(see also How YourShare works with Personal Superannuation and SMSF's)

Running your own Self Managed Superannuation Funds (SMSF) has become very popular for those with the time, knowledge and an amount invested in superannuation to warrant the overhead of running their own fund. These superannuation funds have four or less members, and are either managed by the fund members, or a company owned and controlled by the fund members, acting as trustees for their fund. As trustees they control the SMSF’s investments and are responsible for the funds administration and compliance with the law.

A SMSF is a special type of trust, which holds assets for the purpose of providing retirement income and other benefits to its members. Like all superannuation funds, where the fund is a complying fund and meets the rules and regulations as laid down the fund will qualify for the income tax concessions which make superannuation so attractive.

The Australian Taxation Office (ATO) is responsible for all compliance regarding SMSF’s and ensuring the rules as laid down in the Superannuation Industry Superannuation Act (SISA) are complied with; Some conditions relevant to SMSF’s are:

• The fund must have no more than four members;
• If the trustees of the fund are individual persons, each member must be a trustee. If the trustee of the fund is a company, each member of the fund must be a director of that company
• The members are not in an employment relationship. That is, one member cannot be the employer of another member. The exception to this rule is where the members are also family relatives; and
• No trustee derives any benefit from providing services to the fund or for performing his/her/its duties as a trustee.

The ATO does not provide an annual assessment of SMSF’s, rather compliance is on a self assessment basis, with an annual audit by a qualified auditor/accountant playing a critical role in the self assessment. The auditor must certify that the SMSF has complied with the superannuation law. This certificate is then included in the annual return lodged by the SMSF with the ATO.

Anyone can elect to set up a SMSF, and since the introduction of SuperChoice many more people are able to operate their own superannuation funds. Due to the costs involved in setting up and administering a fund, SMSF’s are particularly attractive to those with large amounts already invested in superannuation or those on high incomes.

All SMSF’s must have an investment strategy, considering all the circumstances of the SMSF and setting out the SMSF’s approach to its investments. As a guide the investment strategy should consider the SMSF’s objectives, cashflow requirements, risks and likely returns from each asset or asset class, diversification, liquidity, and the ability of the SMSF to meet its obligations to its members.
There are no qualitative or quantitative restrictions on the range of investments that a SMSF is able to invest in. However there are rules and limitations on; loans to members and related parties, non arms length transactions, acquisition of assets from members, in-house assets, and assets that don’t meet the sole purpose test (a SMSF must exist for the sole purpose of providing retirement benefits to members and achieving maximum investment returns for members). There has been much debate over what are appropriate investment assets for a SMSF, as a general rule, art, jewellery or any assets with lifestyle advantages like holiday homes, are not appropriate investments. If a SMSF acquires or holds assets not permitted under superannuation law it may become a non complying fund which could have severe tax penalties.

There are 4 main investment asset types: Managed funds, shares, property or fixed interest investments. Investment properties do not feature highly on most SMSF’s radar due to the high entry price, the lack of liquidity, SMSF can not borrow to invest, and because the tax advantages of property are generally worth more if purchased directly, rather than through a SMSF. Some advisors advocate managed funds for investments and superannuation / pensions as they are indirect investments – in that you hold the legal rights to the benefits of the assets held in the managed fund, but non of the issues of direct ownership. Managed funds have the following characteristics for your investments, superannuation, allocated pensions & annuities:

• Market access to a broader range of assets than investors may be able to access individually
• Access to professional asset managers
• Daily fund monitoring, with many managed funds publishing daily valuations for investors to monitor performance
• Diversification within a managed fund and from holding different managed funds in different sectors/asset clases
• Efficiency of being part of a large pool of investors
• Liquidity of investment, as investors may redeem or switch units
• Divisibility, managed investments are divisible by the number of units held in the funds, allowing changes in exposure to different funds to quite precise levels

Investing in managed funds should lower accounting and audit costs, as accounting and audit fees will vary according to the number of transactions made by the SMSF. If the SMSF invests in just a few managed investments then the number of transactions should be reduced and therefore the accounting and audit fees should be reduced also.

The trust deed should be set out by a solicitor and is core to a SMSF, it sets out the rules the SMSF has to follow, the obligations and responsibilities of the people connected to the SMSF, the rules for paying contributions on retirement or death, investing assets, holding meetings, appointing trustees, paying benefits to members and the other matters affecting the SMSF. A well drafted trust deed should allow for changes in circumstance and include:

• General rules stating that the SISA (and all other relevant laws) are deemed to be included in the deed, that the trustee is bound to act in accordance with the SISA, and in the event of conflict between the other provisions of the trust deed and the SISA, the SISA will have priority. This will avoid the requirement to update the trust deed where the SISA provisions change.
• Permit the fund to operate as any of; an employer sponsored fund, a self-employed fund, an allocated pension fund, a superannuation fund paying lump sum benefits, or a superannuation fund paying pension benefits

It is the trustee(s) who are responsible for making sure the SMSF is run according to the trust deed, and that the SISA and all other relevant laws are observed.

For single member funds, that individual can not be the only member and the only trustee, as under trust law there must be a separation of legal and beneficial ownership for a trust to exist. The solution is to use a corporate trustee owned by the member, or have another person act as a second individual trustee. (provided there is a family or business link with the member)

The above is an overview of relevant points regarding SMSF’s, it is not exhaustive, and if you are considering opening a SMSF YourShare recommend your seek professional legal, and financial assistance. For more information on SMSF’s please refer to the ATO website www.ato.gov.au/super, and click on link to self managed superannuation funds.

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Please ensure you read fully the Product Disclosure Statement (PDS) of any pension, superannuation or investment product you are considering of investing in.

YourShare recommend anyone who has questions or is confused about superannuation, savings or investment to seek professional advice and contact a reputable fee for service advisor. If you would like to speak with an associated Fee-for-Service Advisors please click this link. Using a financial advisor is about paying a professional advisor to help you with your superannuation, investment and savings goals. Its not about seeing an advisor once, paying an upfront fee then also paying them for the next 10 years. Its your money make it work for you, not someone else.

For more information on managed funds and superannuation please also refer to Fido, the consumer website of the Australian Securities and Investment Commissions (ASIC), under Superannuation.

Disclaimer
The information in this document reflects YourShare Financial Services Pty Ltd ('YourShare') understanding of existing legislation, proposed legislation, rulings etc as at the date of issue. In some cases the information has been provided to us by third parties. While it is believed the information is accurate and reliable, this is not guaranteed in any way. The information is not, nor is it intended to be, comprehensive or a substitute for professional advice on specific circumstances. The information given in this document is of a general nature and has not taken into account the investment objectives, financial situation or particular needs of any particular person. Before making an investment decision a prospective investor needs to consider, with or without the assistance of a professional adviser whether the advice is appropriate in the light of their particular investment needs, objectives and financial circumstances.