Self Managed Super Funds (SMSF) For Beginners

self managed super fund (smsf)

A self managed super fund gives you more control over the investments in your retirement account. You will become the trustee of the super fund. This means that you can make the decisions of where your investments are in the fund.

However, you also take on the responsibility of making sure that you pay taxes on the fund, are following all of the rules associated with the fund, and that you are only purchasing investments that follow the guidelines for the super funds. If you have a lot of experience investing and managing your money this may be an appealing option.

If you have little to no experience you may be better off going with a super fund that is managed by a company.

Deciding to Open a Self-Managed Super Fund

If you decide to open a self managed super fund, you should seek professional advice before you open it. You need to carefully review the laws surrounding acceptable contributions, and carefully determine if it is the right course of action for you.

You will not be allowed to access the money any earlier than you would with a traditional super fund. The money can only be used for your retirement savings, and although you may be able to purchase investment property with it, you cannot purchase a second home that you plan to live in or collect art with the money in your super fund.

There are also rules about the types of contributions that you accept, and you are not allowed to have property be one of the forms of contributions.

If you understand that the money in the fund is really only for your retirement, then you may be able to manage your own super fund. This is not a way to get around the retirement laws. You also need to understand the market and consider both the different types of investments, as well as the general rules of investing.

You do not want to gamble away the money for your retirement. You can seek advice for tax accountants, and financial advisors to help you determine if this is the best option for you.

Do You Have Enough for Your Own Super Fund?

Before you open the fund, you need to make sure that you have the money available to make viable and competitive with the professionally managed super funds.

Each fund takes approximately $2,000 a year to maintain in fees. You will need to have this money available each year that you are running the fund. The Australian Taxation Office also recommends that you have at least $200,000 before you open the fund.

You also have additional obligations like providing life insurance and other insurance if you were to become disabled. You need to have insurance options available for the trust members, and it can be expensive to get the insurance on your own.

If you do not have enough capital available to open a super fund this year, you can wait until you have saved enough money in your current super funds to do it.

This will give you additional time to study the market and determine the best course of action when it comes to investing your funds. You will not receive any payouts from your funds until you reach retirement age, and so any money that you earn through your investments will go back into your fund.

Can You Handle the Risks?

Investing can be risky, and if you make a mistake, you can be crippling yourself in your retirement years. This is not a step to be taken lightly, and you do not want to play around with this money. If you are older, you will want to be much more conservative in the investments.

If you take additional people into your fund, such as friends and family members, you are also risking their future. You need to be sure to get the advice and that you can make wise investing decisions.

Setting Up the Super Fund

When you set up your fund, it is best to find an SMSF professional who can help you go through the entire process so that you follow all of the laws and have fund that complies to help you receive the tax benefits. You will also need to set up the structure of the fund.

You will need to determine if you want an individual or corporate fund.

  • Individual Fund: This fund has four or fewer members. Each member is a trustee on the fund. No one receives pay for the time that they work on the fund, and no one in the fund can work for another member, unless they are family members.
  • Corporate Fund: A corporate fund is set up to work as a company. It too must have four or fewer members, and each member of the fund is one of the directors of the company. No one can be paid for the time spent on working on the fund.
  • Single-Member Funds: You also can set up a single member funds, but these are more restrictive. You must have two trustees, and you have the option of doing a corporate or individual fund.

In order to qualify as a trustee, you must not have a criminal record, be involved in a bankruptcy, and you must be over the age of 18. You must also not be disqualified by a regulator. It is important to make sure everyone that serves as a trustee or participates in the funds meets these qualifications.

Your fund needs to meet residency requirements in order to qualify for the tax breaks for super funds. This means that the management of the funds needs to be done primarily in Australia.

At least part of the investments must be made in Australia. One member of your fund cannot hold fifty per cent or more of the assets in your fund. If you plan on traveling abroad for an extended period of time, you may need to set up additional safeguards to make sure that your fund will meet the eligibility requirements.

You will need to set up a trust for your fund. In the trust deed, you will need to identify the beneficiaries of the trust, assign the amount that each person is entitled and name the trustees. You need to have this down by a legal professional in order for it to qualify for the fund.  Each member of the trust will need to sign a declaration that they are taking part I the trust.

Then you will need to record each member’s tax identification number with the trust. This allows you to accept super fund contributions for them.

The last few steps include setting up a bank account for the fund. You will also need to register with the Australian Taxation Office, and provide a written investment strategy for the fund. If you are not sure how to write an investment strategy, you can speak to a financial advisor who can help you come up with a strategy that works well for your fund and its members.

Managing Your Funds

There are strict guidelines about how you invest your money. You cannot invest in funds that will benefit any member of your fund or trustee of your fund.

This means you cannot invest in a company that they own or manage. You cannot own property that any member of your fund lives in or vacations in. If you invest in collectibles, none of the fund members may store the collectibles on their personal property or use them. For example if you invest in wine, the fund members cannot have access to the wine that you invest in.

Additionally, you cannot lend money to or borrow money from members of the fund as the fund or for the fund.

Accepting Contributions

When you accept contributions for members, you can accept the employer-mandated contributions for the funds.

You can also accept non-mandated contributions as long as they meet the guidelines. This includes individual contributions. You must make sure that they do not exceed the caps for the individuals that make the contributions. The age of the individual can also affect the caps.

You can also accept rollovers as long as you are following all of the tax laws around each rollover.

Be a Good Record Keeper

Each year your fund will need to be audited by an approved auditor. You will need to submit a copy of the audit each year.

The auditor needs to be independent and cannot be a trustee of the fund or be able to benefit from the fund in any way. You will need to submit an annual report to the taxation office. You will also need to send out an earning report to each member of the trust each year.

You also need to keep minutes of each meeting, and be sure to include the reasoning behind specific investment decisions, as well as whether or not all trustees agreed with the decisions. You also need to keep a copy of all of the paperwork required to open the trust.

Paying Distributions

You must be able to pay out distributions when your trustees reach retirement age. They may qualify for early disbursement for certain qualifying conditions such as a terminal illness or becoming incapacitated.

You will need to file the proper paperwork, and pay the taxes along with the payouts. You must also be able to complete any rollover transactions that the individuals want to make. Each of the payments requires you to pay taxes, usually on behalf of the individual for the money that they receive.

It is important that you follow and understand the tax laws associated with the different methods of payment.

Closing the Fund

When you are ready to close a fund, you need to follow specific requirements. You will need to sell all of the assets of the fund, and distribute the proceeds according to the trust requirements. The funds can be rollover into other Super funds.

You will need to notify the taxation office that you have closed the fund, and submit a copy of the final audit of the fund.

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