If you've ever looked at your super fund statement and thought 'I could do better than that', or wondered exactly what your super fund is doing with the endless fees you pay, you're not alone.
Self-managed super funds (SMSFs) are a result of that optimism, and many small business owners chose this mode of super. One of the many rewarding aspects of running a business is being in control and making important decisions yourself. SMSFs have the same appeal. Instead of passively waiting for your super fund statement to see whether your retirement savings are on track, with an SMSF you're calling the shots.
Jodie Stewart and Joel Aurisch, cofounders of the successful About Life wholefoods stores in Sydney's Rozelle and Bondi Junction, have taken the SMSF route. They have an SMSF "because you have much greater control over your investments... and you can change your strategy at anytime."
Is an SMSF right for you?
If you're thinking about setting up a self-managed super fund, there are some key questions you need to ask yourself:
- Do you have the investment expertise? Creating a sound investment strategy is fundamental to your SMSF making the returns that will provide you and other members of your fund with a comfortable retirement. Before you start, ask yourself if you have the investment smarts to pull it off.
Think long term: as well as creating your initial strategy, you'll need to monitor your investments to ensure that they're meeting the investment goals of your fund.
- What about the responsibility? You must be a trustee of your own fund. Even if you get help from investing, tax and administrative specialists, you are legally responsible for the fund. Your responsibilities include making sure that your fund is properly structured, keeping thorough records and meeting the extensive reporting requirements. If you fail to meet any of your requirements, the penalties can be severe.
- Do you have the time? Creating and managing your investment strategy, and meeting all the compliance requirements, takes time. As a business owner, will you have the time?
- Is it worth it? For an SMSF to be worthwhile — in other words, for the time and cost of running the fund to be justified — you need to have at least $200,000 in your fund. Any less, and the costs of running it (estimated by the Australian Taxation Office [ATO] as upwards of $1700 a year, although there are non-advisory SMSF service providers who offer packages that cost less) is likely to be a significant drag on your retirement savings. Add in the opportunity cost of the time you spend, and SMSFs can be a poor idea.
Toeing the line
The ATO regulates the running of SMSFs and takes the role seriously. It's audit scope is extensive, with a particular focus on the "sole purpose test,." early access schemes and misuse of super via "loans" to cash-strapped business.
The sole purpose test simply states that assets and money in your SMSF are for retirement benefits only, not for the personal or business benefit of you or anyone else. The Cooper Review proposed a ban on collectibles (such as art) being made assets of a super fund, but it is unlikely that this proposal will be accepted. Yet even though they are not banned, you need to be very careful that any assets your SMSF invests in meet the sole purpose test.
Michael Brown, General Manager of Smartsuper Client Solutions, "the evidence is that many of these things provide good returns." He suggests that instead of a ban, there should be "rules that prevent the members siphoning off value from the fund by using the assets without paying for them." Early access schemes that enable you to get money out of your super before you are eligible are illegal, but that has not stopped some schemes targeting SMSFs. The penalties, imposed by the ATO and The Australian Securities and Investment Commission (ASIC), are heavy.
You cannot use funds in your SMSF as loans to your business, no matter how tempting it may be. Again, the penalties are substantial.
Your business and your SMSF: what's the deal?
As stated earlier, your SMSF exists for the sole purpose of retirement benefits for its members, not for the benefit of your business. All investments must be at arms-length and you cannot use your SMSF to acquire assets for your fund from a "related party" of your fund except where:
- The asset is a listed security (shares, units or bonds listed on an approved stock exchange) and is acquired at market value;
- The asset is business real property (land and buildings used "wholly and exclusively in business" and acquired at market value; and • The asset is an in-house asset (in-house assets must be no more than five per cent of total fund assets).
So if you or a "related party" own business real property used in your business, you may be able to transfer the property to your SMSF free of capital gains tax (if it meets the small business capital gains tax relief tests).
Getting the right advice
Tax accountants or agents can help you set up and administer your fund, including your tax audit and compliance responsibilities, but unless they hold a financial advise licence (AFSL), they cannot give you investment advice.
The Cooper Review reiterated that the performance of the SMSF sector relies on quality work from service providers such as auditors and administrators, which ensures a high level of compliance. So if you decide to use one of the many services available, take your time to look around and find one that you trust.