The cornerstone of any successfully operating self-managed super fund (SMSF) is its bank or cash account. After all, it’s the first thing that will be opened whenever an SMSF is established.
Whilst there is the ability to transfer ownership of some assets from outside the super environment to your own SMSF, most transactions will flow through a cash account. If you think about it, so much of your SMSF operates though the cash account. There will be contributions made to your SMSF by members or employers (such as super guarantee or salary sacrificed amounts), there will be returns from investments such as dividends, there will be amounts paid to purchase investments, amounts paid as benefits to members in retirement, and the costs for running the fund, including insurances, administration and taxation.
So what’s the best way to manage cash in your SMSF? Part of this comes to a question of how much cash you need for operating purposes (i.e. to meet regular expenses) and how much is for investment purposes.
Remember that cash can be an appropriate investment for your fund, particularly where it is known that it will be needed for a particular purpose in the near term, or the members themselves are concerned about market volatility and looking for a capital stable investment. In these instances, you could be considering a range of options, from an ordinary cash account (with the highest possible interest rate you can find), a term deposit (which may offer a higher interest rate than a cash account, but locks your money away for a period of time), or even some other forms of fixed interest investments such as managed funds.
How do you choose the cash account and how to operate it for your fund? There is a range of choices available, with some accounts having been developed specifically for the SMSF environment. There are a number of considerations you could take into account for your SMSF’s bank account. These include:
· What rate of interest is payable on the account?
In an environment of low interest rates, many transaction accounts currently pay little in interest (depending on the amount held in the account). This may not be a concern if the balance you are looking to maintain in this account is comparatively low where it is used for transactional purposes.
· What fees are payable?
Like any investment, consider the fees that may be payable and compare that to the level of return you are generating. Is there also a minimum or maximum number of transactions required that impact the level of fees?
· What features does the account come with?
Remembering that as super funds are generally not allowed to borrow, you may need to carefully consider whether to attach any credit card or overdraft facility to the account.
Another thing you could consider is the possibility of having two cash accounts, if that better suits your needs or circumstances. Having two cash accounts can mean that one is used for the everyday transactions of the SMSF, and another that holds the majority of the cash to be kept aside for working needs. This second account could be in a different form, such as online account, which could pay a higher rate of interest. You then have the option of moving money between the two accounts as needed.
One final item to always be conscious of is to ensure that the bank accounts of the SMSF are always maintained separately to your own personal account(s). The Australian Taxation Office (ATO), as the regulator of SMSFs, has a strong focus on the separation of assets of SMSF members and trustees from personal accounts. There are some simple steps you can consider around this, such as whether it is worth setting up your SMSF accounts with a financial institution that is different to where you bank personally. If there is some form of keycard associated with your SMSF accounts, you can consider ways to reduce chances of being accidentally used if you tend to carry it around in your wallet. Or if there is a cheque book for the SMSF, you can consider separating it from your personal cheque book.
The real key to managing cash within your SMSF comes back to taking your time. Be clear on what it is you are trying to achieve. Understand the type of account you need for specific purposes. And do your research. With so many options to choose from, don’t be afraid to ask for professional help to ensure your SMSF gets it right and sets you up for a safe operating future around your retirement savings.
Bryan Ashenden is head of technical literacy and advocacy at BT Financial Group.
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