A self managed super fund (SMSF) can have many benefits such as choice, flexibility and transparency but the obligations and responsibilities can be off putting. There is a certain amount of relief that comes with knowing your super is invested for you — all you have to do is keep working and watching your balance rise. This hands-off approach works well for the first years of your career, but many Aussies eventually wonder if they would be better served with a self managed super fund (SMSF). Perhaps you are investing on your own, and your personal portfolio is outpacing your super. Or you're self-employed, and find that super requirements are hamstringing your access to capital. If you're in your high earning years, you may be in a position to contribute more to your super but are reluctant to do so because the tax benefits aren't great and there's no real investment flexibility. Whatever your reasons, you should have ready and reasonable answers to these six questions before you set up an SMSF.
1. Why do you want to start an SMSF?
Where and how did SMSFs first appear on your radar? Their overall popularity tends to change with the overall share market and the economy, so be wary of the timing if you decide an SMSF is right for you. Your colleague may have just made a killing with a real estate portfolio, but that doesn't mean this is a good time to invest in real estate for yourself. Before you do anything more than listen and google, speak with your financial advisor about commencing your own SMSF and how it may affect your investment strategy.
2. Do you understand the responsibilities and obligations of an SMSF?
SMSFs are regulated under the rules and laws of any other investment instrument. This means that the trustee (you, or a designated substitute) is bound to adhere to the general rules that the Australian Securities & Investment Commission (ASIC) sets. These include:
- Registering with the ATO for an Australian Business Number (ABN) and Tax File Number (TFN)
- Annual fund audit by an independent, ASIC-approved auditor
- Annual filing of fund tax returns and financial accounts
Why is commencing an SMSF so much more complex than simply opening an investment account with a shares broker? Because the nature of any super fund, be it self-administered or part of a larger managed pool, is to provide retirement income—and there are tax benefits to super contributions that independent investments don't enjoy. In order to get financial advantages that a super offers, you must comply with the Australian Tax Office (ATO) rules. Aside from the regulatory aspects of an SMSF, you should also keep these factors top of mind.
- You are responsible for researching your investment options and creating an investment strategy that is consistent with your long-term goals. A trusted financial advisor is a key component of an SMSF, but ultimately, the decisions lie with you.
- That said, it follows that the performance of the SMSF is solely on you—the success or or failure of the fund is your call.
- If you decide to invest in current trends, it's up to you to monitor the markets so that your trades are executed in a timely manner.
3. Do you have sound financial literacy to make investment decisions?
The final point above speaks to another question—do you have the financial literacy to self manage your super fund? It's important here that you differentiate your super from your personal portfolio—this is the income stream that you rely on in retirement should your other investments fail to perform. An SMSF is free to invest in more venues than a standard super—you're able to control how your money is invested and shift your holdings in a more timely manner than a large fund could manage. Investment options are broader as well—you're not limited to Australian shares or bonds; you can put money into international markets, real estate, commodities, cash, classic cars, and crypto. Just be sure that you're either highly financially literate, or adhering to your advisor's recommendations before you buy on a whim.
4. What is your SMSF investment strategy?
Most SMSFs commence when you decide that the standard super investments—cash and shares—aren't generating the returns you think you can get with a broader range of options, Property is often the determining factor, as real estate has many options within that sector (shares, rentals, commercial, residential, development, management) and in recent years has seen aggressive returns. One of the great benefits of an SMSF is portfolio diversity, so make sure you are open to investing in more than property or shares in one industry. SMSF is a long-term project, so align and time your strategies with your goals. Finally, the investment strategy must be in writing.
Do You Understand the Restrictions Around Assets Held Within the Fund?
This also speaks to your financial literacy—are you aware of the restrictions for assets in your SMSF? One of the first rules of an SMSF is that the investment must pass the sole purpose test—does it meet the standard for growing your retirement fund? If you're investing in property, that more than likely passes the test. But if you're thinking of buying modern art NFTs, that's not going to pass.
5. What are your financial goals?
This is the most straightforward answer—you believe you can manage your super better than a professional team and you can retire with more income if you commence an SMSF. Only 20% of Australians retire comfortably, so your super choices are important at any point in your career. You can make riskier decisions in your 30s than in your 50s, so when you're developing a comprehensive investment strategy, remember that your needs will change over time.
6. Who will be on the SMSF?
You can share an SMSF with as many as three other people. Typically, this would be a spouse or other family members (if there is a family business this makes sense). Each member of the fund has equal responsibility for investment decisions and compliance with ASIC rules. The advantages of combining supers is that you have larger sums to invest, which may give you access to more select opportunities. Members can also invest their allotment of the fund independently. Just remember—the risk is always shared. Some members of the fund may choose a cash flow strategy—investing based on the asset's track record in paying dividends. Others may look for long-term capital growth products—instruments that don't yield cash flow but have the potential for resale growth. A shared SMSF also carries member risks—you need to be prepared for a member wanting to leave the fund, bankruptcies, death, or divorce.
Final thoughts
If you're in a position to commence an SMSF, don't try to go it alone, or let your colleagues advise you (unless you're already in the industry). Our blog
“Can a SMSF help you retire early?”explains the complexities and benefits of an SMSF, plus what to include in your investment strategy. If you’re considering an SMSF, seek the counsel of a
professional financial advisor who understands the ebb and flow of the market and can guide you in both the operational and investment components of an SMSF.
