Taking responsibility for the fund’s performance and its investment strategy.
- Ensuring all reporting and taxation requirements are met.
It is this last responsibility—ensuring that reporting requirements are met—that has led many SMSF trustees to involve accountants who use real-time cloud software over recent years.
Let’s get straight to the point
Self-Managed Super Funds (SMSFs) offer significant benefits, including control over assets, tax advantages, flexibility in retirement funding, potential cost savings, and estate planning opportunities.
However, they also require trustees to manage day-to-day administration, stay updated on legislation, ensure fund performance, and meet reporting requirements.
SMSFs are more cost-effective for those with larger balances and require investments to be made on a commercial basis. They cannot buy assets from related parties or provide financial assistance to members.
Running an SMSF demands time, skill, and careful management to avoid significant financial risks. Assistance from professionals is often needed for compliance and management tasks.
If considering an SMSF, weigh these responsibilities and costs against the potential benefits.
What Are The Costs Involved in an SMSF?
The 2021–22 SMSF statistical overview report found that SMSF members are, on average, older, earn more, and have larger superannuation balances than the average employee, with an average SMSF member balance exceeding $780,000.
This is understandable, as SMSFs with $200,000 or less typically incur higher expenses for ATO compliance than they would in a public industry or retail fund. Additionally, smaller SMSFs often do not perform as well as larger-sized SMSFs.
According to Canstar, the costs involved in setting up an SMSF from scratch range from $1,000 to $2,000, with annual fees being approximately the same.
Anyone considering starting an SMSF should calculate their current retail or industry fund fees and compare them against these figures.
Can I Invest In Anything I Choose?
All financial investments by an SMSF must be conducted commercially, known as “arm’s length.” This means that the terms of the investment must be the same as those you would offer to a complete stranger.
Fund assets’ purchase and sale prices should always be at their actual (and verified) market value, and the rate of return reflected in the income generated by fund assets should always represent a real-world commercial rate of return.
With very few exceptions, an SMSF cannot buy assets from a fund-related party. The acquisition of the following is among these limited circumstances:
- Listed securities
- Commercial real property
- Units in widely-held unit trusts
An SMSF can also not lend money or provide financial assistance to a member or their relative. This includes non-arms-length dealings with a related party, loans, guarantee provisions, and debt forgiveness.
Often, scams target SMSFs with the lure of purchasing property and then renting it back to a family member at a cheaper cost—our advice is to avoid these as quickly as possible!
What Time & Skill Is Required To Run An SMSF?
As a member of an SMSF, you will have direct responsibility for ensuring that your fund complies with all applicable legal requirements.
Failure to do so will result in your fund being labelled a “non-complying fund,” disqualifying it from the favourable tax treatment afforded to superannuation funds.
Administering your personal SMSF will require making sound investment decisions, including designing an investment strategy you regularly assess. You will also be responsible for making decisions regarding the allocation of your funds.
An SMSF has the potential to be an excellent vehicle for retirement and tax savings if managed by an experienced investor with a favourable risk profile. Conversely, poor management can wipe out an entire family’s savings.
Nearly all SMSFs will pay for further assistance with the following:
- Annual SMSF return preparation
- Asset appraisals for the SMSF
- Certificates from actuaries for SMSFs that pay income streams (pensions)
- Financial advice
- Legal costs, such as those incurred if the trust deed needs to be altered
- Assistance with managing funds
- Insurance for participants
While all of these can be great recurring revenue for an accountant or financial planner, Bookkept wants you to be aware of the risks involved—we wouldn’t be doing our job if we didn’t!
Conclusion
If you are looking to set up an SMSF or think it’s time to switch to a better accountant who takes care of your needs, please give us a call at (03) 8568 3606.
With over ten years of combined experience working with a diverse range of clients, Bookkept is well-equipped to assist with your personal and business tax and accounting needs.
Frequently Asked Questions
Can My Smsf Borrow Money To Invest?
Yes, under limited recourse borrowing arrangements (LRBAs), SMSFs can borrow to invest in assets, typically property. However, strict rules apply, and borrowing is generally more complex and costly than direct investment, so it’s important to seek financial advice.
What Are The Risks Of Managing An SMSF?
Risks include poor investment returns, potential penalties for non-compliance, high costs if the balance is low, and the time commitment required for ongoing management. Trustees are personally liable for fund decisions and compliance with superlaws.
Is An SMSF Suitable For Everyone?
No, SMSFs are best suited for those with a strong understanding of financial management, a significant super balance, and a willingness to actively manage their retirement savings. If unsure, seeking advice from a financial professional is essential.
How Do I Set Up An SMSF?
To set up an SMSF, you need to create a trust, obtain a trust deed, register with the ATO, and create an investment strategy. You may also need legal and financial advice to ensure compliance with Australian laws.
What Are The Tax Benefits Of An SMSF?
SMSFs enjoy the same tax rates as other super funds, with income generally taxed at 15%. Capital gains on assets held for over 12 months are taxed at 10%. During the pension phase, investment income may be tax-free.
