Thinking of setting up a self-managed super fund (SMSF)? You may be doing it for the wrong reasons, according to the Australian Tax Office (ATO).
In a speech delivered to the SMSF Association, the ATO revealed some of the most common reasons that Australians set up SMSFs, some of the mistakes these Australians make, and some tips for setting up a fund.
The right reasons to set up an SMSF:
According to the ATO, one of the main reasons Australians choose to set up SMSFs is to take an active and direct role in managing their own super.
A SMSF allows individuals to control and manage the assets for their retirement, potentially maximising returns while minimising the taxes and other expenses.
According to an article quoted by the ATO, most SMSF members start their funds at the suggestion of financial professionals.
“SMSF members do not show any greater financial skills than non-members, but they do display overconfidence, a higher risk tolerance and a more trusting attitude to financial professionals.”
Potentially bad reasons to set up an SMSF:
A second reason why some individuals consider SMSFs is so they can access their super money early, for reasons other than funding their retirement, such as paying bills, taking holidays, or buying cars.
“These individuals never had any intention of managing their own super and established an SMSF to gain illegal early access to their benefits. We also see promoters operating in this space, assuring participants that this practice is OK.”
Another reason why some Australians consider self-managed super funds is to buy a house with their super money. According to the ATO, while it is possible to use money in an SMSF to invest in property under certain specific circumstances, there are schemes “pulling on the heartstrings of average Australians struggling to enter the housing market”.
“Retirement savings are targeted by promoting the buying of the property through an SMSF, often with a complicated limited recourse borrowing attached, with no regard to the size of the SMSF or its ability to grow retirement savings.”
Tips for setting up an SMSF
The ATO advised that SMSFs aren’t for everyone, with around 12,000 funds “winding up” every year.
“In the hands of engaged and informed trustees who know when to seek professional advice, SMSFs can be a suitable retirement strategy. On the other hand, if a trustee is not engaged and not informed, SMSFs can be a high-risk or expensive option.”
The ATO advised that Australians wanting to establish a self-managed super fund should:
- Be clear about their purpose in setting up an SMSF.
- Consider whether an SMSF is the right vehicle for them.
- Be aware of the costs, initial and ongoing, involved in running an SMSF.
- Understand the risks, time and resources required and compliance obligations in running an SMSF.
- Consider completing a trustee education course.