When the Financial System Inquiry (FSI) recommended enshrining the primary objective of superannuation in legislation – and the federal government agreed – it underlined that the role of superannuation cannot be taken for granted.
The Government has accepted the FSI’s definition of superannuation’s primary objective as “providing income in retirement to substitute or supplement the age pension”. The Self-Managed Superannuation Fund (SMSF) Association goes further, describing the provision of retirement income as “the quintessential focus of super”.
“By setting the primary objective, all stakeholders in the superannuation system will have an agreed starting point to develop long-term, sustainable retirement income policy,” says Andrea Slattery, CEO of the SMSF Association, which represents SMSF practitioners such as financial planners, accountants, tax agents, auditors, lawyers and actuaries.
It’s a point worth reinforcing, even for SMSF members who have demonstrated a “hands on” commitment to providing for their retirement by taking the DIY approach.
It never hurts to review the objectives of your fund, the investment strategy you have adopted to achieve those objectives and the ongoing administration of the fund.
As SMSF advisers reiterate: setting up a fund is just the beginning of the process of providing for your retirement through an SMSF.
The immediate benefit that fund members – who are usually trustees of the fund – seek from an SMSF is control.
Tim Wedd, director of financial adviser and investment manager Crystal Wealth Partners, emphasises that control need not mean doing everything yourself, nor does delegating or outsourcing mean you are any less interested in the progress of your fund.
“As trustee you are responsible for the fund but you don’t have to do the heavy lifting; there is specialist help that is readily available. Effective compliance management and getting the right advice ensures that you maximise the benefits of your SMSF and up-to-date data supports better decision making,” Wedd says.
“It’s important to understand that compliance management is complex and that the more you take on, the more things you can go wrong, especially as the fund grows, in which case the cost of getting it wrong can be much greater.”
Making informed decisions about your level of involvement is critical.
The questions to ask yourself include: Are you aware of your legal responsibilities? Do you understand the different investment markets? Can you construct and manage a diversified investment portfolio? Do you know the tax implications? Are you familiar with potential breaches of Australian Tax Office (ATO) regulations that can result in fines?
A range of SMSF professionals can assist with the running of a fund: an accountant can help prepare your fund’s accounts and its annual financial position and operating statements; a tax agent can complete and lodge your SMSF annual return, provide tax advice and represent you in dealings with the ATO; a fund administrator can help you manage the day-to-day running of your fund and meet your reporting and administrative obligations; a lawyer can prepare and update your fund’s trust deed; and a financial adviser or planner can help you prepare an investment strategy and advise about the different types of investment and insurance products.
Using SMSF professionals does not lessen control or the level of responsibility for the fund’s management.
As the ATO points out, the difference between an SMSF and other types of funds is that the members of an SMSF are usually also the trustees: “This means the members of the SMSF run it for their own benefit and are responsible for complying with the super and tax laws.”
SMSFs also have the option of appointing corporate trustees. Benefits of a corporate trustee, according to Townsend Business & Corporate Lawyers, includes: ease of administration on the death, bankruptcy or incapacity of a member; ease of administration if a member departs overseas; and minimising the risk of incurring multiple fines in the event of a trustee breach – the ATO can impose a fine on each member, even those who did not participate in the breach.
Anyone who runs an SMSF must ensure that a registered SMSF auditor audits the fund annually. The auditor examines the validity and accuracy of an SMSF’s financial records and makes sure that the fund is compliant with superannuation rules.
Even once a fund is set up, the less left to chance in the event of contingencies the better:
- Consider what happens when the SMSF “winds up”. Wind-up conditions and requirements can be included in a fund’s trust deed. This would cover events that could lead to the fund winding up and how members’ super will be paid out or rolled over in those circumstances.
- Consider what will happen to the fund if a member dies, including the payment of death benefits.
- SMSF members do not have access to the Superannuation Complaints Tribunal to resolve disputes; a fund should document how disputes between members would be resolved.
- If there is more than one member in your SMSF, a written plan should outline what would happen in the event of ill health, death, relationship breakdown or waning interest.
- Ensure all members have a current enduring power of attorney. This makes things much easier in the event that a member loses capacity or departs overseas indefinitely.
Before you start making any investments the ATO requires SMSFs to have an investment strategy that sets out the fund’s objectives and specifies the types of investments your fund can make.
The ATO recommends that the investment strategy be reviewed and if necessary amended to ensure it continues to reflect the “purpose and circumstances” of your fund and its members.
The investment strategy should also consider whether to hold insurance cover – such as life insurance – for each SMSF member.
When preparing and reviewing your investment strategy, take into account the personal circumstances of all the fund members, including their age and risk tolerance. Other factors to consider include:
- Investment diversification (investing in a range of assets and asset classes)
- The liquidity of the fund’s assets (how easily they can be converted to cash to meet fund expenses)
- The fund’s ability to pay benefits (when members retire) and other costs incurred
Janine Cox, investment analyst with financial services company Wealth Within, says the biggest mistakes with SMSFs come from lack of knowledge, lack of planning, lack of research and lack of structure.
“A client who pays someone to set up an SMSF but doesn’t understand the nature of the super fund, the importance of an investment strategy or the role of the trustee is off to a bad start,” she says.
“Even if you’re getting advice on your investment strategy you need to understand that advice. You have got to have at least basic knowledge to plan goals and make decisions competently.
“You’ve got to be able to ask the right questions of advisers. I’m a big believer that the quality of answers always depends on the quality of the questions.”
SMSFs have access to a broader range of investments. In addition to shares, term deposits, managed funds and property, SMSFs can invest in collectibles such as antiques, artwork, jewellery, coins, stamps, vintage cars and wine – although strict rules apply on holding these assets in your SMSF. They must be insured and be treated as arm’s length investments, that is, they cannot provide a “present day benefit”.
A knowledgeable SMSF member/trustee not only guards against falling foul of the regulators, it makes for a more satisfying involvement in the SMSF process.
SMSF members who want to update their skills and knowledge have access to a variety of courses and training programs, including these free programs:
CPA Australia and Chartered Accountants Australia and New Zealand SMSF Trustee Education Program: http://www.smsftrustee.com/cpa/htm/home.asp
SMSF Association SMSF Trustee Education Program: http://trustees.spaa.asn.au/course/9