Lifecycle of an SMSF
Recognising the different phases of your life and adjusting your retirement strategy to adapt to those changes is important to the success of your long-term planning.
This is the case whether you are setting up your self managed super fund (SMSF), accumulating wealth, paying an income stream or winding up your fund.
Establishing your SMSF
Setting up your SMSF can be a time-consuming process, potentially involving lawyers, an accountant and more often, a financial planner. There are some key steps that a trustee must take to ensure your SMSF can operate smoothly.
Open a bank account
You should open a bank account for your SMSF once the fund has been established, that is, the Trust Deed has been signed and dated and properly witnessed. Documents electing for the SMSF to be a regulated superannuation fund must be lodged with the Australian Taxation Office (ATO) so your fund is entitled to the lower concessional tax rate that applies to an SMSF, currently 15%. The ATO will register you on their website as part of this process.
To open a bank account you must provide an Australian Business Number (ABN) and a Tax File Number (TFN) to the bank. You apply for these at the same time as electing to be regulated. Your SMSF will have its own ABN and TFN, not your personal TFN, ABN or the TFN of your corporate trustee.
Write an investment strategy
You also need to ensure you have a written investment strategy, adopted by the SMSF trustees, and in place before investing any of your fund assets.
Once these steps are completed, you are now ready to accept roll overs from other funds, employer superannuation guarantee contributions or salary sacrifice contributions into the fund. It is worth noting that any costs of set up paid by you personally will be treated as a contribution to your SMSF and should be recorded as such.
Accumulating wealth for retirement
During the accumulation phase, investments will be made, changed, adjusted, sold and sometimes repurchased. There are a few things to be careful of when making your investment choices and entering into transactions.
Care should be taken when acquiring assets from related parties, that is, members of the SMSF, relatives of members or businesses they run, family trusts they control and so on. Restrictions apply to these transactions. You should always seek qualified professional advice before entering into these types of transactions.
Income earned on your SMSF investments is recognised for tax purposes in the same way as for an individual investor, when received into your bank account. Equally, you only pay capital gains tax on assets you actually sell for a gain. If you have owned the asset for longer than 12 months, you will pay tax on a discounted capital gain just as you do as an individual. The difference here is that the discount applied is a 1/3 discount rather than the 50% discount you receive personally. Concessional contributions are taxable on a receipt basis as well.
Two exceptions to this general rule are:
- Distributions from managed funds, which like family trust distributions you may receive personally, are recognised on an entitlement at 30 June, even though the cash does not come into your bank account until later; and
- Dividends, which are taxable once they are available to be paid which may be before it is paid into your SMSF bank account, which is the same for you personally, for shares you own in your own name
Remember to invest within the parameters of your investment strategy and change it if necessary to accommodate new investments you want to make.
Paying an income stream or pension
Superannuation law requires that as a trustee, you invest fund assets to ensure the SMSF is able to meet all obligations as they fall due. When a pension is started, ensuring the fund has sufficient cash to make pension payments is part of this obligation. So, carrying a little more cash may be prudent and should be reflected in the investment strategy of the SMSF.
It’s also compulsory for a minimum pension amount to be paid each year to ensure that the tax concessions that flow to your SMSF because a pension is being paid, are received by your SMSF. The Federal Government has introduced limits on the amount of capital that can support a pension for each member and this will need to be monitored going forward by either the trustee or their adviser.
As for being more conservative in your investment choices once a pension has commenced, this will vary between funds and the members of those funds. Even at retirement, the investment horizon, on average, is still considerable for both men and women. You need to remain comfortable with the amount of risk you are taking on. Member choice of investments applies to members of all SMSFs, so investment mixes can be adjusted between retired members and those still in accumulation phase if needed.
Winding up your SMSF
There are a number of reasons why you might no longer need an SMSF, including the drawdown of most of the assets, lack of interest, or health.
When you need your SMSF wound-up, you should consider seeking qualified professional advice. Decisions will need to be made around assets that should be disposed of before income entitlements are crystallised, whether to sell shares before they go ex-dividend and whether to sell managed funds before you are entitled to a distribution.
Let employers who contribute superannuation guarantee contributions to the SMSF know that the fund is being wound up and organise alternative super arrangements to accept these contributions. Make sure fund expenses are met or accounted for before paying out member entitlements or roll overs to other superannuation arrangements.
Don't forget you will have a final tax bill to pay as well as a lodgement fee with your last tax return for the fund.
CommBank has previously partnered with the SMSF Association to produce the SMSF Report2 based on research investigating the motivations, attitudes, and decision-making behaviours of SMSF investors.