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Common Mistakes People Make When Setting Up Their SMSF

how to set up smsf

When it comes to setting up an Self-Managed Super Fund (SMSF), there are some common mistakes that a lot of people seem to make. These points are too often excluded from the conversation and should be considered before setting up your SMSF. This article will outline these points, and how to set up SMSF to achieve the maximum benefit.

The following list covers some of the biggest mistakes people often make.

common smsf mistakes

#1 – Do Nothing

It is incredible how many people have a super fund set up and the money just sits in cash. This is invariably driven by lack of understanding of the options or what is suitable and/or paralysis by analysis. If an SMSF is suitable and you assume control of your own funds, you need to have a strategy and a plan for how you use said funds.

#2 – Poor Assessment of Costs

Costs within the fund can quickly spiral when considering set up, investment costs and ongoing accounting and legal advice. 

When asking yourself how to set up an SMSF, it is crucial to draft out your known costs, including:

  • Set up of the fund itself.
  • If you elect to have a corporate trustee (something you must do if you are a sole investor or if you are borrowing in the fund) you will have the additional cost of a trustee company structure.
  • If you intend to borrow in the fund, you will need to set up a bare trust.
  • If you intend to borrow in the fund, there will normally be a loan application fee with the bank.
  • Ongoing accounting costs.
  • Ongoing auditing costs.
  • Know what you are going to invest into and what costs are associated with the investment. For example, many people intend to buy property and it’s essential to calculate all of the purchase costs of property, including stamp duty and legals amongst others. If your intention is to trade shares, consider the buy and sell costs, including brokerage.
  • Know what the ongoing costs are of the underlying investments you put your money into.
  • Ongoing advice costs, if applicable.

Only once all costs are known and understood are you able to make an informed choice on whether an SMSF will be the most cost effective option.

common smsf mistakes

#3 – Underestimate The Time It Takes an SMSF To Run

This is probably the least understood/considered aspect of what it means to start your own SMSF.

In order to manage your super fund effectively you need to have a clear investment strategy. Whether it is property, shares or other that motivates you to set up a fund, you are doing it because you believe you can achieve a rate of return in excess of the Fund Managers that would be investing your money otherwise.

In order to do this effectively of course, you need to commit a certain amount of time to ensure your investments are managed effectively; and your time commitment does not rest at that.

In reality, if you are to manage your SMSF effectively, the time output includes:

  • Research and education – this is an ongoing commitment.
  • Investment management – Physically managing the investment. This could be trading shares or co-ordinating maintenance on an investment property, for example.
  • Tax returns – You are now responsible for your own tax work, which means collating your years information in the same manner you do currently for your personal tax returns.

You could outsource any one or all of these time outputs (with the exception of preparing your tax work) however you would need to weigh up the costs of this against how this might impact your overall fund return.

Time is a precious commodity that is finite, but it also has a value attached to it.

It is therefore vital that you understand and weigh up what your time is worth, before committing it to running your fund.

common smsf mistakes

#4 – Increased Risk Through Having Legal Responsibility

If you choose to start an SMSF, you are taking on the legal responsibility of a Trustee. In short, your legal responsibility is to operate under the rules of the SIS Act and to work within the rules of your Trust Deed.

While SMSF’s offer considerable flexibility compared to other super fund structures, the rules they operate within are regularly changing. You as Trustee are responsible and liable, if you breach these.

Your Financial Planner and Accountant can provide a lot of guidance in this regard, however the ultimate responsibility still rests with you as Trustee.

#5 – Do Not Effectively Benchmark Return

One of the problems with super generally is that you are not given a reasonable point of comparison to see how you are going, compared to the underlying investment markets that you are invested in. The information is out there, but as it stands it is up to you to seek out the answer, and the reality is that most of us would not know where to start.

As a consequence we can all be guilty of making ‘apple for oranges’ judgements on performance.

The same is true for SMSF investors too. Fed up with relying on someone else to manage their funds, they take control back and invest it for themselves, but what do your returns really mean if you are not benchmarking them? You may achieve a 15% return and feel pretty good about it, but if that is 10% less than market for that year, it’s actually a really poor result.

If you do decide to set up an SMSF, it is essential that you identify how you can effectively benchmark performance if you are really going to achieve what you’ve set out to do; and that is to outperform the alternative you’re thinking of moving away from.

common smsf mistakes

Yield Financial Planning Is Here To Help

As Financial Planners, the team at Yield are specialists in navigating the criteria of SMSF. We can answer any questions you have regarding how to set up SMSF. If you are interested in discussing Self Managed Super Funds, please contact us.

To Learn More About SMSF, Download Our eBook Below

Free: Guide to start your own SMSF

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This article was also featured on the Financial Planning Association (FPA) website.

Important Note
Any information provided here is general advice only and does not consider your objectives, financial situation or needs. This information should not be taken as comprehensive and does not constitute legal or financial advice. You should seek legal, financial or other professional advice before relying on any content. Yield Financial Planning is not responsible to you or anyone else for any loss suffered in connection with the use of this information. Information is only current at the date initially published.

About Yield™ - Financial Planner Melbourne

Who we serve – We help time poor professionals and business owners who intuitively know they should be doing more to improve their financial position and are seeking an expert to guide them on financial planning strategies. Our clients want personalised financial planning advice and to feel empowered and confident that they can achieve a secure transition to retirement.

What we do – We gain a deep understanding of your current financial position and preferences, what you value and want to achieve. We then help you develop a highly personalised financial plan, to show you how to make your money work harder for you. Ongoing we regularly monitor and measure progress against your plan projections, to show you how you’re tracking and help you manage change to your advantage.

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