Self Managed Superannuation Funds - Information

1. Introduction
2. What is a self managed fund?
3. What is an excluded fund?
4. What are the benefits of a self managed fund?
5. What are the disadvantages of a self managed fund?
6. Is there a minimum size?
7. What investments can be included in a self managed fund?
8. Decisions to make in setting up a self managed fund
9. Notes on benefits payable
10. Who does what?

Introduction

The passing of the Superannuation Industry Supervision Act, 1 July 1994 clarified many points in Superannuation Law. This has revived the popularity of self-managed superannuation funds to a point where there is an estimated 400,000 active self-managed superannuation funds in Australia, equating to approximately 800,000 trustee/members. Self-managed superannuation funds make up about 24 per cent of the total superannuation market, with around $160 billion in total assets.

Self-Managed Superannuation Funds (or DIY Funds as they are sometimes known) form one of the fastest growing segment of the superannuation industry.

What is a self managed fund?

A self managed fund is a superannuation fund that is controlled by its members, not by fund managers or outside parties. It establishes the member in full control of the fund and its investments, through membership and being a trustee or instigating a corporate trustee.

What is an excluded fund?

Many self managed funds are excluded funds. An excluded fund is one of 4 or fewer members. An exempt fund is exempted from the need to appoint employee representation, leaving the trustee/s in full control. Currently a self managed fund must have at least two members and trustees or will need to appoint a corporate trustee.

What are the benefits of a self managed fund?

• Control
  The trust is governed by a trustee. In a self managed fund, two or more of the members are appointed as trustees and they have full control of the investment strategy and the selection of investments. This means you get to choose where your superannuation is invested.
  
  
• Acquire
  With certain limitations, it is possible for the fund to purchase assets from a member or a member's company or trust.
  
  
• Transfer of assets
  Within certain limits, it is possible to transfer existing assets directly into a fund and in some cases claim a tax deduction for them.
  
  
• Tax planning
  The primary purpose of a superannuation fund is to accumulate retirement benefits. As some contributions are tax deductible, the fund is a vehicle for creating tax deductions. A superannuation fund also protects future potentially high returning assets from tax, because the maximum tax rate in the fund is 15%.
  
  
• Non compulsory withdrawal
  If a member is over 65 years old and wishes to keep on working, existing funds can be retained in the fund until retirement. Whereas some funds in rollovers on the other hand must be taken out at 65 years old.
  
  
• Convert to a private pension fund
  A superannuation fund can convert to a private pension fund. This allows assets with capital gains to be transferred into an allocated pension account and then sold without incurring any capital gains tax. This is because the tax rate in an allocated pension account is 0%. Similarly, investment returns in the allocated pension account are taxed at 0%. Instead, the member pays tax at his marginal rate on the actual amount of pension received. Allocated Pension payments attract a 15% tax rebate, too.
  
  
• Maintain multiple members
  Arguably this is the greatest advantage. A self managed exempt fund can have up to four members. Some of these could be receiving a pension and other younger members (eg the member’s children) could be still accumulating benefits by contributions. This allows assets to be moved from account to account to obtain the best tax treatment.
  
  
• Develop your own annuity
  This has similar advantages to the private pension account. In addition when the member receiving the annuity dies, the funds stay in the superannuation fund. This can ensure that inheritance complications and capital gains taxes are avoided.

What are the disadvantages of a self managed fund?

• Administration
  The trustee has to stay up to date with the administrative requirements and ensure they are met. This can be time consuming and complex and include ensuring tax returns, audit reports and returns to the Australian Taxation Office are prepared.
  
  
• Possible Liability
  The trustee is legally liable and responsible for the operations, investments and administration of the fund. The liability is administrative; in that an error, omission or negligent act can result in the fund becoming “non-complying” which means it loses its concessional rate of tax and is taxed at 47%. The liability is also criminal in that the trustee can be fined or imprisoned for illegal acts.

Is there a minimum size?

There are no legal requirements regarding size. However, the necessary annual costs of accounting, auditing and statutory charges mean that a fund value needs to be at least $200,000 to be cost effective.

What investments can be included in a self managed fund?

All traditional investments such as first mortgages, debentures, shares, real estate (provided it produces income), unit trusts, and specialist prescribed interests provided they produce or have a strong possibility of producing income.

Certain business assets likely to produce strong returns in the future such as patents are possible investments, as are works of art and antiques.

Investment Rules

The key rules governing the investments of a superannuation fund are:

• The "sole purpose" test; the sole purpose of a fund is to provide a retirement benefit to its members. Private investments are thus scrutinised extensively to ensure that there is not some other primary purpose, eg capitalising a business.
  
  
• The "arms length" test: the investment must be at arm's length to the parties; this means it must be acquired at market price and must return a market rate of return.

Decisions to make in setting up a self managed fund

The most critical decision is: do you want to do it? Do you understand the obligations? Is it important for you to have full control of your investments? Having decided “yes” the next step is to decide what investments you want to include. The choice comes down to whether the fund is going to invest in traditional investments.

Traditional investments are shares, unit trusts, direct property provided it returns an income, debentures, bonds, mortgages and the like.

A documented investment strategy must be prepared which addresses the investment objectives of the fund; it’s risks vs return strategy and such issues as permissible assets, liquidity and the capacity to meet contingencies eg payments of death benefits.

Initial Checklist for Set Up of a Self Managed Supperannuation Fund

What's Required to Run a Self Managed Fund?

The listed summary is aimed at the requirements for a self managed fund under the new ATO requirements, of one or two closely related members. Larger or other complying funds may have additional requirements.

Points to assess for Trustee Selection

A superannuation fund is a trust conducted on behalf of its members. The controller is a trustee. A trustee has certain common law obligations to manage the trust in the best interest of the beneficiaries and not to misuse moneys held in trust for personal benefits or gain.

The Superannuation Industry Supervision Act also disallows certain people from being trustees.

For Individuals:

1. They must never have been convicted of dishonest conduct.
2. They must never have been subject to a special civil penalty order imposed under the Superannuation Industry Supervision Act.
3. They must not be insolvent and under administration.

For Companies:

1. No principal officer can be a disqualified person
2. A receiver, official manager or liquidator must not have been appointed.
3. The company must not have been, or be in, the process of being wound up.

If individual trustees have been appointed, care must be taken to ensure that someone can act for the trustee if he or she dies or becomes in some way unable to act.

There are two main methods:

1. Appoint more than one trustee, with only one required to undertake any actions.
2. Prepare an enduring power of attorney for a trusted person to act on the trustee’s behalf. The trustee will also need to pass on the office of trustee to the executor of his estate in the will.

Notes on benefits payable

Current superannuation law permits the payment of either lump sum or pension benefits to a member upon retirement. The choice of trustee determines which benefits can be paid. Corporate trustees have the power to pay both benefits. Individual trustees can pay pensions only.

However, currently a loophole exists in that a pension can be commuted to a single payment. In other words, rather than being spread out over, for example ten years, a once off lump sum pension payment can be made.

Because of this loophole, it is possible to save the costs of establishing and running a company and still pay a de facto lump sum benefit from an individual trustee. If this loophole is closed at some future time, then a company trustee can be appointed.

However this strategy poses a further risk. Under the current tax law, a change in trustee is a change in beneficial ownership. Therefore, if a new trustee is appointed at some future time, the fund will have to pay capital gains tax on the value of the assets under management at the time of transfer.

The decision as to what kind of trustee should manage the fund must be taken carefully.

Who does what?

The establishment and on going administration of a superannuation fund is a complex task. Legally, everything is the responsibility of the trustee and he or she must sign all documents and bear all liability. In practice, a number of professional advisors are used to look after the routine tasks, while leaving the trustee to focus on the investment decisions; this is what most people who operate self managed funds want.

Three professionals are generally involved: a solicitor, an accountant and a financial planner.

The solicitor is responsible for drawing up the legal documents - the trust deed and any other deeds or documents required. They normally also attend to stamping requirements and in some cases prepare minutes etc.

The accountant is responsible for preparing financial statements, tax returns, arranging the auditing and similar matters.

The financial planner has a broad role of ensuring the fund is operating to the requirements of the member’s who have decided to follow this path.

As financial planners then, tasks include:

• Ensuring the trust deed provides you with the appropriate choice of investments, benefit payment powers (including the ability to provide a complying pension or annuity), powers to act and ability to accept a wide class of contributions and existing superannuation benefits;
• Preparation of minutes and assistance with lodgements to the ATO;
  Assist in selecting an accountant or professional administration service and liaising with them as required;
• Preparing the investment strategy (a document requiring specialist understanding of investment markets and portfolio theory);
• Making investment recommendations to the trustee and implementing the investments once selected;
• Monitoring the investments and providing regular half yearly reports to the trustee;
• Arranging any insurance required;
• Preparing the member annual performance reports to members.

Ballast Superannuation Management is able to assist in all of the steps required and in most cases prepare relevant documents.

This makes it extremely easy for trustees, accountants and advisers to assist their clients, and the clients themselves, with running a fund, from the point of view of not only ease but also compliance.