Setting up an SMSF
Some of the things to consider when setting up an SMSF
Why should you setup an SMSF?
This is the burning question or easily one of the most contentious questions in the Australian financial services market.
SMSF ‘s offer four (4) key benefits
1.Control and Ownership
An SMSF and its assets are wholly owned and controlled by the members and trustees of the SMSF. This is unlike super held in a retail or industry fund where the super funds trustee board control and manage investments and technically and legally own the assets, with super members entitled to the benefits. It is also important to recognise that professional fund managers select investments and manage them in retail and industry funds. In a self managed super fund, members and trustees need to select their investments carefully and with the aid of an adviser if necessary, to avoid mismanaging their super and adding greater non compliance risk to their fund.
- All fees are tax deductible. accounting and audit fees, insurance fees, all fees for the education and management of assets held by trustees and members of a SMSF
- SMSF members receive gross super contributions, not net super contributions, like in industry and retail funds, after the 15% tax is paid to the ATO. In an SMSF imputation credits are paid to the owner of direct shares
You can choose from a variety of investments
- Listed investments ( Shares, ETF’s, Managed funds, Warrants, Bonds)
- Direct property ( residential, Commercial, foreign)
- Collectables ( coins, art, wine, cars)
- Crypto currency
- Metals – Gold, Silver and other metals
- Derivatives, unlisted trusts
- Cash, fixed interest products
Investment choice is one of clear advantage of SMSF’s, but this does come with more time spent on research and management of such investments along with added risks for the unaware.
Benefits can be transferred to your children ( over 18) easily by adding them as members to the fund
A Binding nomination is flexible. It can be non-lapsing or changed at any time
Binding nominations can be advantageous, as a benefit is paid to your intended:
- An individual’s ( partner, or adult child)
- It avoids a testamentary trusts set up in the Will, which might be subject to estate debts, challenges or insolvency
There are no trustee boards overseeing death benefit payments in a SMSF; unlike in retail or industry funds; and payments can be taken as a lump sum or a pension depending on the super funds deeds limits.
Advice, must be sort on super lump sum payments as adult children will typically pay tax on any portion of the super money contributed to super, which contains taxable super components.
SMSF and Traveling overseas and IT Contractors
The key with going overseas or maintaining an SMSF whilst a member is overseas, is to seek advice first before departing overseas. There are temporary provisions for absence or where the trustees intend to work for 2 years and return to Australia. However, where the intent was to leave Australian and not return, the temporary 2 year absence provision is not applicable.
For fund members intending on leaving Australia for greater than a 2 year period, there is the option of appointing a LPR. A legal personal representative, can act for the overseas based members, but the LPR, becomes responsible for all the investment decisions of the fund, without any influence from the overseas based members. The problem with this arrangement, is where overseas based members want to contribute to the fund. Sound advice is paramount with these arrangements.
The ATO’s Tests for Compliance are the following
- Establishment Test – was the fund setup in Australia
- Central management and control Test – are decisions on the management of the SMSF made in Australia by at least 50% of members allowing the SMSF to be a ‘resident’ fund
- Active Member Test – 50% the funds investments must be in Australia and owned by Active of members ( based in Australia)
Reviewing your investment strategy and SMSF Deed
The super laws (SIS Act) under section 52(2) requires members and trustees of SMSF’s to continually review their investment strategy to ensure it is appropriate so it addresses
- Diversification needs – SMSF should investment in different asset classes to improve returns and mitigate risks
- Loans and Debts – SMSF trustees need to make provision for clearing debts or providing a buffer strategy where a reserve fund is used or a surplus of funds is left over for increasing interest costs etc.
- Expenses and Risks
Typically, members of SMSF’s need to hold sufficient funds to pay operating costs and provide for unforeseen costs to the fund. Risks of the fund need to be taken into consideration as well
From the 7th of August 2012 the following new obligations were introduced in section 4.09 of the SIS Act
- SMSF Members are to ‘regularly review’ their SMSF investment strategies
- SMSF members need to consider if fund members need to be insured
Insurance considerations should reflect the following:
- Age of members
- Level of debt in the fund
- Health of members
- Levels of insurance cover held outside super
Other considerations when updating the SMSF investment strategy include:
- Reviewing the SMSF Trust Deed (have laws changed that you current deed does not reflect)
- Adopt a derivatives policy (required if you trade derivatives)
- Collectables policy and adherence to the new regulations for collectables from the 1st of July 2016 (If you want to own, cars, coins, art, wine or other collectable assets)
When should an Investment strategy be updated?.. Typically this should be done when.
- A new pension is commenced
- When a new member enters, or exits the fund
- When the investment profile of members and the fund changes significantly or at the end of the financial year
Always Seek advice: Legal, financial and accounting advice on your SMSF arrangements. This information is general in nature.