7 Biggest Mistakes to Avoid When Setting Up Your Self Managed Super Fund
Are you thinking about setting up a Self Managed Super Fund (SMSF) but not sure if it’s the right step for you? Maybe you have a SMSF already but now realise there is more to running your own super fund than you first thought.
We’ve seen plenty of mistakes made by people who were genuinely trying to do the right thing but have got themselves into a huge mess because they didn’t know what they didn’t know!
So whether you are contemplating starting a SMSF or you already have one, here are some common mistakes:
Mistake No. 1
Setting up your SMSF to do something other than fund your retirement when you retire.
Are you are setting up your super fund solely to pay retirement benefits? If not, then beware. The government says your purpose in setting up your SMSF is to provide for your retirement or pay benefits to your beneficiaries in the event of your death – nothing else.
Did you know it is illegal to set up your Self Managed Super Fund to gain early access to your funds? If money in your fund is unlawfully released, huge penalties (including fines and gaol terms) can apply. Ignorance is no defence and many people have already been prosecuted for this huge mistake.
Mistake No. 2
Mixing the fund’s money and your own.
You must keep the money in your Self Managed Super Fund separate at all times from your own affairs. You must never think that you can take money out of your super fund, even if you fully believe you will pay it back soon.
Money in your fund can only be accessed if the laws say you can access it. Your fund is a complying super fund and qualifies for tax concessions so long as you follow the rules. You avoid penalties and protect your retirement savings when you keep the affairs of your SMSF completely separate to your own personal affairs.
Mistake No. 3
Selecting the wrong person to be trustee of your fund.
Remember the government says it will allow your fund to have many tax concessions, so long as you follow the rules it lays down in setting up and running your fund.
Firstly, make sure you (and the other members) are eligible to be a trustee (or the director of a corporate trustee) and ready to accept the responsibilities of the role. If you choose not to have a corporate trustee, all members must be individual trustees. The government even prescribes who can and who can’t be a trustee.
Anyone 18 years or over can be a trustee of a super fund as long as they are of sound mind and are not a disqualified person. A person is disqualified if they:
- have ever been convicted of an offence involving dishonesty
- have ever been subject to a civil penalty order under the super laws
- are considered insolvent under administration
- are an undischarged bankrupt
- have been disqualified by a regulator
Maybe you want to have a company as a trustee. Usually that’s acceptable too, but the government won’t allow a company to be a trustee when:
- a responsible officer of the company (such as a director) is a disqualified person
- a receiver or provisional liquidator has been appointed to the company
- action has started to wind up the company
Mistake No. 4
Not having an investment strategy for your fund.
This may sound like a small detail – but it isn’t. If you have one and make investments outside of your strategy then you’ll be in trouble too. One of the biggest mistakes people make when setting up their fund is not having a written investment strategy.
The law says your investment strategy should be in writing so you can show that what you have chosen to invest in is in sync with your strategy and complies with the super investment laws. The strategy must be regularly reviewed by the trustees (which is you).
When you prepare your strategy there are many factors you need to take into consideration such as:
- diversification (investing in a range of assets and asset classes)
- the risk and likely return from investments, to maximise member returns
- the liquidity of the fund’s assets (how easily they can be converted to cash to meet fund expenses)
- the fund’s ability to pay benefits (when members retire) and the other costs it incurs
- the members’ needs and circumstances (for example, their age and retirement needs)
- whether the trustees of the fund should hold insurance cover for one or more members of the fund.
Mistake No. 5
Falling for promoters of early withdrawal schemes.
No matter how reputable or influential the promoter of such a scheme may appear, never enter into any arrangement to withdraw some, or all of your super earlier than allowed under the law, or even pay for things other than your retirement. These arrangements are illegal.
If you access your super before you are legally entitled, you will be subject to severe tax and legal penalties. Penalties apply to the Self Managed Super Fund trustee, as well as anyone who receives the benefit.
Mistake No. 6
Not knowing what you can or can’t invest in.
Being a trustee of a Self Managed Super Fund gives you more flexibility in investing your fund’s money. Unlike some other super funds, you can choose the investments for your fund, but you must invest according to the fund’s trust deed, your investment strategy and super laws.
While the super laws do not tell you what you can and cannot invest in, they do set out certain investment restrictions you must comply with. For example, in most cases, trustees cannot:
- use the fund’s money to provide loans or other financial assistance to members or member’s relatives
- acquire assets (with limited exceptions) from related parties of the fund, including fund members and their associates
- borrow money on the fund’s behalf (certain limited recourse borrowing arrangements are allowed)
- lend, invest or lease to a related party of the fund more than 5% of the fund’s total assets
- enter into investments on the fund’s behalf that are not made or maintained on an arm’s length (commercial) basis.
The investment restrictions are some of the most important rules you need to comply with under the super laws. If you don’t, the government will impose significant penalties.
Mistake No. 7
Not appointing a registered SMSF professional to help you set up and advise you on running your fund.
Naturally, during your selection process, do some homework so you can choose a qualified and trusted provider who is acting in your best interest. You can check whether your financial adviser is appropriately licensed or authorised to provide such advice by visiting the ASIC website at asic.gov.au. You can also check whether your tax agent is registered by visiting the Tax Practitioners Board website at tpb.gov.au.
Something to note is, even if you use a professional, the responsibility for running the fund and making decisions rests with you and other trustees. Having said that, in the vast amount of cases, the previous six biggest mistakes could have easily been avoided if the Self Managed Super Fund operators who made these mistakes had sought professional advice.
Prior to establishing your SMSF we urge you to consider using a SMSF professional to help you set up and then manage your fund. There are hundreds of laws that govern the establishment and smooth running of your Self Managed Super Fund. An SMSF professional will help you to keep the money you have built up over the years safe and avoid the biggest mistakes people make with SMSF’s.
It is possible for you to avoid those mistakes and enjoy the process of being involved with self managing your super fund. Simply give us a call to arrange a time to come in for an obligation free chat and let us show you how to ensure you and your nest egg are protected.
Contact us to find out more.
Read more about our Self Managed Super Fund service.