Understanding Self-Managed Super Funds

Ever since compulsory superannuation was introduced back in 1992, savings and retirement funds have really stepped up their game. Today, in Australia, an average worker can look forward to some 20 years of retirement. Though, that’s a long time to live off a small pension. In fact, the Age Pension provides you only with the most basic of needs. What’s more, you can’t even get to invest your super into something more lucrative; instead, it just sits there rotting away. Yet, there’s a peculiar type of super that always you to do just that — a self-managed super fund!

What’s an SMSF?

A self-managed super fund — or SMSF for short — is a special type of superannuation fund that you get to manage all by yourself. In essence, it functions much like a normal superannuation fund — it provides lump-sum payments and pension upon retirement — but has the added benefit of control that the trustees have over it. Meaning, trustees are free to tailor their retirement savings as they see fit and invest them accordingly. According to a report conducted by the Australian Taxation Office (ATO) in March this year, there are some 600,000 SMSFs currently in Australia, with more than a million members overall. What’s more, for the past five years, there’s been a steady increase in both the number of funds and the number of members.

How Does It Work?

Due to legal requirements, each fund has at least two — up to four — trustees. These trustees then go on to manage the SMSF fund with its sole purpose being the provision of financial aid to retired members (or their beneficiaries upon death). It contains its own Tax File Number, Australian Business Number, as well as a bank account to make and receive contributions. Trustees are also free to make their own investment decisions which are all made in the name of the fund.

What Are the Responsibilities of SMSF Trustees?

Apart from making investment decisions, trustees are also responsible for maintaining proper records, filing tax returns, presenting financial statements, and organizing independent audits. Now, because of these strict obligations, a lot of trustees go on to employ self managed super fund specialists to assist them with their administrative duties such as auditing and accounting, and even providing them with some sound financial advice. Nevertheless, the trustees are still the ones fully in charge of the fund and all its investments. In addition, there are two types of trustee structures:

Individual trustee — a minimum of two trustees, each one is a member.

Corporate trustee — a board of directors of a company take control of the fund; each director must be a member of the said fund and the company in question must be registered with the Australian Securities and Investments Commission (ASIC).

How Are SMSFs Regulated?

In a nutshell, the ATO regulates SMSFs directly by ensuring that they are in compliance with their tax reporting and other obligations. If not, hefty penalties are applied including the loss of certain tax benefits, heavy fines, disqualification from the use of SMSFs, and even imprisonment (in most severe cases).

What’s more, the ASIC oversees the registration process of independent auditors to ensure the full compliance of SMSFs with the above-mentioned regulations; any and all breaches are reported back to the ATO.

What Are Some of the Benefits of Using SMSFs?

The most noteworthy benefits include:

  • More control over investments — trustees get to choose how to invest their funds. For instance, purchasing residential real estate and then leasing it to a third party.
  • Tax benefits — In Australia, benefits collected after the age of 60 are tax-free, as well as when the fund is in pension mode.
  • Greater flexibility — with SMSFs property and shares are directly transferred to a beneficiary. Also, future generations can get funds more tax-efficiently in the form of pensions rather than lump sums.
  • Better asset protection — SMSFs are not viewed as property according to the Bankruptcy Act — hence they are an effective way of protecting one’s assets against bankruptcy and creditor claims.

At the end of the day, SMSFs are an excellent way to put your retirement savings to good use. Even though today money doesn’t grow on trees, money does grow on money still.