As a recent or long-time business owner, you know better than anyone how hard you work for your money. But wouldn't it be better if your money put in the same kind of effort that you do every day? In other words, what if your money worked even harder for you?
It can with a self-managed super fund (SMSF). An SMSF is a private fund that you set up and provide contributions to, in the form of income you receive or savings. As the account's name indicates, you're involved in all of the major decisions regarding the SMSF's operation. You get to choose what to invest in, and select the accompanying members (no more than four, who may also pay into the SMSF), as well what insurance to buy for indemnity purposes.
But much like running a business, overseeing and operating an SMSF can be a full-time job. There are a lot of layers to it and it requires a rigorous understanding of the risks, responsibilities and rules.
Here are a few rules — both written and unwritten — of SMSFs if you're seriously thinking about setting one up and making ongoing contributions:
1. Age requirement for contributions
As pointed out by the Australian Taxation Office, there is no specific age limit on who mandated employer contributions go to. There is, however, for contributions. For financial years ranging between 2004 to 2020, contributors must be no younger than 65 but also no older than 75. They also can't contribute more than $300,000 for any 12-month period.
Due to new rules established by the government, eligibility criteria for the years following 2020 has tightened. Starting next year, SMSF members must be at least 67 years old and under 75. The balance itself can't go over $300,000.
2. Ability to contribute may be affected by hours worked
The age of the contributor and their workweek in terms of time on the clock influences who can pay in. For example, below the age of 65, anyone can contribute regardless of employment. But between 65 and 70, contributors must work at least 40 hours over a 30-day period for the financial year in question.
The same goes for ages 70 to 75. The only difference is the contributions from members must be on their own behalf, rather than a family member or spouse, for example. Beyond 75, only compulsory contributions are deemed acceptable.
3. Passing the 'sole-purpose' test
SMSFs exist for one singular reason: to provide retirement benefits in the form of ongoing income for you and your members to use post-career. The sole-purpose test is a bit complex so if you're not familiar with how it works, you may want to consult with a professional at a comprehensive financial services firm.
For example, even though the fund is called a "sole purpose" account, the monies within can still be used for more than one reason if they classify as a "core purpose" or "ancillary purpose." An example of a core purpose would be a member's retirement from gainful employment. An ancillary purpose would be providing benefits to someone who has to stop working due to physical or mental health issues.
Again, there are many layers to the sole-purpose test, so we recommend you reach out to us here at WMC Accounting to learn all about this complex issue.
4. Highly strict administrative requirements
Running your own SMSF brings with it a lot of flexibility and self-determination when you're the trustee. But it's also very regimented and entails a lot of red tape. For instance, there are a lot of regulations established by the Australian Taxation Office, requiring you to maintain impeccable records (detailed financial statements and associated documents) and file tax returns separate and distinct from those you file exclusively for your business. As an SMSF trustee, you will need to go through an independent audit to ensure compliance.
5. Managing an SMSF entails effort and money
Earlier, we mentioned that in some ways, serving as the trustee of an SMSF can be like a full-time job, or at least it can be, as this is largely influenced by how many members there are, your investments and record-keeping strategy. The numbers corroborate as much. According to an Investment Trends report, SMSF trustees spend roughly eight hours per month managing an SMSF. That translates to almost 100 hours a year.
In other words, while a successful SMSF really can put your money to work, that doesn't absolve you from putting in some of your own time and energy along the way. In terms of what you can expect to spend, the average in 2018 was $6,152, according to estimates from the Australian Taxation Office.
If SMSF management isn't exactly your specialty, don't worry; it is for us at WMC Accounting. Contact us today and we'll help you get one up and running.