Setting up your SMSF is just the beginning. Make sure you know your obligations as an SMSF trustee and get the most out of your fund with this quick guide containing five critical tips for managing your SMSF.

While the list of SMSF administrative tasks and responsibilities may seem daunting, it’s there for a good reason: to ensure your fund’s decisions protect your retirement savings and provide financial security for your SMSF members in the future.   Your SMSF administrator, accountant or financial adviser will be able to help you with all these, but you still need to understand your ultimate responsibility.

Here are five tips to help you build a solid foundation for managing your SMSF.

1. Know your responsibilities as a trustee

Ongoing administrative tasks include, but are not limited to:

• Only accepting and allocating super guarantee contributions in line with required standards.
• Valuing fund assets when necessary to complete the SMSF’s financial statements, annual returns, and member benefits reports. 
• Engaging an approved auditor for the annual audit.
• Lodging the SMSF annual return with the ATO.
• Reporting certain events within the required time frame (such as the commencement of a pension within 28 days of the end of the relevant quarter).
• Notifying the ATO of any change in fund details, such as contact details, name, address, membership and trustees, within 28 days of the change.
• Keeping proper and accurate tax and superannuation records.
• Reviewing and updating the SMSF’s Investment Strategy.
• Transferring part of or all benefits to another superannuation fund (a rollover) if required by the member. The rollover must be performed via SuperStream and generally initiated within three business days of receiving the completed request.
• Making member benefit payments as a lump sum or income stream.
• Withholding Pay As You Go (PAYG) tax if a taxable benefit is paid to a member (such as when the member is under age 60).

Your adviser will be able to help you with most of these but it’s still technically your responsibility.

2. Supercharge your SMSF cash hub

Your SMSF bank account manages the entire lifecycle of your fund. It should be your one-stop shop for receiving contributions, receiving investment income, buying & selling investments, and paying expenses and member benefits (when eligible). It’s essential to ensure you have enough cash in the day-to-day account to pay SMSF expenses, – such as life insurance premiums, advice fees and taxes. You can hold surplus your cash in a higher-interest savings account or term deposit.

Case Study 1: Getting started with your SMSF bank account

Brian and Kathryn recently established an SMSF and now need a bank account within their SMSF to manage several transactions, including:

• Accept the rollover of superannuation benefits from Kathryn and Brian’s existing super funds
• Accept personal contributions from Kathryn so she can claim a tax deduction to offset some of her self-employment income
• Accept employer contributions from Brian’s employer
• Receive investment income from the planned investment portfolio
• Set up regular investment from surplus inflows
• Pay fees and expenses.

As their SMSF trustee has decided not to allocate specific assets to Brian and Kathryn’s member accounts, multiple bank accounts are not required. That means the SMSF can use one bank account.

Brian and Kathryn have taken the steps for their SMSF to comply with the requirement to accept rollovers and employer contributions electronically via SuperStream and documented an investment strategy for their SMSF.

The balance in their SMSF bank account will help them meet the investment strategy’s requirements, including:

• risk and likely return of the fund’s investments
• investment composition and diversification
• liquidity to meet expected cash flow requirements and
• ability to pay benefits such as pension payments and lump sums after retirement. 

3. Regularly review your investment strategy

The ATO expects SMSF trustees to review their investment strategy at least once a year to ensure it remains appropriate.  The Investment Strategy considers many issues, including the SMSF’s liquidity, investment diversification across the asset classes, and members’ insurance needs.   When a new member joins or leaves the fund, or if a member transitions to the pension phase, you will also need to review and potentially reallocate funds.

It is possible to manage different investment goals for each member by apportioning or segregating the fund’s investments to suit their needs. For example, you could have one member still Accumulating and one member taking a Pension or have two members with different risk profiles who need to invest their member account differently from the others.  

We recommend chatting with your financial adviser to help formulate and review your investment strategy.

Case Study 2: Making sure your SMSF cash account is retirement-ready

Brian is ready to retire and wants to set up an account-based pension. Kathryn is still working and wants to maximise her super over the last decade of her career. Once the appropriate documentation is completed, Brian can convert his accumulated benefits into a pension account. The SMSF will not pay any tax on earnings related to Brian’s pension account, where previous earnings were taxed at 15%.

Brian and Kathryn know that the SMSF must pay at least the minimum pension from Brian’s account-based pension each year, based on his age. Pension payments must be made by cash payment (they can’t be made in-specie by transferring an asset out of the SMSF).

The SMSF makes the required pension by regular monthly payments from its existing SMSF bank account to Brian’s personal transaction account outside the SMSF. The minimum annual pension requirement from Brian’s account-based pension may change each financial year, so Brian and Kathryn will need to update the monthly payments each year. They have also diarised to check towards the end of each financial year to ensure the relevant minimum pension will be paid by 30 June of that year. 

To manage the SMSF’s cash flow effectively, they may need to top up the SMSF’s bank account by selling an asset within the SMSF to ensure they have sufficient liquidity to meet the ongoing pension payments.

By paying the minimum pension each year, Brian’s pension income will be tax-free.

4. Understand the potential tax advantages available.

The superannuation environment is typically more tax-effective than investing outside super. So, having more control over your investment strategy through an SMSF also gives you more flexibility to manage the tax implications.

For example, you can buy and hold investment assets in your SMSF while accumulating your super.  If you then retire and start a pension, then the profit on sale of any investments supporting that pension account should capital gains tax free.

Other general superannuation tax benefits worth remembering include

• Tax deductions for personal contributions made by members up to their concessional contribution cap.
• Concessional tax on salary sacrifice contributions, up to their concessional contribution cap.
• Tax rebates for certain contributions made on behalf of a low-income earning spouse.
• Lower tax on super investment earnings (Earnings on pension accounts are tax-free; or if in an Accumulation Account, you’ll pay up to 15% on investment earnings, whereas marginal tax rates may be as high as 47% outside super.)
• Effective CGT rate of 10% on the sale of Accumulation Account assets held for 12 months or more. (Sale of pension account assets are tax free).
• Once super can be accessed, payments made to members aged 60 or over are tax free.

Working with a holistic financial advisor like Everalls Wealth Management will bring a tax-aware lens to our work. Our partnership with DFK Everalls, with their tax expertise and SMSF setup knowledge, means that the management of your SMSF is in good hands.

5. Be ready to manage life changes

Most SMSFs involve two members. If a separation occurs, there is loss of mental capacity or death of one member, having the right structures in place can help protect members (and their beneficiaries) and reduce the complexity of navigating a difficult time.

Dealing with a divorce can be incredibly challenging, particularly if the fund’s primary investment is property.   The SMSF Trustees would not want to be forced into selling that type of investment to get the cash necessary to rollout to exiting member’s account balance.  

Estate planning should also include watertight steps for what happens to the SMSF in the event of either member passing.   This includes reviewing both who is to take over as Trustee of the fund as well as what is to happen to the deceased member’s account payout eg Binding Death Benefit Nominations or Reversionary Pension nominations.  If the surviving Trustee does not have a lot of experience managing the SMSF they make like to engage a financial adviser to help them run it and make well informed decisions with more confidence.

So, while no one starts an SMSF expecting things to turn out badly, being prepared is essential.  Having the right structures, agreements and advisers in place can help you manage these unexpected changes and the more predictable administration tasks involved with an SMSF. If you are considering setting up an SMSF or are concerned about your current arrangement, speak to DFK Everalls and Everalls Wealth Management experts. Your financial future will be in good hands. 

Source: Macquarie