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Now you know you are legally allowed to and can afford to start a SMSF, is taking superfund matters into your own hands the right option for you? This is an important point to explore as a SMSF doesn't suit everybody. When trustees are not proficient and methodical in performing their duties, they put their retirement nest egg and therefore themselves at a big disadvantage. Usually because outside services then need to be engaged - at a cost - to get things back in order. It's better to start on the right foot and understand what's expected of you in the long run.

What are my motivations?
The first question to ask yourself is, what are my motivations for setting up a SMSF? Your reason(s) need to be valid and clear as these will help shape the framework of your SMSF. Below are the most common reasons why people make the switch:

  1. Control. This is the number one motivation quoted by SMSF trustees. With the larger funds, members don't have the same level of choice over the type of investments. This is fine for some people, but for others this is limiting. With a SMSF there is simply more choice when it comes to strategy and in what assets you invest in i.e. real estate, art and even vintage fashion.
  2. Better Performance. Professionally managed funds do not guarantee high performing super. Many Australians, especially those already established in investing, believe they have the means and know-how to do better.
  3. Tax Strategies & Benefits. There are certain tax benefits linked with SMSFs, so a carefully considered tax strategy can help reduce tax payments.
  4. Non-monetary contributions. This is one of the lesser-known benefits of a SMSF. Known as 'in specie' contributions, trustees have the option to transfer assets (i.e. shares, business real estate or managed funds) into the SMSF instead of only cash contributions.
  5. Estate planning. Under current tax laws, death benefits paid from your SMSF to your dependant's are tax-free.
  6. Save Money. For funds where trustees do the majority of administration and investing themselves, costs should be very low if they have kept the funds records accurately and in sufficient detail.

Am I prepared for the paperwork?
Most seasoned SMSF trustees will say the main challenge when it comes to running your own super fund isn't the investing part, but the administration - the filling out of all the paperwork to keep your SMSF compliant.

Typically, trustees do most of the administrative work themselves while only engaging with outside service providers for the preparation of audits and tax returns etc. Whereas in large funds (government, retail, corporate or industry funds), professional trustees and administration teams look after the administration and super benefits for you - a service for which they charge.

Apart from managing investments, other responsibilities of SMSF trustees include, but are not limited to:

  • Paying members' benefits.
  • Record keeping of membership details (and retention of all records for a minimum of 10 years).
  • Annual tax returns to the ATO (and retention of all tax information for a minimum of 10 years).
  • Payment of the annual $259 Superannuation Supervisory Levy to the ATO.

So if you are considering switching to a SMSF, reflect on your own habits and character. Are you organised? Are you usually on top of household paperwork i.e. bills, tax etc? Do you shy away from responsibility? Are you prepared to take on the additional tasks and responsibility that come with managing an SMSF?

How will I invest?
Despite common misconceptions, you actually don't need to be an expert in investing, or even in superannuation, to run a SMSF. Some SMSF trustees opt for a hands-on approach to their investments, investing directly in holdings such as shares and property for example. However, other trustees rely totally on an investment adviser.

Either way, trustees must have an investment strategy in place before any money is rolled over. Many financial planners criticise SMSFs due to trustees not managing investments properly. They usually quote higher-than-usual levels held by SMSFs in lower interest cash accounts such as CMTs and bank accounts as evidence. Yet holding superannuation in cash accounts can be advantageous. Large funds tend to buy/sell most shares, options etc at 'at-market' prices because they have so much 'guaranteed' incoming contributions daily. In contrast, a SMSF can hold savings in cash and patiently wait for market bargains and better yield. In fact, many SMSF experts suggests keeping 25% of SMSF holdings in cash

In the end the investments made are the trustee's choice, but the investment strategy must be reviewed at least annually and take account of the components outlined in Section 52 of the SIS Act.

If you have an established history in investing, whether it be in property or shares for example, then you will have a head start when it comes to applying this to your superannuation. However, if you have minimal interest in, or a poor record of, investing, you should consider engaging in outside advice (just keep in mind the added cost and ensure your investment adviser is legal and reputable).

Final Thoughts
Most SMSF trustees will have confidence and experience developed from prior success in business or investing. They may come from a spectrum of ages and backgrounds, but tend to share independent and self-driven characteristics. Therefore, those who are self-employed and/or have larger holdings to start them off are considered best-suited for SMSFs. But running a SMSF isn't just about having the confidence to do so, it's also about knowing your strengths and weaknesses. In other words, recognising when you need to step-up, and when to call in the experts. So if you have self-discipline, a genuine drive to build your savings, and aren't unsettled by responsibility - you have a strong foundation for running your own super fund.

First Published: 7 September 2018 - Copyright © Electronic Information Solutions Pty Ltd 1990 - . All Rights Reserved.

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