Key Considerations
Make sure you have enough assets, time and skills
Consider the amount of time, money and skill you’ll need to devote to managing your own super fund and whether it’s worth your while.
Operating an SMSF means you’re responsible for the fund. You need to make sure you have enough assets, time and appropriate skills to:
As a trustee of an SMSF, your primary responsibility is to ensure you have invested your fund’s money appropriately, so ask yourself the following questions:
If you are not confident you can get a better result, you may be better off leaving it to super professionals.
You need to ensure you have enough super savings to make your fund viable. The costs of establishing and running a fund can vary significantly but as a general guide, to be competitive with an APRA-regulated fund, you will need up to around $200,000. You should get advice about your circumstances, including the proposed number of members and how you propose to run the fund.
All SMSFs are subject to an annual supervisory levy designed to fund the regulatory costs of making sure funds comply with their super obligations. An annual levy of $150 is currently payable as part of the fund’s income tax liability.
If you set up or join an SMSF, you need to make sure you have adequate life insurance in case you die or you’re unable to work because of an illness or accident. Most APRA regulated super funds offer life insurance benefits up to a certain level if you die or you are unable to work because of an illness or accident at a low cost because they can buy group policies. You may need to consider additional costs for insurance when comparing the benefits of an SMSF with your existing fund.
You should also consider the amount of time you will need to devote to managing your own super.
Understand the risks and laws
All financial decisions carry risk, so it’s important to think carefully about how you choose your investment options to balance the level of risk against the level of financial return. You also need to be sure your super investments are legal.
It’s important to think carefully about how you choose your investment options. When thinking about how to manage the risks associated with your investment options, we recommend you also consider:
Spreading the risk
Avoid risking all your retirement savings in one or a few investments. By spreading your investments (diversifying) you can help control the total risk of your investment portfolio. If one or more of your investments perform poorly or fail, the other investments may be performing better to help cover the loss.
Effectively spreading your risk means investing not just in different companies or different sectors of the market, but in different sectors of the economy. Don’t just spread your money between different companies within the same group or only between different companies of the same type such as resources companies or banks.
Following tax and super laws
Super funds, including SMSFs, receive significant tax concessions as an incentive for members to save for their retirement. However, you need to follow the tax and super laws to receive these concessions.
The assets and money in your fund are solely for your retirement benefits, and are not to benefit you or anyone else outside your fund. This means that the personal use of funds for holiday homes, art to decorate your house and your golf club membership almost certainly won’t comply.
Schemes that try to get your super money out of existing funds early are usually illegal and fraudulent. Because of this, if you are caught in one of these schemes you will pay heavy tax and legal penalties. You also won’t be eligible for any compensation under super law if your super fund suffers from fraudulent conduct or theft.
Make sure your trust deed and investment strategy are tailored to suit the members
Regularly review whether the trust deed and investment strategy still meet the needs of your fund and update them when required.
Trust deeds
A trust deed is a legal document that sets out the rules for establishing and operating your fund. Together with the super laws, they form the fund’s governing rules. The trust deed needs to be:
Investment strategies
An investment strategy sets out the fund’s investment objectives and your plan to achieve them. It provides you and the other trustees with a framework for making investment decisions to increase member benefits for their retirement. Your investment strategy needs to take into account the personal circumstances of all the fund members including:
One strategy may not suit every member, especially where the fund consists of people at different stages of life. In these situations you need to select and manage investments well enough so they grow in value and meet the investment objectives of all members.
You need to make asset allocation decisions by choosing from a range of investment assets including:
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cash
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bonds
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property
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shares.
Defensive investments
Cash and bonds are defensive investments, with practically no risk of losing money, and the returns may seem reasonably high. However, you will lose some of the return in taxes and some to the effect of inflation. These safer (defensive) investments don’t provide long-term capital growth.
Capital growth investments
Property and shares are capital growth investments and tend to be more tax effective. This means the value of your investment should grow faster than inflation, creating real wealth. However, capital growth is not guaranteed and there can be a lot of ups and downs over the investment time period. Each year, the amount and frequency of your gains or losses will be uncertain and could differ, perhaps significantly, from reasonable long-term estimates. Specific assets may lose value and never regain it.
Outlook can provide you with professional advice and assistance to ensure your fund is set up and operates according to the law.
Make sure you can meet your record keeping and reporting obligations
One of your responsibilities as a trustee of an SMSF is to keep proper and accurate tax and super records to manage your fund efficiently.
It’s a good idea to take minutes of all investment decisions, including:
If, as one of the fund’s trustees, you invest the SMSF’s money in an investment that fails, the other trustee(s) could take action against you for failing to be diligent in your duties. However, if your investment decision was recorded in meeting minutes that were signed by the other trustees, you will have a record to show the other trustees agreed with your actions.
You need to make certain records available to your fund’s approved auditor when they audit your fund each year. You may also need to provide accurate records to the Tax Office if they ask to see them.
You need to report changes in certain aspects of your fund to the Tax Office when they happen and you also have annual reporting obligations, so make sure you’re familiar with these requirements so you can comply with them.
Make sure you understand the auditing obligations
You have a legal obligation to have your SMSF independently audited annually.
You need to appoint an approved auditor, who will:
Approved auditors play an important role in maintaining the health of SMSFs.