A self-managed super fund (“SMSF”) can sometimes be the best way to manage your retirement savings. However, despite the countless benefits that you can receive when you create an SMSF, you must also be aware of a number of considerations prior to its creation. Too many people fail to deal with issues because they are not made aware of the ten main considerations prior to setting up a SMSF. The main considerations to take into account is as follows:
1. You must have an active interest in your super
The first thing to know is that you must have an active interest in your super. If you are wanting a greater level of control over your retirement savings and are confident to make the right investments decisions then an SMSF might be right for you. As the trustee of the SMSF, you will be the person in control of its operation, so you will need to invest your time wisely in order to properly manage your SMSF.
2. You must know your administrative and legal obligations for your SMSF
As you will be the trustee of the SMSF, you must know that you will be responsible for the administration, compliance and investment strategy of your SMSF as there are strict rules that you must comply with. An audit professional can guide you as these strict rules have dire consequences should you fail to meet your obligations under superannuation and taxation laws. Some of the consequences include but are not limited to severe financial penalties such as ATO fines to disqualification as the trustee. It is important that you seek specialist advice and support prior to setting up a SMSF. Whilst you should never set up an SMSF without specialist advice, as the trustee it will be you who is liable for the compliance and operation of your SMSF.
3. To operate your SMSF, you must have an appropriate minimum balance
In order for your SMSF to be worthwhile in the long run, you must also be aware that there are costs that are involved with setting up an SMSF. The main initial costs to be aware of are establishment costs, may include where applicable, a trusts deed and creation of a corporate trust. Further, there is ongoing costs associated with running your SMSF such as investment fees, the cost of an annual tax return and the annual audit of your SMSF.
4. Beware of the laws should your SMSF becomes subject to fraud or theft
Unfortunately, as an SMSF member, if your SMSF becomes subject to theft or fraud which results in financial loss, you cannot receive any statutory compensation via the Superannuation Compensation Scheme. This is because SMSFs are not subject to regulations from the Australian Prudential Regulation Authority and thus do not receive the same protections. However, you do have certain rights and options available if your fund suffers a financial loss due to fraudulent conduct or theft. Legal options are available under corporations law if you received advice or services from an Australian financial services licensee who was involved in the fraudulent conduct or theft. You should seek legal advice about taking action against a person who engaged in fraudulent conduct.
5. If you are planning to live overseas you must seek appropriate advice
Whilst travelling overseas is a definite must for some people, if you are intending on residing overseas for one or more years, it is in your best interests to seek advice from an SMSF specialist. This is because the Australian Taxation Office has strict rules and regulations in relation to extended leave outside Australia. In order to be compliant with these strict rules and regulations, you must be an Australian resident to establish and manage an SMSF. There is the potential to incur heavy penalties should you fail to comply with these requirements.
6. SMSF support specialists can help you establish and run your SMSF
Prior to establishing your SMSF, you should do some research into the SMSF support specialists that can assist you. You may require SMSF specialist support such as an financial planner for financial advice, accountant or actuary to help you establish and manage your SMSF. Even if you plan to do most of the work, you will still need SMSF support specialists such an independent auditor.
7. Holding insurance cover with your existing super fund is highly recommended
It may seem obvious to maintain any existing insurance cover on your current superannuation fund prior to switching to an SMSF but you will be surprised at the amount of people caught out by failing to do this. There are extra costs involved with this but in the long run it could prove more economical for you. You might also wish to consider the holding total and permanent disability insurance as well as life insurance through your superannuation fund. Also, do not forget that the policy needs to be the owner of your SMSF.
8. There are numerous complaints and dispute resolution mechanisms available
If you have any disputes or complaints whilst managing your SMSF, you can report these complaints to the Financial Ombudsman Service and the Credit and Investment Ombudsman Service Limited for independent dispute resolution services. Unlike industry Superfunds though, you must be aware that SMSF members are not able to have access to the Superannuation Complaints Tribunal.
9. It is your decision on how you structure your SMSF
If you decide to establish an SMSF, you will need to choose either setting up a corporate trustee or using an individual trustee. There are benefits and limitations to both structure and this is why you should seek professional advice prior to deciding which structure is better for you.
10. Exit stage left – you are responsible for closing your SMSF
If you need or want to wind up your SMSF you should be aware that you are responsible for devising an exit strategy in order to do so. You should seek professional advice should you wish to close your fund.
SMSF Audits is about more than just cost effective audits. We provide complying, timely audits and offer support to solve potential problems. Let us be your competitive advantage.