SETTING up a self-managed superannuation fund is a popular option for investors.More than 214,000 small funds have been set up in Australia, with about 420,000 members.
SETTING up a self-managed superannuation fund is a popular option for investors.
More than 214,000 small funds have been set up in Australia, with about 420,000 members.
However, self-managed super does not suit all investors.
The cost, complexity and legal responsibilities mean that investors need to carefully assess this option before making a commitment.
Investment adviser John Coombes likens the responsibilities to being a director of a company and advises that members should be prepared to devote time and resources to running their fund properly.
Mr Coombes recommends that investors should consider a self-managed fund only if they have at least $100,000 to invest or plan to rapidly increase their superannuation savings.
Hartley Poynton’s Graeme Yukich agrees that self-managed super is generally not appropriate for people with less than $100,000.
“As well as the cost of running the fund, you need the capacity to diversify your investments across a range of assets classes and securities,” he said.
Mr Yukich believes the principal benefit of self-managed super is that members have complete control over their investments.
The funds can invest in a wide range of assets such as bank deposits, shares, managed funds and income producing property.
This can include business property owned by the members in certain circumstances, although assets like vacant land and holiday homes are no longer allowed.
Mr Coombes said another benefit of self-managed super is the ability to transfer assets between generations in a tax-protected environment.
This gives members more flexibility with their estate planning.
This can be particularly useful where the member takes a “complying pension” after retiring.
Any balance at the time of death stays in the fund for the benefit of other members, which may include the spouse or children.
In contrast, where a complying pension is taken with a life office, the balance stays in the life office.
The trade-off for these benefits is the legal responsibilities of running your own super fund.
The members of the fund are its trustees, and all decisions and responsibilities associated with managing the fund rest with them.
This includes developing an investment objective and strategy, and ensuring that the fund complies with that policy.
Record keeping is another area watched closely by the Tax Office, which regulates self-managed super funds. The Tax Office stated that “poor and inadequate record keeping has been identified as a major problem for small superannuation funds.
As this can pose a compliance risk for funds, trustees need to give this area detailed attention.
The records that trustees are required to keep include “accurate and accessible” accounting records and annual operating statements for at least five years and minutes of trustee meetings for at least 10 years.
In addition, the accounts need to be audited.
Draconian penalties, including loss of all tax concessions, may apply if a fund fails to comply with all of its responsibilities.
Since the Tax Office assumed responsibility for self-managed super funds in late 1999, it has spoken to about 2000 funds over “specific issues” and says it is working with those funds to rectify the problems.
A Tax Office spokesman insisted that it was keen to provide guidance and education.
“Our style is not to be a heavy-handed regulator,” he said.
Many aspects of running a super fund can be outsourced, including administration, compliance and investment management.
However, members need to strike a careful balance in this area.
Outsourcing increases the cost of running the fund, but in the long run may be the most cost-effective approach because it ensures that the fund is properly managed.
Also, outsourcing may erode some of the flexibility and control that the members are seeking in the first place, Mr Coombes said.
n Mark Beyer can be contacted at mbeyer@vianet.net.au
More than 214,000 small funds have been set up in Australia, with about 420,000 members.
However, self-managed super does not suit all investors.
The cost, complexity and legal responsibilities mean that investors need to carefully assess this option before making a commitment.
Investment adviser John Coombes likens the responsibilities to being a director of a company and advises that members should be prepared to devote time and resources to running their fund properly.
Mr Coombes recommends that investors should consider a self-managed fund only if they have at least $100,000 to invest or plan to rapidly increase their superannuation savings.
Hartley Poynton’s Graeme Yukich agrees that self-managed super is generally not appropriate for people with less than $100,000.
“As well as the cost of running the fund, you need the capacity to diversify your investments across a range of assets classes and securities,” he said.
Mr Yukich believes the principal benefit of self-managed super is that members have complete control over their investments.
The funds can invest in a wide range of assets such as bank deposits, shares, managed funds and income producing property.
This can include business property owned by the members in certain circumstances, although assets like vacant land and holiday homes are no longer allowed.
Mr Coombes said another benefit of self-managed super is the ability to transfer assets between generations in a tax-protected environment.
This gives members more flexibility with their estate planning.
This can be particularly useful where the member takes a “complying pension” after retiring.
Any balance at the time of death stays in the fund for the benefit of other members, which may include the spouse or children.
In contrast, where a complying pension is taken with a life office, the balance stays in the life office.
The trade-off for these benefits is the legal responsibilities of running your own super fund.
The members of the fund are its trustees, and all decisions and responsibilities associated with managing the fund rest with them.
This includes developing an investment objective and strategy, and ensuring that the fund complies with that policy.
Record keeping is another area watched closely by the Tax Office, which regulates self-managed super funds. The Tax Office stated that “poor and inadequate record keeping has been identified as a major problem for small superannuation funds.
As this can pose a compliance risk for funds, trustees need to give this area detailed attention.
The records that trustees are required to keep include “accurate and accessible” accounting records and annual operating statements for at least five years and minutes of trustee meetings for at least 10 years.
In addition, the accounts need to be audited.
Draconian penalties, including loss of all tax concessions, may apply if a fund fails to comply with all of its responsibilities.
Since the Tax Office assumed responsibility for self-managed super funds in late 1999, it has spoken to about 2000 funds over “specific issues” and says it is working with those funds to rectify the problems.
A Tax Office spokesman insisted that it was keen to provide guidance and education.
“Our style is not to be a heavy-handed regulator,” he said.
Many aspects of running a super fund can be outsourced, including administration, compliance and investment management.
However, members need to strike a careful balance in this area.
Outsourcing increases the cost of running the fund, but in the long run may be the most cost-effective approach because it ensures that the fund is properly managed.
Also, outsourcing may erode some of the flexibility and control that the members are seeking in the first place, Mr Coombes said.
n Mark Beyer can be contacted at mbeyer@vianet.net.au
