Over a half a million Australians have decided to take control of their retirement destiny, by setting up a self-managed super fund (SMSF). And the number of DIY funds is only going to increase – and rapidly – with an estimated 1,500 new schemes being set up every month. In fact, the Australian Prudential and Regulation Authority has found that SMSFs are now the second largest category of superannuation behind retail super, holding $166 billion in assets.
Surprisingly, it is not only those with large amounts of cash to invest who have set up a scheme. While an SMSF must have less than five members, new research from the Investment and Financial Services Association (IFSA) has discovered that almost one-third of schemes had a balance of less than $100,000.
So what are drivers for becoming a fund trustee, with all the responsibilities and administrative work that such a role entails? In addition to the feeling of being in control, Damien Palmer, director of Super Outsource, says: “SMSFs allow access to innovative strategies and products not available through a public offer fund, such as instalment warrants, deferred settlements strategies for property and shares, unit trusts for property acquisition, direct property acquisition and estate planning purposes. “The one thing that is certain is that it is a completely tailored experience for each fund, and no two funds are ever the same in the way they invest.”
But before you go thinking that an investment free-for-all approach is allowed, Palmer warns that SMSF trustees must ensure that the nature of the fund assets are complying according to Australian Taxation Office (ATO) rules.
Property investment is particularly well-regulated. Palmer explains: “It is a complying transaction for a SMSF to purchase a residential investment property though the local estate agent that is up for sale, but it is completely non-complying to purchase a residential property from your uncle.” Nor can you rent out an investment property owned by the SMSF to your kids, or use fund cash to finance a property purchase.
And while more unusual investments, such as valuable artwork, vintage cars and crates of Hermitage aren’t on the banned list, these types of assets must meet the ATO’s sole purpose test. This states that members of the fund cannot enjoy a direct or indirect benefit from the investment. So hanging that Van Gogh on your wall isn’t going to pass muster.
It is also important to remember that trustees have defined legal responsibilities. These include:
– Lodging an annual income tax return and superannuation fund annual return
– Lodging member contribution statements
– Reporting payments of member benefits for reasonable benefit limit (RBL) purposes
– Appointing an approved auditor to complete the annual audit
– Maintaining records for up to ten years, and
– Complying with investment restrictions.
Next comes the time involved in selecting, managing and maintaining your investment portfolio. While some people may have the confidence and experience to invest directly, others pay for expert advice Palmer says: “Some people invest with the advice of stockbrokers or financial planners and benchmark themselves against these individuals. This can be quite a useful tool, considering the amount of money that is being invested.”
According to IFSA, almost 90 per cent of SMSFs hold shares, with an average share portfolio among those doing so $180,000. Sixty per cent of SMSFs hold property of some kind (residential, commercial or listed property trust), and 58 per cent have managed fund investments.
But ultimately, being your own super boss can be as complex or as simply as you like, says Palmer. “It depends on how the trustee wants to run their fund, and how they wish to invest. Obviously, a buy and hold approach requires very little effort on a day-to-day basis, but if you wish to have an actively managed account that you as trustee conduct, then the time can range up to four plus hours per day. For some clients, this is their retirement job!”