Retirement is something that everyone should prepare for. Even business owners grow old and there will come a time that you may not have the physical or mental capacity to run your business and support your basic needs. Business owners have the option to set up a self-managed superannuation fund, or most commonly known as self-managed super funds or SMSFs.

SMSFs are highly regulated by the Australian government, and there are numerous rules and regulations that one must know. Rules govern the setup procedures, annual compliance requirements, contribution limits and tax obligations for contributions and withdrawals and earnings on investments. There is much to learn about SMSFs and the information mentioned below summarize the basic information that one should take into account before deciding to start an SMSF.

SMSFs are geared towards providing business owners the opportunity to save for their retirement. One SMSF can only have a maximum of four members. An individual or corporate trustee should also be appointed, and the trustee will have full control in managing the SMSF. Any changes to the trustee or the assets being managed must be promptly reported to the government to avoid any penalties or tax consequences.

Tax Benefits, Contribution and Withdrawal Limits

If you are able to comply with all the rules and regulations, SMSFs offer significant tax benefits. Contributions can be concessional or non-concessional. Concessional contributions are pre-tax, meaning any amount deposited into the fund is not subject to your normal tax rate and will be subject instead to a contributions tax of just 15%. Non-concessional contributions, on the other hand, are post-tax; these are funds that are already taxed at your existing income tax rate, but will be tax-free once the funds are eligible for withdrawal or distribution. Capital gains are also taxable at 15%, but discounts are applicable if assets are not sold for at least 12 months.

The maximum amount that you can contribute or add to your SMSF depends on your annual income. Therefore, it is always recommended to consult experts first on how much you can contribute on an annual basis. There is no limit to the amount of money you can deposit into an SMSF. However, contributions that exceed your annual cap will be subject to an excess contributions tax amounting to 31.5%.

Withdrawals prior to your preservation age are generally not allowed, unless you are under any certain circumstances where the government permits premature withdrawals. The preservation age depends on your date of birth and ranges from 55 to 60 years. Recently, the government allowed borrowing against one’s SMSF. This means that you can borrow up to a certain amount, without actually withdrawing funds from your SMSF. However, this is also a highly regulated process which might entail seeking advice first from financial planners who are familiar with this.

Fees and Costs Involved in Setting up and Managing SMSFs

There are various costs involved in setting up and managing SMSFs. Normally these costs are fixed, regardless of how much you are planning to invest in the fund. Therefore, if you are planning to invest a small amount, for instance less than a hundred thousand into the fund, you will have a higher percentage of funds allocated for fees and charges, compared to someone who is planning to invest five hundred thousand or higher.

The initial setup involves appointing a trustee, filling out paperwork which lists down all the assets that will be included in the fund, and assigning an independent auditor that will do the annual audit for the fund. If you do not have any previous experience in setting up an SMSF, it is highly recommended that you hire financial planners or advisors that will help you with the initial setup and in complying with all the paperwork and other requirements that you need to submit.

If you are investing a higher amount into the fund, and the annual costs of hiring experts to manage the SMSF is less than one percent of your total assets, then you are better off sticking with having other people manage the fund for you. However, if you are just starting out and you would like to do some of the administration tasks yourself, you can save a significant amount of money. You just need to make sure that you really understand what you are getting yourself into. Keep in mind that SMSFs are usually joint ventures between business partners, and if you are not sure of what you should do, you are also putting other people’s retirement funds in jeopardy.

To summarize, investing your retirement money into an SMSF offers a lot of tax benefits. By accurately investing in various securities, you are also presented with the opportunity to grow your retirement funds significantly. However, the setup and the annual maintenance of the super fund entail a lot of work and also involve certain costs. Thus, it is essential to have a thorough analysis of whether the potential earnings would offset the costs.

By looking for trustworthy and competent financial advisors that can help you with the setup and annual compliance requirements, you can have peace of mind knowing that you have everything covered. There is no need to worry about any loose ends that can cause you significant amount of penalties or tax consequences. It will also allow you to focus on growing your business further, which in turn would allow you to further grow your super funds and have enough money to enjoy your retirement years with your loved ones.