Do-it-yourself Superannuation

Small business owners are showing strong interest in managing their own money in saving for retirement and when no longer working full-time. Often, the management of their own self-managed super fund (SMSF) becomes their new ‘small business’ in retirement.

Many businesspeople have been hesitant to start an SMSF because they have not known what is required of them. The following is a list of what you need to get right and what to avoid in establishing and running a DIY fund. Potential trustees of their own fund must have a clear picture of the main issues when having discussions with their accountants and financial advisers. 

This list only seeks to be a good starting point for that discussion with qualified advisers.

IMPORTANT DOs

1. Treat the fund as a separate entity. This means:

• the fund’s money must be kept in its own bank account

• the fund’s bank account must contain the name of the fund

• the fund’s expenses must be paid out of the fund’s bank account

      • the fund’s money, such as contributions, interest and dividends, is all paid             into the fund’s own bank account

2. Ensure that all records are kept of decisions of the trustees and of any member death benefit nominations.

3. Remember that the fund must be audited each year and that the audit will cover both financial and compliance issues.

4. Ensure that all the fund’s transactions are on commercial terms (i.e. arm’s length terms).

5. Ensure the fund has an investment strategy:

• record the investment strategy in a written format.

•  implement the investment strategy.

•  regularly review the investment strategy.

6. Ensure that the fund’s investments are recorded in the trustee’s name.

7. Comply with the fund trust deed and governing rules.

8. Obtain and keep all documents relating to the fund’s financial transactions, expenses and payments.

9. Remember that, generally, the fund cannot acquire an asset from a member (or other related party) whether by purchase or as a contribution. However, certain exceptions apply:

• business real estate property can be acquired from a member (or related party) but you should obtain specific advice before acquiring the asset.

• listed securities can be acquired.

10. Ensure that the fund’s earnings are allocated to members’ accounts and that members’ account balances are reconciled to fund’s account balance.

IMPORTANT DON’Ts

1. Don’t let the fund borrow money by:

•         letting the fund’s bank account go into overdraft.

•         paying fund expenses using your personal bank account.

However, in limited circumstances, it is now possible for a fund to borrow directly for investment purposes.

2. Don’t breach the contribution rules – remember the annual contribution caps and, for members aged 65 or over, the age-based contributions restrictions; for members aged 75 or more, generally no contributions can be accepted.

3. Don’t lend, invest or enter into a lease arrangement in respect of more than five percent of the fund’s asset with a related party such as a fund member or a relative.

Getting good advice is necessary in most financial transactions but essential in all parts of starting and running your own super fund. The price of poor advice, no advice or ignorance about what is involved in the SMSF world could lead to depending on the old age pension if things go badly wrong.

Townsends assists many SMSF owners, via their accountants and financial advisers, with its SuperCentral service. Michael Hallinan is Special Counsel for Townsends Business & Corporate Lawyers.