When it comes to setting up a Self-managed super fund (SMSF), there are some common mistakes that a lot of people seem to make. These points are too often excluded from the conversation and should be clearly considered before setting up an SMSF in the first place.
The following list covers some of the biggest mistakes people often make:
1. Do nothing
It is incredible how many people have a super fund set up and the money just sits in cash. This is invariably driven by lack of understanding of the options or what is suitable and/or paralysis by analysis. If an SMSF is suitable and you assume control of your own funds, you need to have a strategy and a plan for how you use the funds.
2. Poor assessment of costs
Costs within the fund can quickly spiral when considering set up, investment costs and ongoing accounting and legal advice. Before you set up an SMSF, you need to draft out your known costs, including:
- Set up of the fund itself.
- If you elect to have a corporate trustee (something you must do if you are a sole investor or if you are borrowing in the fund) you will have the additional cost of a trustee company structure.
- If you intend to borrow in the fund, you will need to set up a bare trust.
- If you intend to borrow in the fund, there will normally be a loan application fee with the bank.
- Ongoing Accounting Costs.
- Ongoing Auditing Costs.
- Know what you are going to invest into and what costs are associated with the investment. Many people intend to buy property for example and it’s essential to calculate all of the purchase costs of property, including stamp duty and legals amongst others. If your intention is to trade shares, consider the buy and sell costs, including brokerage.
- Know what the ongoing costs are of the underlying investments you put your money into.
- Ongoing advice costs, if applicable.
Only once all costs are known and understood, you can make an informed choice that an SMSF is the most cost effective option.
3. Underestimate the time an SMSF takes to run
This is probably the least understood or considered aspect of what it means to start your own SMSF.
In order to manage your super fund effectively you need to have a clear investment strategy. Whether it is property or shares or even buying art that motivates you to set up a fund, you are doing it because you believe you can achieve a rate of return in excess of the Fund Managers that would be investing your money otherwise, were you to leave it invested in a public offer fund.
In order to do this effectively of course, you need to commit a certain amount of time to ensure your investments are managed effectively and your time commitment does not rest at that.
In reality, if you are to manage your SMSF effectively, the time output includes:
- Research and education – this is an ongoing commitment.
- Investment management – Physically managing the investment. This could be trading shares or co-ordinating maintenance on an investment property, for example.
- Tax returns – You are now responsible for your own tax work, which means collating your years information in the same manner you do currently for your personal tax returns.
You could outsource any one or all of these time outputs (with the exception of preparing your tax work) however you would need to weigh up the costs of this against how this might impact your overall fund return.
Time is a precious commodity that is finite, but it also has a value attached to it.
It is therefore vital that you understand and weigh up what your time is worth, before committing it to running your fund.
4. Increased Risk through having legal responsibility
If you choose to start an SMSF, you are taking on the legal responsibility of a Trustee. In short, your legal responsibility is to operate under the rules of the SIS Act and to work within the rules of your Trust Deed.
While SMSF’s offer considerable flexibility compared to other super fund structures, the rules they operate within are regularly changing. You as Trustee are responsible and liable, if you breach these.
Your Financial Planner and Accountant can provide a lot of guidance in this regard, however the ultimate responsibility still rests with you as Trustee.
5. Do not effectively benchmark return
One of the problems with super generally is that you are not given a reasonable point of comparison to see how you are going, compared to the underlying investment markets that you are invested in. The information is out there, but as it stands it is up to you to seek out the answer, and the reality is that most of us would not know where to start.
As a consequence we can all be guilty of making ‘apple for oranges’ judgements on performance.
The same is true for SMSF investors too. Fed up with relying on someone else to manage their funds, they take control back and invest it for themselves, but what do your returns really mean if you are not benchmarking them? You may achieve a 15% return and feel pretty good about it, but if that is 10% less than market for that year, it’s actually a really poor result.
If you do decide to set up an SMSF, it is essential that you identify how you can effectively benchmark performance if you are really going to achieve what you’ve set out to do, and that is outperform the alternative you’re thinking of moving away from.
6. Store documents
Keeping the documents related to your Self-Managed Superannuation Fund (SMSF) is crucial. These documents are essential for staying compliant with the law, completing audits, and being accountable for your fund’s actions. They act as a record of what happens in your SMSF and provide protection in case any disputes or claims arise.
Records to be retained for a minimum of 5 years include:
- Accounting Records: Comprehensive and accurate records reflecting all financial transactions and the current financial status of the SMSF.
- Annual Operating Statements: These statements outline the annual financial operations of the fund, providing a clear overview of income, expenses, and investments.
- Annual Statements of Financial Position: These documents offer a snapshot of the fund’s financial standing at the end of each fiscal year, detailing assets, liabilities, and member balances.
- Copies of SMSF Annual Returns: Duplicates of all SMSF annual returns filed with the Australian Taxation Office (ATO).
- Copies of Other ATO Lodgment: Copies of any additional statements or reports submitted to the ATO or shared with other superannuation funds.
Records to be preserved for a minimum of 10 years encompass:
- Trustee Meeting Minutes: Detailed minutes capturing discussions and decisions made during trustee meetings, especially those pertaining to significant fund matters.
- Records of Trustee Changes: Document any changes in trusteeship, along with written consent from members agreeing to serve as trustees.
- Trustee Declarations: Declarations acknowledging the duties and responsibilities of trustees or directors of a corporate trustee appointed after June 30, 2007.
- Member Reports: Copies of all reports disseminated to fund members, ensuring transparency in financial matters.
- Decisions Regarding Collectibles and Personal Use Assets: Well-documented decisions concerning acquiring, storing, and managing collectibles and personal use assets within the SMSF.
Stephen Lowry (CFP® Professional, DFP, AIF®) is a representative of Alman Partners Pty Ltd, Australian Financial Services Licence No: 222107.
Any information provided to you was purely factual in nature. It has not been taken into account your personal objectives, situation or needs. The information is objectively ascertainable and is not intended to imply any recommendation or opinion about a financial product. This does not constitute financial product advice under the Corporations Act 2001 (Cth). It is recommended that you obtain financial product advice before making any decision on a financial product such as a decision to purchase or invest in a financial product. Please contact us if you would like to obtain financial product advice.