SMSF: Do’s and Don’ts

When it comes to self managed super funds there seems to be a slate of questions and concerns among people who don’t really understand how to properly manage their fund.

Being unsure about how to mange the fund properly can cause several problems, including investment failure and trouble with the ATO. The AFR’s Smart Investor says you need to put the following into your investment strategy to appease the tax office:

  • A written investment strategy.
  • Regular reviews (at least annually) with the changes documented.
  • The consideration of insurance for each of your fund’s members, although purchasing insurance is not obligatory.
  • Some consideration of diversification.
  • Liquidity (access to cash) for pensions and other benefits or requirements.
  • Consideration of ancillary needs, goals and objectives of the members of whom maybe at different life stages and circumstance.

This is probably a great place to start when determining what to do and what not to do. It’s always best to have the tax office onside from the beginning.

What else do you need to consider?

Well, if you want hands on control of your superannuation, you should have some understanding of what an SMSF is and how it works. And you should be confident in financial and legal matters. It also helps if you have significant super funds.
Understanding how the SMSF works is crucial. If you set up your own fund it must follow strict guidelines that are regulated by the ATO.
The basic facts when you run your SMSF are:

  • An SMSF can have between one to four members. Each member is a trustee (or director if there is a corporate trustee).
  • You must carry out the role of trustee or director, which imposes important legal duties on you
  • Use the money only to provide retirement benefits
  • Set and follow an investment strategy that ensures the fund is likely to meet your retirement needs
  • Keep comprehensive records and arrange an annual audit by an approved SMSF auditor

You must at all times remember that you are liable for the decisions made by the fund, even if you receive professional help.

What you shouldn’t do

SMSFs are tricky. Make one mistake and you could hurt your long-term retirement plans. It is thus important to have all your ducks in a row, before considering whether to enter into a self managed fund or not.

Your main consideration should be the state of your finances. If you don’t have a large amount of money in the fund, you will struggle with the basics such as yearly running costs and set up. In fact, you may not even get it off the ground.

Further to this failure to budget for ongoing expenses such as professional accounting, tax, audit, legal and financial advice, could see you lose everything you have put in. It doesn’t matter how confident you are in your ability to manage a fund you still need professional advice.
Don’t go into an SMSF, if you don’t have the time to properly manage it. It’s like anything in life, the more time you spend on something the better it will be.

Finally, don’t lump your life insurance, income protections and TPD into your super fund. Should your fund go broke, you will have no coverage or protection for you or your loved ones.

These are some pretty simple rules, but if you are serious about managing your own super fund it is important to take heed of them. Failure to do so could cause serious financial pain.

The best thing to do before you start is seek financial advice and ensure you have the means, the knowledge and the time to make your SMSF work for you.