Self Managed Super Funds – Is it Right for You?

Self-managed super funds (SMSFs) are now the largest and fastest growing segment of the super industry.

For trustees of SMSFs, managing their own fund correctly is very important.  There are many rules and regulations in the various laws that govern super that are designed to protect your retirement income.  As a trustee, you need to adhere to the rules and know that you are ultimately responsible for the running of the fund, even if you use tax, financial and super professionals to help to manage it.

What is a Self Managed Super Fund (SMSF)?
Otherwise known as “Do It Yourself” or “DIY” super funds, SMSF provide a more flexible option for investing your hard earned Superannuation. You as the owner of the fund can take control of your own money and invest in areas you feel most comfortable with.

Recent changes in the Superannuation arena have now seen the ability to be able to borrow, or leverage, your money with a loan to buy into residential or commercial real estate.

By owning a SMSF you can diversify your money into shares, property, term deposits, bonds, etc in order to help protect yourself from major fluctuations in the various sectors as opposed to ‘lumping your eggs into one basket’.  However, younger people may feel comfortable investing a major portion of their super in say the Australian share market despite the chance of major fluctuations or corrections, on the basis that they have many years for the market to recover.

Depending on factors such as your age, cash flow, personal and investment debt, you may be able to contribute more than the compulsory 9% into your SMSF therefore creating more wealth within a possible tax free environment at retirement.

Trustees’ Roles and Responsibilities
SMSF trustees are ultimately responsible for running the SMSF. It is important they understand the duties, responsibilities and obligations of being a trustee.

A trustee of an SMSF, needs to act according to the fund’s trust deed and any relevant Superannuation, Tax or Corporations Laws.
It should always be remembered, that the purpose of setting up your own SMSF is to provide for your retirement.  It is illegal to set up a SMSF to gain early access to your funds. If benefits are unlawfully released, significant penalties can apply to you, your fund and the recipient of the early release.

Understand the Rules
The rules you need to follow as a trustee of an SMSF, include the following:

• act honestly in all matters concerning your fund
• exercise skill and diligence in managing your fund
• act in the best interest of all members
• keep the money and assets of your fund separate from personal money and assets
• retain control over your fund
• develop and implement an investment strategy (refer below)
• you can’t enter into contracts or behave in a way that hinders you or other trustees from performing or exercising functions or powers
• allow members access to certain information
• you can’t access or allow others to access funds early
• The SIS Act contains rules that impose minimum requirements on trustees and are deemed to be included in the trust deed of every regulated fund. These reflect the duties imposed on all trustees under trust law in general.
• You can appoint other people to help you or provide services to your fund (for example, an accountant, super fund administrator, tax agent or financial planner). However, the ultimate responsibility and accountability for running the fund in a sensible manner lies with you.
• Money belonging to your SMSF can’t be used for personal or business purposes under any circumstances. The SMSF’s assets are not a form of credit or emergency fund when faced with a sudden need and should never be used as such as the penalties applicable can be severe.

Trustees that don’t follow the rules, risk one or more of the following:

1. The SMSF being deemed non-compliant and losing its tax concessions
2. Getting disqualified as a trustee
3. Prosecution; or
4. Penalties.

What is an Investment Strategy?
Under the SIS Act, one of the responsibilities of trustees of SMSFs is that they are required to document a medium to long-term investment strategy that considers:

• A wide range of investment possibilities including such things as:
  • Cash based, low risk investments
  • Growth investments such as shares or property, and
  • A combination of different investment types.
• The return on investments compared with the risks involved
• The ease of converting assets to cash in order to meet payments due by the fund (i.e. liquidity of investments)
• Members’ ages and individual retirement benefit needs, and
• Overall, the aim of the fund’s strategy should be to increase members’ benefits over time.

Corporate vs Individual Trustees?
When you establish a Self Managed Superannuation Fund, one of the first issues to consider is whether the trustee should be a company or a group of individuals. There is no right or wrong answer but below are some of the issues to consider in helping you make a decision.

Why is the type of Trustee relevant in the first place?
To be eligible for tax concessions (on income and benefit payments for example), a new fund must formally elect to be regulated by the Superannuation Industry (Supervision) Act 1993 (SIS).  In order to be regulated under SIS, a superannuation fund must either:

1. Have a trustee that is a company; or
2. Have the primary purpose of providing old-age pensions (in which case the trustee can be either a company or a group of individuals).

Note that this doesn’t mean that clients who opt for the second approach (ie, a primary purpose of providing old age pensions) necessarily have to take their benefits in pension form from their SMSF.  The fund can provide the full range of benefits, it must simply ensure that its trust deed states that the primary purpose is to provide old-age pensions.

What if I change my mind and want to change the Trustee?
If you take one option initially you can change your mind in the future.  However, as with any change it may be necessary to amend the trust deed, report the change to the regulator and transfer all the assets held by the super fund into the new trustee(s) name.  This may have capital gains tax and stamp duty implications.

Advantages of using a Corporate trustee
In some circumstances, it may be appropriate to use a corporate trustee. Corporate trustees have the advantages of:

1. It reduces the ability for trustees to mix up their personal assets with the superannuation assets as they are in a different name.
2. It is easier to add another member/trustee as with a corporate you simply add a director and no change of name on assets of the fund is required.
3. Enables the same ease upon the death of a member for the naming of assets.
4. Control of the fund upon death can be established with greater certainty as shareholding & voting power can be left in a will.
5. A director of a corporate trustee can delegate his duties through the use of an enduring power of attorney while an individual cannot.  This is important where there has been a loss of capacity of a member or for non-residency issues.
6. The ability to have a sole director (and therefore, one member).

Advantages of using Individual trustees
1. Fewer statutory forms and less reporting. With a group of individuals, there is no need to complete ASIC forms (say, in the event of a change in the trustee group) and ASIC annual reviews.
2. Fewer procedural issues to consider. When a fund has a corporate trustee, the trustee must ensure that it complies with both the Constitution of the company and the requirements of the trust deed as regards meetings, changes etc.
3. Less costly to establish. Unless you already have a company available to act as the corporate trustee you will need to establish one. This will be an additional expense at the start although it will not be a significant additional ongoing cost.
Regardless of the trustee structure, the responsibilities of those acting in trustee capacities for a superannuation fund (either individually or as a director of a company) are the same. As a general rule, the choice between corporate and individual trustees will be a matter of personal preference.

A Summary of Common Fees charged by Public Offer Super Funds
Entry fee
When investing through an investment adviser, you may be charged an entry fee depending on the funds you invest in. Typically entry fees range from 4% to 5% of the initial investment and every subsequent investment including any regular investment plans. 
This entry fee is normally paid to your financial adviser, and where you invest in a fund with no financial adviser the entry fee is retained by the fund manager.  Entry fees can have a large influence on the returns.  There is a move in the Financial Planning industry to a “fee for service” charge rather than commission based fees.

Nil entry fee funds
Nil entry fee funds are an alternative some fund managers offer investors. Typically these funds tend to charge a higher annual management fee or MER.

Exit fee
Exit fees are not charged by all funds, but some fund managers will apply a one-off charge when you withdraw money from the fund. An exit fee may be a percentage of the money withdrawn but it can also be a flat fee. An exit fee can be quite inconvenient. Always check a fund for a possible exit fee.

Management expense ratio (MER)
This fee is an ongoing fee that typically incorporates all of the expenses incurred in the professional management of the fund, such as trustee, legal, tax consulting and audit fees.  The MER can be up to 3% of the total value of your investment in the fund. Typically the MER of a retail managed fund ranges between 1.5% and 2.5%, but this may be higher for funds that require more active management such as geared funds and hedge funds.

What is the MER of your current Fund?  If you don’t know, you should check now and compare to costs of running your own fund after speaking to us.

Transaction costs
Transaction costs are the difference between the buy price and sell price of a unit and are often referred to as the ‘buy-sell spread’.  For example, the ‘buy price’ for a unit normally exceeds the ‘sell price’ on the same day, which means that selling and buying units on the same day, would result in losing a fraction of the invested money as part of the transaction.  This price differential is used to cover the costs associated with buying and selling assets at the investor’s request.

Switching fee
In some cases when switching from one investment type to another within the same company’s range of investments, a fund requires the payment of a switching fee. This is usually a small percentage of the sum of money to be transferred. The investor is often allowed to perform a number of switches per annum for free.  If a switching fee applies, it will be stated in the Product Disclosure Statement (PDS).

Performance fee
Some managed funds will charge a performance fee.  A performance fee is best described as a reward for performing above the fund’s stated benchmark.  There is no standard percentage for a performance fee because they are separately calculated for each fund manager.  If a fund has a performance fee, it is stated in the PDS.

Adviser service fee
If you are investing via a financial adviser, they will often mark up the fees on your investment with an ongoing adviser service fee. This is typically 1% to 2% p.a. which is deducted from your investment and lasts for the life of your investment.  An adviser service fee is paid over and above the fees payable to the fund manager and other charges your may pay your adviser.

Costs of Establishing & Administering a Self Managed Super Fund
The time and costs of setting up and administrating your own SMSF will vary depending on the size and activity of the fund and whether you have individual trustees or a corporate trustee. 

If you would like to know more about the benefits and costs of establishing and administering a self managed super fund, please call Matt or Brett at Eclipse Accounting Group on (02) 9531-0922 to arrange a time to discuss.

For more information on Self Managed Super Funds, follow these links:

• Thinking about self-managed super
• Running a self-managed super fund
• Setting up a self-managed super fund

The information contained in this document is of a general nature only and is not intended to be personal advice.  No person should act solely on the basis of the information contained herein but only after discussing their individual circumstances with their financial Adviser.