Self Managed Super Funds

Understanding self-managed superannuation

What are the advantages?

The benefits of running your own self-managed superannuation fund include:

Control/flexibility

As trustee, you choose what assets the fund invests in. Compared to your ordinary superannuation fund, a self-managed fund allows you to invest in a significantly broader range of options that might include direct shares and property, a variety of overseas assets and alternative assets such as appropriate levels of artwork or antiques. Importantly, however, all investments need to be made in accordance with the fund’s investment strategy (see further below).

You don’t need to exit or rollover out of a self-managed superannuation fund just because you have retired. These funds can continue into retirement by starting a pension with your savings.

A self-managed superannuation fund can also provide the flexibility that is often lacking in larger funds. For example, the flexibility to tailor investment strategies or to carry out estate planning strategies that can help to transfer wealth to the next generation.

Management of tax

As you build up superannuation savings before retirement, tax is applied to some contributions and fund earnings at the maximum rate of 15%.

By structuring a self-managed fund to invest in shares that pay franked dividends you can cut this 15% tax rate, reducing it substantially in some cases. During the pension phase there is generally a zero tax rate and imputation credits can actually be refunded by the ATO. Your financial planner can explain to you in more detail how tax can be effectively managed in a self-managed fund.

Cost savings

Cost savings will rarely be the main reason for running your own self-managed superannuation fund. However, compared to your ordinary public offer superannuation fund, the fixed cost aspect of self-managed superannuation funds can be attractive, especially for if you have accumulated larger account balances (see further below).

Small funds with less than 5 members that do not satisfy the definition of a self-managed superannuation fund must appoint an ‘approved trustee’. These are called small APRA funds and are regulated by the Australian Prudential Regulation Authority (APRA).

A lot of the flexibility afforded to self-managed superannuation funds is also available with small APRA funds. These funds present an option for people who like the investment flexibility and control, but do not wish to take on the role of trustee.

Who are self-managed superannuation funds appropriate for?
As already mentioned, self-managed funds may be appropriate if you wish to take greater control of your retirement savings.

If you can accept the role of trustee, the operation of a self-managed fund can provide investment flexibility, tax benefits and cost savings that simply are not possible elsewhere in the superannuation environment.

What about the disadvantages?

While self-managed superannuation funds might offer significant advantages, the onerous duties that must be performed as trustee may be a disincentive.

As trustee of the fund, you are ultimately responsible for ensuring the fund is properly invested and administered in accordance with the relevant superannuation law. It is well worth highlighting that a breach of superannuation law can result in harsh penalty tax which could see you losing almost half of your savings in tax. You could also incur fines and jail sentences for severe breaches.

While the role of trustee may sound both demanding and time-consuming, the truth is that it need not be, as long as you follow the rules and seek professional advice before carrying out any actions you are not sure about.

Professional self-managed superannuation fund administration companies exist to take care of the day-to-day administration and compliance requirements of the fund. This leaves you free to focus on the fund’s investments in conjunction with your financial planner.

The complexity of individual self-managed funds will vary depending on the underlying investments, membership of the fund and whether a pension is being paid.

Investment rules – what can you invest in?

Superannuation law does not prescribe the type of assets a superannuation fund can and can’t invest in. Rather, it sets an investment framework that trustees must adhere to for how to purchase and use investments.

In the first instance, superannuation law requires the trustee of the fund to put together a written investment strategy. All investments of the fund must be made and maintained in accordance with this strategy.

The investment strategy must take into consideration the risk and return of holding assets, diversification, liquidity and the ability of the fund to meet liabilities.

It is important that investments are made on an arm’s length basis and are made for the ‘sole purpose’ of providing members with retirement benefits. This is probably the most important point for trustees of self-managed funds to keep in mind.

There are several specific investment restrictions that include:

  • Generally, a fund may not acquire assets from a member or ‘related party’ unless it is listed shares, units in a widely held trust or business real property at market value
  • All transactions need to be conducted on an arm’s length commercial basis
  • A superannuation fund cannot borrow to invest, unless it meets the limited liability rules
  • A superannuation fund may not provide financial assistance to members.
  • The investment rules are complex in some areas and professional advice is recommended to ensure you do not make mistakes.

How expensive is it to run your own fund?

As mentioned, self-managed superannuation funds generally have some fixed costs each year, so obviously, the higher the account balance the cheaper it becomes in relative terms.

Generally, it will cost between $4000 and $7,000 to set up a self-managed fund using a corporate trustee. This cost includes the drafting of the trust deed that will become the fund’s most important document and registering the trustee with ASIC.

Annual administration and compliance costs will be from $1,500 and potentially up to around $5,000 depending on the fund’s complexity and whether an administrator is appointed to manage the day-to-day running of the fund.

It is generally suggested that you need at least $200,000 before a self-managed superannuation fund starts to become cost effective. Note this is for the whole fund, not each member. If four family members had $50,000 each, for example, the combined balance would be $200,000 and fund expenses can be absorbed evenly between the members.

Wouldn't it be great to be in control?

A note on ‘Small APRA Funds’

Small funds with less than 5 members that do not satisfy the definition of a self-managed superannuation fund must appoint an ‘approved trustee’. These are called small APRA funds and are regulated by the Australian Prudential Regulation Authority (APRA).

A lot of the flexibility afforded to self-managed superannuation funds is also available with small APRA funds. These funds present an option for people who like the investment flexibility and control, but do not wish to take on the role of trustee.

Who are self-managed superannuation funds appropriate for?
As already mentioned, self-managed funds may be appropriate if you wish to take greater control of your retirement savings.

If you can accept the role of trustee, the operation of a self-managed fund can provide investment flexibility, tax benefits and cost savings that simply are not possible elsewhere in the superannuation environment.

Style Switcher
Colours
Headers

NOTE: Vertical headers will not work on pages that have the naked header enabled