The popularity of SMSFs over managed funds appears to come down to two main factors: more control of investments, and a lower percentage of fees on funds with higher balances.
While some managed funds do allow you to select between types of investments, the level of control is far greater in a SMSF, where you can essentially invest on your terms – as long as you remain within the regulations!
Because managed funds tend to work on a per cent of fund balance fee structure, SMSFs become more cost-effective once your balance exceeds around $250,000, however this does depend on the amount of involvement you have in the fund as the trustee, and how much you need to pay advisers.
In order to set up a SMSF, you will need to keep the following factors in mind:
- The SMSF can only have a maximum of four members (who will be trustees)
- Between all the members, you will need enough money to make the set-up and administrative fees cost-effective (ideally over $250,000)
- As with managed funds, once the money is in the SMSF, it can only be used to generate retirement benefits. This is a very important point to keep in mind, as there can be serious implications – including fraud charges – if you use the SMSF to gain tax benefits for money that you then use for a purpose other than retirement.
- Even if you use professional advisers, you, as the trustee, will be ultimately responsible for maintaining your fund’s compliance within regulations. This means you could be held personally liable for some infractions. And if you fail to maintain your fund’s compliance, income of the fund is taxed at the highest tax rate (currently 47%) rather than at the normal superannuation rate (15%).
- You will need to arrange an independent audit of the fund on an annual basis. You will also need to allow for any other administrative and advisory costs that are incurred – the less you know or are able to do, the more it will cost you in advice.
- Ensure that things like insurance, which are often included in managed funds at a discounted rate, will still be catered for either through your SMSF or separately.
While there are real benefits to creating a SMSF, it is worth discussing your responsibilities with your accountant before you do.
By Jennifer Lowe