11 things you need to know about SMSF rules before setting up a fund

Many young adults nowadays are now eager to enter the world of investing and choose SMSF. But What is SMSF? Self-managed super funds (SMS) is a private super fund that is managed by yourself. As most young adults today are risktaker and wanted are take the advantage of having the flexibility and time to study and learn from their successes and failures they choose to work on their investments through SMSF.

So, if you are wondering how does SMSF work and what is needed to set up one, this piece is for you. Below are eight golden rules you need to be aware of before setting up your own self-managed super fund (SMSF).

Growing popularity of SMSFs

Recent stats by ATO show that SMSFs are growing in popularity. There are over 601,000 SMSFs in Australia today that control over $876 billion in assets. That is over a third of all assets in the superannuation system. Even though SMSFs can have 4 to 6 members, only 7% of the funds have more than two members. Interestingly, about 65% of the members are over the age of 55. And over 70% of the members have an annual taxable income of less than $100,000.

Almost anyone can start an SMSF

There are two qualifications you need to meet to start an SMSF, according to Mark Chapman, the Director of Tax Communications at H&R Block; the first is a “fairly decent pot of super.” The reason is simple; an SMSF won’t make sense if you have less than $250,000. The costs of setting up and running it alone can consume a chunk of the funds.

The second requirement is a desire to gain control over your super. This makes sense since most individuals will have their funds invested in industries or retail funds where they have no control over what happens to their super.

Almost anyone can start an SMSF

The many benefits of an SMSF

There are a few benefits to be found by having an SMSF. First, it allows you to save for your retirement and the other one is it can be controlled. Since it is known as “DIY super” and it’s a private super fund and you get to manage it by yourself and make all the crucial investment decisions. You get to control how your funds are invested; therefore, you can choose assets/investments that you feel most comfortable with. However, control comes with responsibilities. You will have to choose an investment strategy and make investment decisions by identifying the kind of assets that will offer optimal returns for your retirement. That said, the element of control, the ability to make your own decisions, and possibly performing better than those who run the big funds can be very exciting.

Deciding if it’s the best choice for you

When it comes to setting up and operating an SMSF, the first thing you will have to do is evaluate if it is for you since this is a major financial decision. You need to understand that the responsibility for running the fund and complying with the law rests solely with you as the trustee. Therefore, determining if you have the time, knowledge, and skills to manage your own SMSF and the assets and money to make the fund a reality is crucial. At this stage, it’s advisable to see a qualified and licensed professional to help you make the decision.

Knowing the roles of trustees and their responsibilities

Each SMSF needs four or fewer members, and being a member means you must be a trustee. The role of trustees is to run the fund and act in the best interests of all fund members when making decisions. Also, the trustees will have to comply with the superannuation and taxation laws to ensure the fund retains its complying status and is entitled to the superannuation tax concessions.

The SMSF must comply with Australian super fund rules

For your SMSF to be considered as a complying super fund and receive superannuation tax concessions, it will have to meet the definition of “Australian superannuation fund” for tax purposes. For this to happen, there are three tests the fund must meet; be established in Australia or the assets of the fund must be allocated in Australia; satisfy the central control and management test, and satisfy the active member test.

Choosing a retirement plan strategy

The good thing about SMSF is that they allow you to choose various retirement plan strategies, which allows you to achieve your goals and objectives with ease. Therefore, it is crucial to seek professional advice from a financial adviser to ensure you maximize your SMSF and retirement planning goals and objectives.

Setting and defining your investment strategy

Avoid breaking investment rules

SMSF rules stipulate that a trustee of the fund will have to prepare and implement an investment strategy. Therefore, when coming up with one, you need to establish investment objectives and detail the investment methods the fund will adopt to achieve the goals. As you come up with the investment strategy, you will also have to consider the risk insurance needs of the members.

Avoid breaking investment rules

As a trustee, you need to be familiar with all the relevant restrictions that prevent SMSFs from making certain investments. For example, you need to avoid borrowing in particular circumstances and lending money or even providing financial assistance using fund resources to a member or a relative. Therefore, it does help to solicit advice from a financial adviser to help ensure the trustees set, execute, and review an appropriate investment strategy.

Remember the sole purpose test

The SMSF sole purpose test aims to ensure investments are maintained for the purpose of providing benefits to fund members upon their retirement and not for any other purpose. The trustees of an SMSF have to comply with the test to maintain the taxation concessions available. For example, if members of the fund and their families occupied a holiday home owned by the fund, they would be in breach of the sole purpose test.

Keep things separate

Another crucial thing you should be aware of is keeping things separate. As a trustee of an SMSF, it is crucial to keep the assets of the fund separate from personal assets. This means separate bank accounts and so on.

That said, there are a bunch of other things you need to pay attention to when setting up an SMSF. However, by following the eight rules above, you should be on your way to a smooth start.

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