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Matters to Consider Before Setting Up an SMSF

Self-Managed Superannuation Fund
A Self-Managed Superannuation Fund (SMSF) is essentially a do-it-yourself super plan that can have up to four members. One of the main motivations for setting up an SMSF is to be in control of your own fund and how investments are made. As well as the development of a sound investment strategy, running a fund also requires certain skills in terms of administrative, financial and legal matters.

If you are thinking about setting up your own SMSF, here are some of the factors to consider.

Skills and responsibilities

  • Your role – with an SMSF, you need to take on the role of trustee or director, which comes with legal obligations and considerable responsibilities, including personal responsibility for compliance.
  • Investment skills – you will need to have the time and skills to research investment options, to understand how investment works and to develop a sound long-term strategy.
  • Administration – there is a considerable amount of administration required in running a fund, including record-keeping, taxation, compliance, keeping up with government legislative changes regarding super and tax, and so on. You also need to be able to engage directly with the ATO.

If you wish to set up your own fund but lack the skills or time required to run it, you may of course be able to hire someone else to do the work for you.

Financial matters

  • Enough money to invest – it’s usually recommended you should have at least $200,000 to invest to make an SMSF worthwhile in terms of the fees involved. Investment options may include property, shares, term deposits, managed funds, artworks, or even antiques.
  • Fees – these are likely to include payments for independent audits, annual returns, asset valuations, legal matters, insurance, and professional advice. You need to bear in mind that the fees involved may be proportionally higher than for an industry fund.
  • Borrowing to invest – since 2007, it has been possible for SMSFs to borrow to invest in assets such as property, shares, and land. There are however some stringent rules around this that you need to be aware of – such as the single-asset rule per borrowing arrangement, and restrictions on asset improvements.

Insurance

  • Life insurances – super funds generally offer insurance to members in terms of life, disability, accident and income protection cover, and also usually have the advantage of group buying power which can lower the premiums for members. SMSFs are obliged to offer life insurance to members, and in this case you would need to purchase your own insurance cover.
  • Other insurance – cover should also be taken out for assets such as property to provide financial protection.

General questions to ask yourself before going ahead

  • How well will your SMSF be able to outperform other funds?
  • Do you have the skills, time and motivation required (or alternatively the means to pay someone else) to administer the fund?
  • What other options are available? For instance, if you are not happy with the performance of a fund you are a member of, you might be able to switch to a more suitable one. If it is more control over investments you want, some funds allow you to have input into how your money is invested.

If you enjoy investing and have strong skills in financial management and a good grasp of legal matters, an SMSF may be a good option for you. On the other hand, if you lack the skills and time but would still like to set up your own fund, consider utilising the expertise of an SMSF accounting firm in Sydney to administer the fund on your behalf.