An alternative to the pension fund is the Self Manager super fund, which is managed by you yourself. It is also known as DIY superannuation. In these circumstances, it should not surprise anyone that control tops the list of reasons for flying solo.
A SMSF allows its members to invest their retirement savings in a manner that fits their needs and preferences. In addition to the poor performance of an existing public fund, accountants and financial planners can recommend an SMSF.
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Guidelines for SMSFs
SMSFs have the sole purpose of providing retirement benefits to their members (or their dependents in the event of their death before retirement).
SMSFs are set up through trusts (legal tax structures) that are administered by either individuals or corporations. It is the responsibility of the SMSF trustees to manage the fund’s assets and to ensure ongoing compliance with superannuation and taxation legislation. Among those responsibilities are annual audits, reporting and tax obligations to the ATO.
Who Can be a Member of an SMSF?
Trustees must also be members of an SMSF. The SMSF members must be directors of the company if the SMSF has a corporate trustee. Each director of the company must be registered with ASIC (Australian Securities and Investments Commission).
An SMSF will be able to have up to six trustees/members starting on 1 July 2021, up from four previously.
As a trustee (and thereby a member) of an SMSF, you must consent to your role and accept your responsibilities by signing a trustee declaration. The same is true for SMSF members.
What are SMSFs and How do They Work?
Trustees make investment decisions for SMSF funds. Documented investment strategies are a legal requirement for SMSFs. The trustee should use this investment strategy to guide their decision-making based on the sole purpose test.
The following factors should be considered when developing an SMSF investment strategy:
- A fund member’s age, current financial situation, and risk profile are among the factors considered
- Investing in a diversified fund reduces risk. Fixed interest products, direct shares, managed funds, listed properties, and real estate are the major investment options
SMSFs Offer Some Benefits, What Are They?
SMSFs have several benefits, including:
A Greater Degree of Tax Flexibility
It is possible to invest in superannuation tax-efficiently. The concessional tax rate of 15% in Australia applies to superannuation funds that comply with super legislation (up to certain limits).
Furthermore, after 60, benefits are not taxable. A SMSF with a pension plan is also not subject to tax.
Investments are More Under Control
Investment decisions are made by trustees of the SMF. Public funds can invest in a lot of the same products as private funds, as well as some that aren’t. Many public funds are restricted from investing in residential real estate, but SMSFs can invest directly in residential real estate.
An SMSF can be used by business owners to purchase their business premises or other commercial property, which can then be leased to a related party.
Potentially Lower Fees on Higher Balances
Rice Warner’s comprehensive report for the SMSF Association provided some much-needed clarity on the real cost of managing an SMSF after years of heated debate.
External service providers provide the service in the report Costs of Operating SMSFs 2020. The report gave a breakdown of ongoing costs for various balances and the amount of administration. Investments in direct properties were also considered.
Planning for the Future
SMSF funds have the advantage of providing greater flexibility in member death benefits than public funds, which is often overlooked.
SMSF members can, for instance, arrange:
- A dependant’s death benefit would be paid as a pension, rather than a lump sum, allowing the SMSF to continue operations
- Investing in future generations in a tax-effective manner
- Property or shares (other than cash) that can directly be transferred to a beneficiary.