How hard is it to run your own SMSF?

The Four Cs: Complexity, Compliance, Costs, Capability

Running an SMSF is complex by definition - you are taking charge of your retirement future. The rules, structures, and decisions are going to be more complex than handing over everything to an APRA regulated super fund, and that’s one reason an SMSF is not for everyone. But for people who thrive on that sort of challenge, running your own SMSF can be very rewarding.

If you’re wondering whether an SMSF is right for you, it’s worth considering both your life stage and what sort of investor you are. SMSFs cover a vast range of life stages and experience, including investors who are just starting out, people who are well into the accumulation phase (post mortgage and children’s education), and others either entering or well into their retirement. Depending on your circumstances, it’s important to ask yourself: “Do I have the time and capacity to focus on the management of my fund?”

Your investing style will influence the advice you need, how you administer your fund, the investments you make, and the cost of running your fund.

What style of investor are you?

CommBank’s research identified four distinct styles:

• The Outsourcer - looking for the one-stop shop; do it for me.
• The Coach Seeker - a growing segment looking for advice, featuring a younger demographic, including more women.
• The Controller - they like doing it for themselves and seek information to support their decisions, often business owners, showing the highest income of all the segments.
• The Self Directed - the traditional profile characterised as older, male and often either business owners or ex-business owners.
   

Compliance requirements

Understanding the legal and compliance requirements of running an SMSF can be a challenge, although getting good advice from qualified people can help. This challenge increases when there are major changes to the law, such as changes which occurred on 1 July 2017⁽²⁾.

Sometimes legal changes can have unforeseen effects. For example, the introduction of the Transfer Balance Cap (TBC)⁽³⁾ had a consequential impact on estate planning (an already complex area) and associated tax changes introduced at the same time have impacted Transition to Retirement (TRIS)⁽⁴⁾ plans.

According to the Australian Taxation Office (ATO)⁽⁵⁾,  close to 2% of SMSFs were issued with auditor contravention reports (ACRs). The following four types of contraventions make up over 60% of all ACRs both by number and value of assets:

1. Loans or provisions of financial assistance to members or their relatives
2. In-house assets
3. Separation of assets
4. General administrative contraventions

The top three contravention types involve areas that should be well-known to SMSF trustees, and they can often be avoided with appropriate advice.

The ATO’s oversight of the SMSF sector is increasing.  It has indicated⁶ that its current compliance focus includes:

• Targeting people who set up SMSFs with the intention of using them to illegally gain early access to their superannuation benefits, as well as targeting promoters of these type of schemes.
• Targeting the non-lodgement of annual returns by SMSFs, which the ATO says can be a strong indicator that the retirement savings of the fund’s members may be at risk.
• A ‘top 100’ SMSF program investigating aggressive tax planning arrangements particularly within SMSFs with the highest asset balances.  Areas of focus include the use of limited recourse borrowing arrangements, rapid and excessive asset growth rates and non-arm’s length arrangements.
• Increased reviews of the top SMSF auditors to ensure a large part of the SMSF sector is receiving adequate audits, as well as analysis and review of auditors considered to be ‘high risk’.
• Monitoring the use of reserves within SMSFs, particularly to identify whether reserves are being used to circumvent key 2017 superannuation reforms such as the transfer balance cap and total superannuation balance.

The ATO has also recently contacted some SMSF trustees about their SMSF investment strategy and considerations for investment diversification, stemming from concerns of high concentration of holdings in one asset or a single asset class.

Investment decisions

Deciding what to invest in can be another challenge.

Here are just a few of the things that might influence an investor’s level of confidence:

• Challenging market conditions, especially during protracted downturns in the market. When markets are under stress, investment decisions become more difficult.
• An investor’s lack of experience or a previous bad experience with an investment.
• Information overload - too much information from too many sources, and few ways to gauge the reliability of the information.
• Changes in government policy.

The best defence against this uncertainty is to have a clearly defined, diversified, long-term investment strategy.

Having an effective investment strategy should help to guide you and your fund through uncertain times. Superannuation is for the long term (potentially over 50 years). So a good investment strategy that keeps members disciplined and focused on the long term is essential. Reviewing the purpose and circumstances of the fund and its members at least every 12 months is good way to make sure the initial goals and potential outcomes remain relevant and achievable.

Getting the right advice

“Self-managed” does not mean that trustees have to make all the decisions about the fund on their own.

Based on CommBank’s research, we know that about 80% of SMSFs use at least one adviser. Of those that do use an adviser, around 37% use more than one.

The key for an SMSF trustee is to find specialist advisers capable of meeting the specific needs relevant to your SMSF at the time you need it. The type of advice you need could include things like setting the investment strategy, building a diversified portfolio, tax and compliance matters, or estate planning.

One of the most important times for advice is often at the transition from the accumulation to pension phase. An investor might have been quite comfortable investing for growth during the accumulation phase. But once they move to the pension phase, they‘ll need advice on how to generate sustainable income from a more defensive portfolio, while maximising tax benefits. They may also need advice to ensure they are not sacrificing all their growth opportunities.

Complicating this search for advice is the impact of the licensing regime on accountants.

From 1 July 2016, accountants wanting to provide financial advice to SMSF clients must be authorised by an Australian Financial Services Licensee (AFSL). This has led some accountants to form partnerships with licensed advisers. Another emerging trend is for administration platforms that can manage both the funds’ investments and the administration and compliance requirements.

So, is an SMSF right for me?

There’s no perfect profile of a successful SMSF investor. But the growing number of SMSFs each year, and the growth in balances of SMSFs, is some evidence that many investors have been successful in managing the hurdles.

Much of the compliance workload can be cost-effectively outsourced, thanks to technology, although it’s not possible to outsource trustee obligations. These technology developments could continue to reduce the costs of running and administering a fund and help provide fast access to more information, at a lower cost.

Product innovation and developments have made it easier to invest in asset classes that used to be difficult or expensive to access. For example, exchange traded funds (ETFs) and exchange traded bonds can provide investors with exposure to international shares, fixed interest, infrastructure, and commodities. Automated assisted advice is expected to open up further opportunities in the future.

However, sometimes the self-directed option just doesn’t fit your lifestyle. Some people have time constraints, like working full time or running a business, which can make it difficult to stay on top of SMSF requirements.

For others, investing is an area they would rather monitor with minimal touch, leaving the day-to-day decisions to a trusted adviser. Deciding what is right for you can take time, but by researching your options, you’re more likely to make an informed choice when you’re ready.

(1) https://www.ato.gov.au/About-ATO/Research-and-statistics/In-detail/Super-statistics/SMSF/Self-managed-super-fund-quarterly-statistical-report---March-2019/

(2) https://www.moneysmart.gov.au/tools-and-resources/news/superannuation-changes-1-july-2017

(3) https://www.ato.gov.au/Individuals/Super/Withdrawing-and-using-your-super/Transfer-balance-cap/

(4) https://www.ato.gov.au/individuals/seniors-and-retirees/transition-to-retirement/

(5) https://www.ato.gov.au/Super/Self-managed-super-funds/In-detail/Statistics/Annual-reports/Self-managed-superannuation-funds--A-statistical-overview-2016-2017

(6) https://www.ato.gov.au/Media-centre/Speeches/Other/SMSF-regulation--an-update/