A self-managed super fund can give you control of your finances. When compared with other superannuation options, an SMSF provides a couple of unique advantages you cannot find in other kinds of funds – but it is not suitable for everyone.
Instead of leaving others to invest your super, SMSF gives you a platform to make your own investment choices that will cover your retirement.
Therefore, you have more control, flexibility and choice with an SMSF; however, you will have to put in more effort, responsibility and time.
If you choose to take an SMSF, here are a couple of dos and don’ts that will prepare you to run your fund appropriately:
Do have a good reason for choosing to establish and run an SMSF
Expect to be involved in whatever is taking place after you establish an SMSF. You need to allocate adequate resources and time towards running the fund. In every investment, have a well-thought investment strategy you can implement. The benefits you are bound to get should be the impetus for choosing to have an SMSF as your retirement fund. Ensure that an SMSF is a suitable fund for you.
Do Review your investment strategy
Before you undertake any investment, you need to prepare a successful plan. The plan is a written investment strategy – a document defining the trustee(s) responsibility – whose sole purpose is generating retirement benefits that are beneficial for the fund member(s). An auditor or the ATO will first examine this document to see whether the trustees are taking their responsibilities seriously.
Do seek adequate professional assistance and advice
In case you are looking to set up an SMSF or have already set the fund, you need enough advice to make the right investment decisions and ensure that you comply with the current regulations. Professional advice will ensure that you run your fund in a compliant way – as some parts of the super laws might be complicated.
Do understand your role as a trustee
To effectively carry out your trustee role effectively, you should understand the various regulations and requirements that determine how you will run your SMSF. Even if you need to outsource some of the administrative work to multiple service providers, you just have to take up the responsibility of managing your fund. Ensure that you don’t lend some of the funds to your business or relative.
Do review your contributions strategy
Do you already have a strategy for making your contributions? Instead of making minimum contributions, such a strategy can enable you to explore ways to grow your super. Consider implementing salary sacrifice to boost your super – for instance; you can allocate 9% of your employment salary towards your super. In case you’re self-employed, you can take a part of your one-month earnings and make the necessary contributions.
Do consider gearing within your SMSF
As from September 2007, government authorities made SMSFs access gearing opportunities easily. So, if you want to either purchase a residential or commercial property, your SMSF is allowed to borrow within your fund. Therefore, it is not a must for your super fund to have sufficient cash to purchase a particular property outrightly.
If you have an escalating rent burden – and you know that rent builds a fund’s equity – for the small business you are running, you might consider purchasing a business, residential or commercial property, using a gearing strategy.
Do consider segregation strategies
Running segregated accounts in your super can have considerable advantages if you’re currently running one or several pensions in your SMSF. This usually occurs when a member has a small accumulation account, and the other member is all accumulation.
High income-producing assets in the pension fund produce significant benefits, but assets held for the purposes of generating a capital growth will be held in accumulation interests for a long-term.
While you will pay tax on accumulation funds, a pension is usually tax-free. Therefore, you will get huge tax advantages from your segregated accounts if the growth assets don’t incur tax (until when sold) and the income-based assets are tax-free.
Talk to a knowledgeable accountant or financial adviser if you intend to have this option within your super fund since it complex to make decisions regarding segregated assets.
Do renew your Trust Deed
You have a duty to make sure your trust deed is up to date. Renewing your trust deed ensures that it is compliant with the present legislation.
Superannuation Industry (Supervision) Act (SIS Act) has undergone through numerous changes. For instance, the deed formed after SIS Act 2007 changes now permit gearing within super fund under specific circumstances.
The payment of benefits, binding death benefit nomination and payment of a pension or reversionary pensions are not provided in other deeds. To properly implement the things you desire, you will have to engage expert review your deeds.
Don’t be misinformed
Getting the wrong information can make you make the wrong decisions that lead you astray. So do your own research and gather relevant information that is out there before deciding whether an SMSF is right for you. Know that you will effectively achieve your set retirement goals when you have adequate information and time at hand.
Don’t give financial aid to SMSF members or even your relatives
Regardless of whether you want to lend a loan for commercial purpose, trustees are prohibited from providing financial assistance or lending money to either a member or a member’s relative. Meaning, if you decide to lend some amount of money to your daughter or son to acquire a particular property at the commercial rate – appearing as a sound investment decision – you will be breaching the SIS Act and regulations.
Don’t acquire residential property from a related party
Super funds act of acquisition of assets from a party related to the fund is usually prohibited. However, this rule might be exempted under these circumstances:
- Where the asset is listed security, e.g. shares, units or bonds.
- The asset acquisition does not form 5% of the funds that related parties have invested in the superannuation fund.
- In case the assets are ‘business real properties’– buildings and land and that the business for business purposes.
Don’t put all your investments eggs in the one basket
A majority of SMSF around usually invest a significant portion of their fund in cash or Australian shares. However, if you want to minimize losses and improve returns wisely, you should consider other viable asset classes that exist out there. Even so, Australian shares are amongst the underperforming investment options in the last four financial years.
Go ahead and consider diversifying your funds into international shares and property or even some other assets that generate fixed assets. Due to the guarantee of certain returns, most financial advisors consider fixed interest to be an awesome asset class.
Don’t take too little or too much pension
A pension is usually available to cater to you during the retirement period. Some people have the habit of taking either excess or less amount of pension – especially the transition to retirement (TTR) pension.
If you are a TTR member, you will have to take 4-10% of the July 1 super balance to be the pension. However, the lower limit has been reduced from 4% to 3% in the current financial year.
Failing to meet the minimum pension is a serious SIS Act rules breach that can make ATO deem your fund non-compliant.