A SMSF is a small superannuation fund that is run by its members. A SMSF is used to accept superannuation contributions, invest this money, and pay benefits to the members following retirement, total and permanent disablement or death of the member.
A SMSF must have less than five members and each member of the fund is required to act as a trustee. The main advantage of a SMSF is the increased control of retirement funds.
Advantages of a SMSF
Trustees are able to invest in a range of traditional assets (such as direct shares, managed funds, term deposits, property and so on) and some non-traditional assets. For example, a trustee may be able to purchase business premises and lease those premises to a member of the fund.
SMSFs generally give members greater control over how their superannuation death benefits are distributed. Additionally, it may enable members to ensure that their benefit is paid in the most tax effective way.
SMSFs can be tax effective as there is no CGT payable on the transfer of the assets from accumulation to pension phase.
A SMSF may have lower fees than a retail super fund. Retail funds generally charge a flat percentage for management fees and ongoing expenses, increasing in line with the value of the fund. SMSF fees are normally fixed dollar amounts, which usually form a small proportion of the total fund expenses as the value of the fund increases.
Disadvantages of a SMSF
Trustees are bound by law to responsibly manage the super fund for the benefit of the members. The level of effort required can be considerable and non-compliance can result in severe penalties. The Trustees however, can seek assistance from professionals in meeting these obligations.
Corporate Trustee Vs Individual Trustee
A SMSF must have a trustee in place that is ultimately responsible for the administration and affairs of the fund. The SMSF can have either a:
- Individual trustee – the members of the fund are individual trustees; or a
- Corporate trustee – the members are directors of a company that is the trustee.
Corporate trustees are recommended as a better and more efficient structure. Details of the advantages are given below:
- Individual Trustees can be personally liable.
- Corporate Trustees possess limited liability, therefore protecting the member’s personal assets from being exposed or seized.
- To change Individual Trustees upon the death or loss of capacity of an individual trustee a considerable amount of paperwork is required. This will be at an added cost to the members, effectively diminishing their retirement funds.
- In a Corporate Trustee structure, a successor director can be appointed in the situation where a director dies or loses capacity and is a much simpler process.
- In order to either add or subtract a member of a fund with Individual Trustees, the fund would require the Trust Deed to be amended and would need to transfer all fund assets into the names of the new individual trustees.
- The process to add or resign a director of Corporate Trustees is far simpler and does not require an amendment of the Trust Deed or the transfer of any assets.
Individual trustees are a lower cost choice in terms of establishment and annual fees. However in the long run, the corporate structure may ultimately prove to be less expensive and provide fewer barriers to change. ASIC provides two types of structures for Company Trustees:
- A Sole purpose trustee (used only for the SMSF) – at a cost of $41 per annum; or
- An ordinary company trustee – at a cost of $218 per annum. This structure is not recommended due to potential exposure to other liabilities.