Super and tax provisions offer incentives to save for retirement
These savings may be handed over, typically to a public offer fund to manage on one's behalf, or they may be managed directly by you.

Managing your own retirement savings however is a huge responsibility and one that should not be viewed lightly.  How you live and how comfortable your life will be when you're no longer earning an income will depend largely on your efforts of saving and the investment performance and management of your super fund. And while there is no greater way to take control of your retirement savings than setting up a self-managed superannuation fund (SMSF), this is not something that can be recommended for everyone.

We consistently report on matters pertaining to SMSFs, from compliance requirements to tax obligations. For those who are interested in establishing an SMSF but do not currently have one, the following may provide some insight into managing such a fund.

There are strict rules and tangible risks to setting up an SMSF, but at the same time you can choose how to invest your fund's money and exercise full control as well as having greater flexibility over your investment choices. With an SMSF, you are responsible, you are the trustee of your own fund, you need to comply with the superannuation laws and regulations and you wear the consequences of all your investment and compliance decisions.

While SMSFs will be suited to many people, they are certainly not for everyone. The Tax Office asks all prospective SMSF trustees to consider the following aspects before deciding whether they should manage their own super: 

  1. Consider your options and seek professional advice
  2. Make sure you have enough assets, time and skills
  3. Understand the risks and laws

Super funds, including SMSFs, receive significant tax concessions as an incentive for members to save for their retirement. However, you need to follow the tax and superannuation laws to receive these concessions. Effective from July 1, 2014, SMSF trustees can now be fined $1,700 for a breach of failing to keep adequate records. The penalties incurred by individual trustees for not complying with the law can be severe, refer to our article in last month's Monthly Client Newsletter to read the lowdown. 

One overriding obligation that every SMSF must meet is to pass the "sole purpose test", which basically means that the fund is legally required to be maintained for the sole purpose of providing benefits to each member on retirement, or to their dependants upon the member's death. Buying a holiday home or yacht for use by your family is in breach of the "sole purpose test" and compliance with this provision is fundamental; straying from it can lead to severe penalties.

Another essential role of an SMSF trustee is to keep proper and accurate tax and superannuation records. It is always a good idea to take accurate minutes of all investment decisions, including why a particular investment was chosen and that all trustees agreed with the particular decision.

Additionally, you have a legal obligation to have your SMSF independently audited every year. The annual audit will require certain records to be made available, and you may also need to provide other records to the Tax Office to keep your fund compliant.

If you set up or join an SMSF, you will also need to consider having adequate insurance in case you pass away or are unable to work because of an illness or accident. As an SMSF trustee, you are required to consider insurance cover for fund members as part of the fund's investment strategy. However, it is not a requirement that such a policy be taken out. Life insurance can also be expensive compared to the large funds; they buy group policies that enable them to offer life insurance benefits for illness or accident at a relatively low cost.

If you decide to set up an SMSF, you're legally responsible for all the decisions made, even if you get professional advice. Typically, an SMSF is suited for those who want greater control, but are also able to actively manage their investments while keeping up with the mandatory regulatory and compliance obligations.

Contact GJB to seek appropriate advice before taking the plunge. Being at the helm of an SMSF can be a very rewarding experience, and it offers innumerable benefits – from tax savings and greater estate planning certainty to more investment control and greater investment choices. Just be sure it is the option for you.

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