About Self Managed Superannuation Funds
The following is general information about self managed super funds - it does not constitute advice, and it is not intended that you rely purely on this information when making a decision about your super. We would be more than happy to discuss your individual circumstances.
What is a self managed fund?
A self managed superannuation fund, otherwise known as a DIY or is a special type of Trust. It operates under a trust deed and is operated for the benefit of up to 4 members. All members are trustees or directors of a corporate trustee except in the case of a single member fund where there may be a second trustee who is not a member. These funds are generally managed by the ATO.
A self managed fund must have a documented investment objective and strategy. Generally, compared to institutional superannuation funds, it is only economical to establish a self-managed fund with more than $150,000 in fund assets though this may be lower in special circumstances. This is because the minimum cost of administering a fund, including audit and ATO Fees is around $1,500 per annum. Which equates to 1% of the total assets of the fund if $150,000 is invested.
Who can establish a self managed fund?
Virtually any adult Australian including employees, self-employed individuals and retirees.
How is a self managed fund structured?
Generally, you and your family are members as well as being trustees of the fund. The maximum number of fund members is four. You may employ administrators, accountants and investment advisers to help you manage the fund. The fund can invest in a wide range of assets including both direct and managed investments.
Who can contribute to a self managed fund?
Generally anyone. You can have your superannuation guarantee payments from your employer paid directly into your fund. You could depending on your employment situation make salary sacrifice contributions into your fund. You can also make undeducted contributions (contributions for which you do not take a tax deduction) to your fund. There are no limits to the levels of undeducted contributions which can be made and any such contributions can then grow in the tax advantaged superannuation environment. The fund is also able to accept rollovers from other funds. It can also accept Government co contributions.
What type of benefits can a self managed fund provide?
Benefits are payable on retirement, disablement or death of the member in the form of lump sums, allocated pensions, non-complying pensions (flexi pensions) or complying pensions. Benefits may be payable in cash or in specie.
Advantage & Disadvantages of Self Managed Superannuation Funds
You have complete control over the investments of the fund. Subject to an appropriate investment objective and strategy you are able to invest in a wide range of assets and implement a wide range of strategies. The choice is yours. The members, or a company controlled by the members, of the Fund act as the Fund Trustees and so you are ultimately responsible for the fund’s activities usually with the assistance of a financial planner and an accountant or specialist administration and compliance bureau.
The family super fund is the only vehicle that allows multi generations to aggregate their savings and investments to provide a desired income for retirement or in the event of a member’s death. The fund can provide a wide range of choices for your personal income stream. Although only four people can be members of the fund at any given time, it can be customized to meet those members’ needs. Typically there are 3 stages in the life cycle of membership of a fund:
1. Accumulation – contributing to the fund
2. Pension/Income stream – phase in which you draw down from the fund
3. Family succession – passing your assets on to the next generation/beneficiaries
The fund continues unless you wish to wind it up. The fund can provide benefits to you, your spouse and even your children and grandchildren. The fund can continue indefinitely.
The cost of managing a self managed fund is less than the charge structure of comparable institutional funds if the fund is large enough, generally over $200,000. For example fund manager fees on $200,000 could be anywhere from $2,000 to $8,000 annually. Compliance Fees would be in the area of $1,300 to $2,000 depending on the number and complexity of investments.
Diverse Investment Choice
One of the benefits of a family super fund is the ability for members/trustees to control their investments. The law provides broad investment powers to the trustee. Each member may have their own investment strategy and can invest in numerous assets including shares, warrants, bonds, property, managed funds, private equity, direct mortgages and fixed interest.
As you have control and flexibility you are able to take positions in new floats and potentially enhance the fund’s performance as a consequence.
Self-funded retirees are high on the Government’s list of priorities and therefore offer a number of generous concessions to encourage Australians to save for their retirement. Tax deductions for contributions into a superannuation fund are available. Tax of only 15% is levied for income earned by member’s of the fund during the accumulation stage. A low 10% tax rate applies for realized capital gains. There is no tax on income or capital gains in the fund during the pension income stream phase. Imputation credits can offset tax in the accumulation phase or refunded to the fund in pension phase. Structured correctly, all or most of the pension income stream will be tax exempt with a 15% tax rebate on any taxable pension income. This benefit is also available for a pension paid to a dependant beneficiary upon the death of a member.
Within a self managed fund you may change investment managers without having to rollover your fund. This allows you to retain your fund components which can maximize your long term taxation position.
The Fund can accept personal and multiple employer contributions. On retirement a member’s account may pay a lump sum or continue administration as an allocated and/or complying pension paying a tax effective income stream without impacting on other members in the accumulation phase.
Contributions/Withdrawals in specie
You are able to contribute listed shares, units held in managed funds, fixed term deposits and business real property directly to the fund instead of cash if you wish. Benefits may also be paid in specie with no limitation as to type of asset.
The fund has an indefinite life and can be used to provide benefits from generation to generation. Looking after your family after your death is generally a major concern. With a family super fund you have the choice of allocating an income stream or a lump sum depending on what you deem appropriate for you family members. Topping up your fund with life insurance should enable you to fulfill your desired outcome for your family in the event of your death. Binding death benefit nominations are often used for this purpose.
The Fund is totally portable; it is not necessary for each member to reside at the same address or even in the same State. It is necessary for a majority of the members to live in Australia. If this condition cannot be satisfied the fund will need to be wound up or converted to a Small APRA fund which is similar in many respects to a self managed superannuation fund but has an approved trustee in place.
All decisions and responsibilities associated with managing the fund rest with you as trustee. In addition, all superannuation funds have to comply with rules and deadlines. As trustee you are responsible for making sure the fund meets all requirements on time – so you need to keep up-to-date. An experienced fund compliance and administration service, such as ours, is a must for most fund trustees.
Compliance & Administration
Because of the rapidly increasing size of this sector of the retirement savings market and the relative inexperience of the Trustees who control each fund the regulators are increasingly concerned about the level of compliance and administration inherent in funds of this type. Compliance in a family super fund consists of three important elements
1. The Trust Deed;
2. Transaction Documentation;
3. Administration and Audit
Severe penalties exist for willful non-compliance including up to a 47% penalty on the assets of the fund, a $220,000 fine and up to 5 years jail. Compliance is crucial when it comes to family super funds yet is often a misunderstood concept. For most advisers compliance is looked at in terms of preparing accounts, member statements and lodging tax returns. Total Super understands that administration and compliance is more than just administration. It is meeting ALL of the compliance requirements laid down for SMSFs in the superannuation laws.
Limited ability to diversify investments
Although you are generally able to invest in a greater range of assets, you may not have sufficient money in the fund to diversify across them all. You may overcome this by investing in managed or pooled investments with the assistance of a qualified investment adviser.
Unable to gear
Your fund is unable to borrow.
Cannot assist members or related parties
The fund must be used for the benefit of members or their beneficiaries on retirement, disablement or death. It cannot be used to provide benefits outside of these parameters such as loans to members or holiday accommodation in a fund property for example.