Essential Rules for Managing Your Self-Managed Super Fund

Self-Managed Super Funds (SMSFs) are private superannuation funds managed by the fund’s individual trustees or corporate trustee, offering you control and flexibility over your retirement investments.

However, trustees must effectively run their own super fund to maximise returns, achieve retirement goals, and secure long-term financial well-being.

This article provides a guide covering essential rules for managing your self-managed superannuation fund, from setting up and managing an SMSF to satisfying reporting and compliance requirements as well as maintaining effective administration and governance.

Establishing and Structuring an SMSF

Primarily, one has to think about evaluating the key considerations before establishing a self-managed super fund (SMSF) and understanding the necessary steps in setting it up.

Considerations Before Establishing an SMSF

There are three main things you have to consider before establishing an SMSF. These are assessing its suitability and potential benefits, evaluating your financial resources and investment knowledge, and determining the number of members and trustees.

1. Assessing the suitability and benefits of an SMSF

Before setting up your own super fund, it’s important to compare its benefits and suitability to other superannuation options. The cost-effectiveness of an SMSF should be evaluated, taking into account the costs of setting it up and running it, which typically include accounting fees, investment management fees, and legal fees among others.

You also have to know what your legal duties and administrative tasks are and be ready to invest the time and effort required to effectively carry out these duties.

[PLEASE CREATE AN IMAGE: Time and money spent to manage an SMSF]

2. Evaluating financial resources and investment knowledge

A thorough evaluation of available funds and investment knowledge is essential before starting an SMSF. The establishment and running costs must be covered, thus having a bigger superannuation balance is more cost-effective.

SMSF industry research yielded an estimate where SMSFs with balances under $200,000 are anticipated to have far lower net investment returns.

ASIC’s case studies note that there is no “one size fits all” approach to establishing SMSF suitability; and that there may be circumstances where an SMSF with a lower starting balance is consistent with the fund members’ best interests as opposed to a higher starting balance that does not meet their objectives, financial situation or needs.

Additionally, trustees must have a thorough understanding of investing to make wise decisions for handling the investments of the SMSF effectively.

3. Determining the number of members and trustees

Your SMSF can have 2 to 6 trustees. The number of trustees and members for an SMSF is a significant consideration. It impacts the organisation, management, and decision-making processes of the fund.

Prospective members/trustees must choose between a corporate trustee or an individual trustee structure, depending on the number of members. Compatibility among members should be assessed to ensure effective decision-making and fund cohesiveness.

Understanding the duties of each trustee, including investment decisions, compliance monitoring, and administrative tasks, is essential for successful SMSF management. Communication and shared commitment are key to achieving the fund’s goals.

Setting up the SMSF

Careful planning and attention to monetary and legal requirements are necessary while establishing an SMSF. Choosing a trust structure, creating an SMSF trust deed, registering with the Australian Taxation Office (ATO), and getting an Australian Business Number (ABN) and Tax File Number (TFN) are all necessary procedures for establishing an SMSF.

1. Choosing a trust structure and creating a trust deed

Selecting a suitable trust structure and preparing an extensive trust deed are the first and most important steps in setting up an SMSF.

An individual trustee structure or a corporate trustee structure are the options available. A corporate trustee structure comprises a distinct corporation serving as the trustee (with each member of the fund serving as a director of the corporate trustee), whereas an individual trustee structure involves each member of the SMSF assuming the function of a trustee. The decision should be driven by the members’ individual needs and preferences.

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The legal document known as the trust deed defines the rules and regulations governing the SMSF. It describes important details such as the fund’s goals, investment tactics, trustee authority, and member rights.

To ensure that the trust deed appropriately reflects the members’ goals and conforms with regulatory requirements, it is important to get professional guidance from a legal expert or an SMSF specialist due to the legal implications involved.

2. Registering the SMSF with the Australian Taxation Office (ATO)

You must register your SMSF with the ATO when it has been established and all trustees have signed a trustee declaration. Registering with the ATO is an important step in ensuring compliance and reaping the benefits of the Australian superannuation system.

The ATO monitors SMSF tax obligations and compels them to follow relevant tax legislation and reporting requirements. By registering the SMSF, it becomes a registered superannuation fund, subject to the taxation laws that regulate contributions, investment earnings, and withdrawals.

Furthermore, registering with the ATO allows the fund to take advantage of different tax breaks offered to superannuation funds. Contributions can be tax-deductible, investment returns are taxed at 15% during accumulation, and withdrawals are typically tax-free in retirement.

The ATO also offers further security to the fund’s members. The ATO creates superannuation laws and regulations to protect SMSF members’ interests, such as requiring trustees to be prudent in managing the fund’s investments.

2. Obtaining an Australian Business Number (ABN) and Tax File Number (TFN)

The first step in registering with the ATO is getting an Australian Business Number (ABN), which acts as the self-managed super funds’ special identification. The ABN is critical in several administrative and compliance elements of the SMSF.

The ABN application can be done online through the Australian Business Register (ABR) website. The required details, such as the trust deed information, trustee particulars, and member information, need to be given.

Simultaneously, the SMSF must apply for a Tax File Number (TFN). To speed up the process, the TFN application is often submitted concurrently with the ABN application. The TFN is essential for tax reporting and compliance requirements.

The ATO will process the ABN and TFN applications once all required information and documentation have been supplied. The approval duration may vary, and the ATO will notify the SMSF once the ABN and TFN have been issued.

[PLEASE CREATE AN IMAGE: What to do when completing the ABN application]

Investment Strategy and Asset Allocation

As trustees take control of their retirement savings, it becomes crucial to develop a self-managed super fund (SMSF) investment strategy that aligns with their goals and risk tolerance. Additionally, trustees must navigate the regulatory landscape to ensure compliance with SMSF investment restrictions.

Developing an Investment Strategy

Developing a well-defined investment strategy is a critical step in efficiently managing the assets of an SMSF. Trustees can maximise returns while minimising risk by carefully assessing investments against their objectives, risk tolerance, and diversification, as well as undertaking regular portfolio reviews.

1. Defining investment objectives and risk tolerance

The first step in developing an SMSF investment strategy is to define specific investment goals. Trustees must define their goals, whether they be capital growth, income creation, or a combination of both. These goals serve as the foundation for making sound investing decisions.

Equally crucial is determining one’s risk tolerance. Trustees need to evaluate their financial circumstances, time horizon, and willingness to accept fluctuations in investment values and returns. This evaluation assists in determining the level of risk that the SMSF can easily bear, ensuring that the investment plan fits with the trustees’ (and in turn the members’) risk appetite.

2. Diversification and asset allocation considerations

Diversification is a fundamental investment management principle. To reduce risk, it is necessary to distribute assets among asset classes, sectors, and geographical locations. A well-diversified portfolio is essential for an effective SMSF investment strategy.

A major part of diversification is determining an appropriate asset allocation. When allocating assets, trustees must examine the SMSF’s investment objectives and risk tolerance. This may entail allocating funds to cash, fixed income, equities, real estate, and alternative assets. To accomplish the intended risk-return tradeoff, the correct balance must be struck.

3. Regularly reviewing and updating the investment strategy

An SMSF investment strategy shouldn’t be a fixed document. It must be reviewed and updated regularly in order to remain current and effective. Trustees should set a review timetable based on considerations such as financial success, legislative changes, and significant life events impacting the trustees.

Using the services of a professional financial adviser can be quite beneficial during the continuous evaluation process. These professionals can provide expertise and advice customised to the SMSF’s specific needs and aims.

Investment Restrictions and Compliance

Trustees must not only develop a sound investment strategy but also navigate the regulatory landscape to ensure compliance. Self-managed super funds are subject to specific investment restrictions and guidelines set by the ATO, particularly the sole-purpose test, prohibited investments and related-party transactions, and meeting the ATO’s investment guidelines.

1. Understanding the sole-purpose test

The sole-purpose test is an essential requirement for self-managed super funds since it ensures that the SMSF is run for the sole purpose of providing retirement benefits for the members. This means that SMSF investments must be primarily focused on creating retirement income and building wealth for members. Any investment decisions or activities that depart from this objective risk violating the sole-purpose test and incurring penalties.

2. Prohibited investments and related-party transactions

Specific investments are prohibited by the ATO to protect SMSF members’ retirement funds. Prohibited investments include:

obtaining assets from related parties for less than market value
investing in assets that provide personal benefits to members, and
investing in in-house assets more than the permissible limitations.

Trustees of self-managed super funds (SMSFs) are normally banned by law from borrowing the fund’s money, with a few exceptions. A limited recourse borrowing arrangement (LRBA) is one of these exclusions.

An LRBA is a loan obtained by an SMSF trustee from a third-party lender. The trustee then invests those funds in a single asset (or a collection of identical assets with the same market value) to be held in a separate trust.

3. Meeting the ATO’s investment guidelines

Self-managed super funds must follow the ATO’s investment rules to remain compliant. While the ATO allows for a great deal of range in investment choices, trustees must ensure that their investment strategy and decisions adhere to these requirements.

Trustees should examine asset allocation, liquidity, and the SMSF’s investment horizon. It is critical to examine and document investment decisions regularly in order to demonstrate conformity with the ATO’s standards.

Contributions and Contributions Caps

To maximise your self-managed super fund (SMSF) benefits and establish a healthy retirement nest egg, you must first understand SMSF contributions and contribution restrictions. As trustees, you must be aware of the different types of contributions, their limits, and the penalties for exceeding these limits.

Types of Contributions

Understanding the differences and implications of concessional and non-concessional contributions, you can make informed decisions to optimise your retirement savings within the SMSF framework.

1. Concessional contributions (before-tax contributions)

Concessional contributions are made with pre-tax dollars and include employer contributions, salary sacrifice contributions, and personal contributions for which you receive a tax deduction. These contributions are taxed at a lower rate within the superannuation system.

2. Non-concessional contributions (after-tax contributions)

Non-concessional contributions are made from after-tax income and are not tax deductible. Personal savings, inheritance, or other non-taxable sources may be used to make these contributions.

Contribution Caps and Limits

The annual concessional and non-concessional contribution caps determine the maximum amounts that can be contributed to your SMSF within a fiscal year. Understanding these caps, along with the associated penalties for exceeding them, is essential to ensure compliance and optimise your retirement savings.

1. Annual concessional contribution cap

The annual concessional contribution cap limits the number of concessional contributions that can be made to an SMSF within a fiscal year. Beginning 1 July 2021, the cap is set at $27,500 per fiscal year. This is indexed by average weekly ordinary time earnings (AWOTE).

Keep in mind that your cap may be higher if you did not use your entire cap in previous years. This is known as the carry forward of unused concessional contributions.

2. Non-concessional contribution cap

The annual non-concessional contribution cap is currently set at $110,000 and is indexed to AWOTE (Average weekly ordinary time earnings).

If you are eligible for the bring-forward arrangement, you can adjust your non-concessional contribution cap. The bring-forward arrangement permits you to gain access to future year caps if you make contributions above the annual non-concessional contributions cap. This means you can contribute up to 3 times the annual cap amount during the bring-forward period. Eligibility criteria regarding age and your Total Super Balance apply.

3. Exceeding the contribution caps and associated penalties

Contributions that exceed the established caps may result in excess contributions, which may incur additional tax liabilities and penalties. Extra concessional payments are taxed at the individual’s marginal tax rate, while extra non-concessional contributions are also taxed (however the ATO provides options you can choose from).

To avoid mistakenly exceeding contribution caps, it is critical to regularly monitor contributions and seek professional guidance. Proper planning, keeping track of contributions throughout the financial year, and judicious use of the carry-forward and bring-forward rules can all help to manage contributions successfully.

Benefit Payments and Preservation

When determining the most suitable benefit payment option, it’s essential to consider factors such as your retirement goals, financial situation, age, and personal circumstances.

Conditions of Release

Self-Managed Superannuation Funds (SMSFs) are subject to specific conditions of release, which dictate when and how funds can be accessed. Attaining preservation age and retiring, reaching age 65, and satisfying other special circumstances are the three major criteria of release for SMSFs.

1. Attaining preservation age and retiring

Reaching preservation age and retiring from the workforce is one of the main requirements for the release of self-managed super funds. Depending on the person’s date of birth, the preservation age ranges from 55 to 60 years.

When a member of an SMSF reaches preservation age, they have three options for using their superannuation benefits: taking a tax-free lump payment, starting a pension, or doing both.

Retirement refers to the intention to end gainful employment permanently. It’s important to remember that, provided they fulfil the preservation age requirement, some people may opt to collect their superannuation benefits while continuing to work part-time or in another role.

2. Reaching age 65

The second criterion for SMSF release is reaching the age of 65. Individuals achieve full access to their superannuation benefits at this point, with no employment or retirement-related constraints. SMSF members can withdraw their savings as a lump payment or start a pension, based on their financial requirements and goals, regardless of their job position or intentions.

Individuals who reach age 65 have complete control over their retirement savings, regardless of their retirement status or employment circumstances. When an individual reaches the age of 65, all restrictions are lifted, allowing them to use their superannuation money as they see fit.

3. Meeting other special circumstances

SMSF members may obtain their superannuation benefits early under certain conditions other than attaining preservation age and reaching the age of 65. Terminal illness, significant financial difficulty, or compassionate grounds are examples of these. Each of these situations necessitates the fulfilment of certain eligibility conditions and documents.

Terminal Illness: If a self-managed super fund member has a terminal illness, they may access their superannuation benefits before reaching preservation age or retirement. This provision attempts to provide the required financial assistance during a difficult moment. The concept of terminal disease may differ depending on the legislation that governs self-managed super funds in each jurisdiction.
Severe Financial Difficulties: SMSF members who are experiencing severe financial difficulties may seek early access to their superannuation funds. Individuals must demonstrate that they have been receiving government income support for at least 26 weeks and are unable to fulfil their immediate living expenditures to qualify for severe financial hardship.
Compassionate Grounds: Individuals may access their superannuation benefits on compassionate grounds in extraordinary circumstances. These may include paying for medical bills, averting a mortgage foreclosure, or funding changes to accommodate a permanent disability. Typically, relevant government authorities grant approval for compassionate grounds release.

Determining the Most Suitable Benefit Payment Option

Lump sum withdrawals, account-based pensions, and transition to retirement income streams (TRIS) are three typical SMSF benefit payment alternatives. Each alternative has advantages and disadvantages, so individuals must carefully analyse their specific circumstances and financial goals before making a decision.

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1. Lump sum withdrawals

Lump sum withdrawals allow you to withdraw your entire superannuation balance at once, providing flexibility for paying off debts, investing, or enjoying retirement.

Before withdrawing a lump sum, you must first consider the tax implications of withdrawing a large sum in one fiscal year. Depending on age and amount withdrawn, a superannuation lump sum tax offset or additional taxes may apply.

Consider as well the need for responsible management and good financial planning when making a lump sum withdrawal.

2. Account-based pensions

Account-based pensions provide retirees with a steady income stream from their SMSF through regular payments and benefiting from tax-free investment earnings. Retirees can budget and invest their pension balance for future returns while preserving funds for the future.

However, account-based pensions also have drawbacks as poor investment performance might result in a decrease in account balance and result in lesser pension payments.

Furthermore, individuals must be aware of the government’s minimum requirements for annual pension payments, as failure to achieve these criteria may result in tax penalties.

3. Transition to retirement income streams

Transition to retirement income streams help people transition from work to retirement by accessing a portion of their superannuation while still working. TRIS offers flexibility, additional financial support, capital gains tax (CGT) relief, and potential tax benefits for individuals aged 60 and above.

However, it has some restrictions and considerations. Each fiscal year, the maximum pension payment is normally limited to 10% of the account balance. To begin a TRIS, individuals must be aware of their preservation age and meet the “condition of release” criterion.

Reporting and Compliance Obligations

The failure to comply with reporting and compliance requirements for SMSFs may result in fines, the loss of tax benefits, or the disqualification of trustees.

Annual Reporting Requirements

Trustees must meet annual reporting requirements to ensure compliance and the integrity of their SMSF.

1. Preparing financial statements and member benefit statements

Financial statements and member benefit statements give a comprehensive picture of the fund’s financial situation and the status of each member’s benefits. These typically include an operating statement, balance sheet, and statement of changes in equity. Trustees can get insights into the fund’s performance, investing strategy, and any compliance issues that may need to be addressed by properly preparing these statements.

2. Appointing an approved SMSF auditor

SMSFs are required to appoint an SMSF auditor registered with ASIC to ensure independent evaluation and verification of the fund’s financial statements. The auditor’s function is crucial in providing an impartial evaluation of the completeness and accuracy of the financial accounts as well as in spotting irregularities or potential risks. This unbiased examination improves the SMSF’s credibility and transparency.

3. Lodging the annual return with the ATO

The filing of the annual return allows the ATO to track compliance with tax and superannuation regulations by providing a thorough disclosure of the fund’s operations and financials. Information on member contributions, investments, income received, and benefits disbursed is included in the return. The annual return must be filed on time and accurately for the ATO to effectively regulate and oversee SMSFs.

SMSF Compliance Obligations

SMSF trustees must adhere to a range of compliance obligations to ensure their funds operate within the legal framework set out by the Australian government.

1. Operating within the Superannuation Industry (Supervision) Act (SISA)

The Superannuation Industry (Supervision) Act of 1993, often known as the SIS Act, was developed to protect the members of super funds and to ensure that funds are spent as intended. This entails abiding by restrictions and rules regarding investments, contributions, benefit payments, trustee responsibilities, and other provisions outlined in the legislation.

Trustees can guarantee that their SMSFs remain compliant and safeguard the retirement funds of their members by working within the SISA.

2. Keeping accurate records and maintaining an audit trail

SMSFs are obligated to keep accurate and detailed records of their operations and transactions. This includes maintaining records of financial statements, member contributions, investment documents, trustee meeting minutes, and other relevant records.

Having a well-maintained audit trail ensures that all financial transactions can be traced and substantiated, which is essential for demonstrating compliance and responding to any inquiries from SMSF auditors or regulators.

3. Complying with ATO reporting deadlines and obligations

SMSFs must meet reporting obligations and deadlines set by the ATO. This includes providing accurate and timely information in the annual return, reporting member contributions, and complying with other reporting requirements such as events-based reporting for pensions and reporting changes in trustees or members.

SMSFs must also adhere to the reporting and payment deadlines for taxes, such as the lodgment and payment of the SMSF annual return. Failing to meet these reporting deadlines and obligations can result in penalties and other consequences.

Administration and Governance

Self-managed super fund (SMSF) administration and governance necessitates close scrutiny to ensure compliance with legal obligations and decision-making is in the best financial interests of the fund’s members. Engaging professionals with specialised knowledge can make the administration of an SMSF less complex.

Roles and Responsibilities of SMSF Trustees

As the stewards of the fund, trustees have a set of roles and responsibilities that they must fulfil diligently.

1. Trustee obligations and fiduciary duties

Trustees of an SMSF have several obligations and fiduciary duties they must fulfil.

Trustees must act in the best interests of all members of the SMSF. This means considering the retirement goals and financial needs of each member. This is especially important since self-managed super funds do not receive the same government protections that are given to an APRA-regulated superannuation fund, which are generally eligible for compensation in the event of theft or fraud.

Trustees must ensure the SMSF is compliant with all relevant superannuation laws and regulations. This includes keeping up with changes in legislation and ensuring the SMSF operates within the prescribed limits.

Trustees must maintain accurate and up-to-date records of the SMSFs transactions, financial statements, and member contributions. They are also responsible for reporting the fund’s financial activities to regulatory authorities.

Trustees must develop an investment strategy for the SMSF that aligns with the fund’s objectives and risk tolerance. They must also regularly review the fund’s investment strategy to ensure it remains current.

Trustees have a duty to protect the assets of the SMSF and ensure they are held separately from personal assets. They should exercise due care, skill, and diligence in managing and investing the fund’s assets.

2. Decision-making processes and trustee meetings

Trustees must make decisions collectively and follow proper decision-making processes. This typically involves holding regular SMSF trustee meetings, resolving conflicts of interest, and documenting decisions and actions.

Trustees should convene regular meetings (in person or through electronic means) to discuss and decide on matters related to the SMSF.

Trustees must disclose and manage appropriately conflicts of interest. They should prioritise the best interests of the SMSF and its members over personal interests.

Trustees should maintain proper documentation of decisions made during SMSF trustee meetings, including minutes of the meeting. This helps demonstrate compliance with fiduciary duties and provides a record of the SMSFs decision-making process.

Engaging Professionals for Assistance

Consider engaging the service of professionals to assist with fund governance, such as an SMSF administrator or accountant, solicitor, and licensed financial adviser.

1. Accountants, tax agents, and auditors

An SMSF administrator or accountant can assist the SMSF with financial record-keeping, financial statement preparation, and tax reporting. They ensure that appropriate accounting standards are followed and offer tax guidance.

They are also experts in SMSF tax compliance and reporting. They assist trustees in preparing and lodging annual tax returns, calculating tax liabilities, and ensuring compliance with taxation laws.

SMSFs are required to have an annual audit performed by an independent auditor. Auditors evaluate the SMSF’s financial statements and compliance and offer an audit report to assure the fund’s regulatory compliance.

2. Financial advisers

To assist in designing and implementing the self-managed super fund’s investment strategy, trustees may seek the advice of professionals such as financial advisers. These experts advise on investment strategies, risk management, asset allocation, and portfolio diversification when building and maintaining the SMSF’s investment portfolio.

3. Solicitor for complex matters

Trustees may meet complex legal challenges or require legal assistance regarding their SMSF in specific situations. A legal professional, such as a solicitor, can assist with issues such as estate planning, trust deeds, family law concerns, and regulatory compliance. Legal professionals advise and aid in understanding these complex aspects of SMSF administration.

Staying Informed and Seeking Professional Advice

Staying informed and seeking professional advice are crucial aspects of managing a self-managed superannuation fund (SMSF). To stay updated:

regularly review updates from regulatory bodies such as the ATO, ASIC, and the Australian Prudential Regulation Authority (APRA)
subscribing to industry publications and resources dedicated to SMSFs
attending industry events, seminars, and webinars

In addition, regularly review the SMSF investment plan by:

creating review intervals
analysing performance
considering changes in circumstances
seeking professional guidance when dealing with complex issues

Summary

Managing an SMSF requires careful consideration and dedication, particularly from the fund’s trustees.

From establishing and structuring the fund to complying with regulatory requirements, and from investment decisions to ongoing administration, there are multiple facets that demand attention. Successful management involves conducting thorough research, seeking professional advice, and staying updated with changing legislation.

Balancing the benefits of increased control and potential wealth creation with the responsibilities and complexities involved is crucial. Ultimately, a well-managed SMSF can offer select individuals the opportunity to achieve their retirement goals and secure their financial future.

Get Superwise About Your Self-Managed Super Fund with Coastal Advice Group

Superannuation is vital to your financial future in retirement as an Australian. Whatever stage you are right now in your career, learning about how you can make the most out of your long-term retirement savings plan is always a good practice.

At Coastal Advice Group, we can provide the specialist financial planning, expert knowledge and guidance you need to help you make the right financial decisions for your self-managed super fund so you can look forward to your future with confidence.

Call us or book online to secure your first appointment with us today and get started!

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