10 golden rules for Self Managed Superannuation Funds (SMSF) – a great place to start before setting up an SMSF
Your superannuation (super) fund will most likely be the primary vehicle for achieving your retirement goals and if managed properly, it should end up being one of your largest assets – more than enough to support you as you enjoy your retirement. It is also a very attractive investment, primarily due to its high tax effectiveness, which improves your ability to accumulate wealth.
Self managed super funds (SMSF) continue to remain popular and offer higher levels of control over your retirement planning. There are many rules applying to SMSFs. The following 10 golden rules are a great place to start.
What are the 10 golden rules?
1. Know whether your SMSF is an Australian super fund
For an SMSF to be considered as a complying super fund, the fund must satisfy three tests for it to be classified as an ‘Australian superannuation fund’. The fund must have:
• been established in Australia or the assets of the fund are located in Australia;
• satisfied the central control and management test; and
• satisfied the active member test.
It is important to satisfy this definition to ensure the fund is concessionally taxed at a maximum of 15 per cent on income (including capital gains at 10 per cent). If the fund fails this definition, then the fund’s taxable income will be taxed at 45 per cent.
2. Understand your trustee role, responsibilities and duties
Being a member of the fund also means you must be a trustee. All trustees are responsible for the running of the fund and the decisions affecting each fund member. Most importantly, the trustees need to comply with the superannuation and taxation laws to ensure the fund retains its complying status and is entitled to the superannuation tax concessions. The trustees of an SMSF also need to:
- act in the best interests of all fund members when making decisions;
- manage the fund (including the assets) separately from their own personal financial affairs; and
- ensure the money in the fund is only accessed where the law allows it.
3. It pays to invest professionally
One of the key areas of responsibility for trustees of an SMSF is investment management. Most importantly, a trustee of an SMSF is required to prepare and implement an investment strategy for the fund. An appropriate strategy will establish investment objectives and detail the investment methods the fund will adopt in order to achieve these objectives. It is essential to seek advice from a Chan & Naylor financial adviser to help ensure the trustees set, execute and review an appropriate investment strategy.
4. Keeping the sole purpose test in the fund
The sole purpose test for an SMSF aims at ensuring investments are maintained for the purpose of providing benefits to fund members upon their retirement. The trustees of an SMSF must comply with the test to maintain the taxation concessions available. An example of a possible contravention of the sole purpose test is where members of the fund and their family occupy a holiday home owned by the fund.
5. Keeping things separate is the best option
The trustees of an SMSF must ensure the assets of the fund are kept separate from their personal financial affairs. This means trustees must ensure the members’ benefits are not illegally accessed prior to retirement or in the event of their death by their beneficiaries.
6. Follow the rule books
An SMSF is a trust and the trust deed (i.e. the rule book) contains the governing and operating rules of the fund. An SMSF must adhere to other rule books such as superannuation and taxation laws which need to be consulted in conjunction with the trust deed. When setting up a fund, the deed should be constructed by a professional such as Chan & Naylor financial planning who specialises in SMSFs. Your deed will also need updating over time to reflect the changes in superannuation law.
7. Do not break any investment rules
The trustees of a fund must be aware of relevant restrictions that prevent SMSFs from making certain investments. Examples include borrowing in particular circumstances and lending money or providing financial assistance using fund resources to a member or a relative.
8. Know what retirement planning strategies you can use
An SMSF can allow you to use many different retirement planning strategies in order to reach your goals and objectives. It is essential to seek professional advice from a Chan & Naylor financial adviser to ensure you maximise your SMSF and retirement planning goals and objectives.
9. Decide whether you need to outsource
Trustees can engage SMSF professionals to complete mandatory obligations and tasks including taxation returns, administration, reporting and auditing. Some of these professionals can include an accountant, administrator or a financial adviser. Even though trustees can engage the services of professionals, they are bound to retain control over the fund and will have ultimate responsibility and accountability for the fund.
10. Satisfy the mandatory obligations
Having an SMSF can deliver many advantages to members of the fund. However, it is important that trustees ensure mandatory obligations are met. These can include taxation returns, record keeping, administration, reporting, auditing etc.
Need more information?
To obtain more information about SMSFs, contact Chan & Naylor Financial Planning on
1300 250 122 or visit us at www.Chan-Naylor.com.au
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General advice warning:
This information is of a general nature only and is not intended to represent investment or professional advice. This information does not take into account your individual objectives, financial situation and needs. You should assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision.