Self Managed Superannuation Funds Rules


This article was originally published by Justine Davies on February 24, 2016.

Self-managed super funds (SMSFs) are popular – but as Michal Bodi explains, it’s easy for trustees to get lost in the rules.

How does an SMSF run?

A self-managed super fund, or SMSF for short, is a do-it-yourself superannuation scheme designed for those who want direct control over their retirement savings and investments. A SMSF can have up to four members, all of whom are trustees of the fund.

As trustees, all members are personally liable for all the decisions made by the fund.  In the government’s 2009 Super System Review, they noted that SMSF members are on average older, earn more and have larger superannuation balances than the average worker, with the average SMSF member balance being $456,000.

Opening a SMSF is a popular activity. According to the tax office’s September 2017 quarterly report, there are around 589,620 SMSFs in Australia.

For some eager Trustees though there may be a risk of underestimating the complexity of running a SMSF. Sometimes, according to Sydney Financial Planning‘s Senior Financial Planner Michal Bodi, trustees may not open an SMSF for the right reasons – and may then quickly get lost in the rules.

Many mistakes are committed by SMSF trustees daily, simply because running a super fund is hard work,” says Michal.

“It’s not for everyone. It’s not for majority of people. It’s like running a small business on a side. You need to be aware of your responsibilities and go into it for the right reason. Why would so many SMSF trustees take on so many (ever changing) rules and duties of these complicated structures, make their lives extra complex and risk heavy penalties?”

Are people being sold the wrong idea about SMSFs?

The answer, according to Michal, is because they were sold the idea of owning something special that will place them in a better position to achieve their goals. It may be, though, that they were not sold the right thing.

Sometimes unexpected events get in the way; according to research released jointly by CommBank and the SMSF Association, more than four in ten SMSF trustees (42 per cent) out of 801 SMSF trustees surveyed have had an event occur in their life, including loss of employment, a separation/divorce, or death of co-trustee, since starting their SMSF that could have significant implications for the management of their super.

Particularly worryingly, given women’s greater life expectancy, the research found that men are far more likely (65%) to be the sole decision makers in terms of SMSF investment that women (28%).

“Given that women account for nearly half of all SMSF members, more must be done to better support and empower female trustees,” Commonwealth Bank Head of SMSF Customers Marcus Evans said.

“This is also true when it comes to funds with joint-trustees, with major life events such as a divorce leaving many female trustees without the confidence to manage what is many individuals’ biggest investment.”

SMSF research for trustees is vital

Michael Bodi likens starting an SMSF without doing thorough research into the responsibilities involved to being sold a product with a complicated manual.

“It’s inevitable that many Trustees get in trouble – starting from not even having an investment strategy (and understanding its importance), all the way to wanting to move into their SMSF property or using SMSF assets to pay for their personal expenses,” he says.

“It’s shocking that many SMSF Trustees wouldn’t understand the basic implications of the sole purpose test, in-house assets or providing financial assistance to its members.

“But I believe it’s a matter of time before people will realise that by simply owning a fancy tax structure will not assure realisation of their long term financial goals. You need to have both a good reason as well as (in my view) at least $750,000 to open an SMSF to make it worth your time, money and the risks involved.”

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