What Is A Self-Managed Super Fund (SMSF): A Complete Guide

Students want to know what a self-managed super fund (SMSF) is and how to set up one.

 

Self-Managed Super Funds have grown explosively in recent years in Australia. There are nearly 600,000 SMSFs with a combined 1.1 million members, which controls about 25% of all assets.

 

An SMSF is a private superannuation fund that the ATO regulates. It allows one to manage superannuation investments for retirement and future finances. Unlike other public super funds, the members of an SMSF and responsible for complying with the superannuation laws.

 

While gaining control over your super may look appealing, SMSF comes with risks and might only be suitable for some. You need time, knowledge, and money to correctly set up and run your fund.

 

This blog will help you understand the basics of SMSF, its pros and cons, and ways to set up your super fund in Australia.

 

 

1. What Are Self-Managed Super Funds?

 

A Self-managed super fund is a private fund with a superannuation trust structure. It provides benefits to its members upon retirement. In contrast to a professionally managed fund, such as a retail or industry fund, SMFFs allow you to create and manage your super on your own.

 

An individual or family usually establishes self-Managed Super Funds to look after their super savings. All SMSF members are trustees with complete control over their investments and financial future. They are accountable for investment decisions and compliance with tax and super laws.

 

The fund has a Tax File Number, Australian Business Number, and a transactional bank account that enables it to receive monetary contributions and rollovers, pay out lump sums and pensions, or make investments. All SMSF investments are made in favour of the fund and are managed by the trustees.

 

As a SMSF is a trust, it requires a "Corporate trustee" or an "Individual trustee" for its setup and operation. 

 

  • Corporate trustee - A company plays the role of the trustee, and each of its members serves as a director. The advantage of this structure is - easy recording and registering of assets, administration efficiencies, and flexible memberships. 

  • Individual trustees - Each SMSF member is appointed as a trustee with a minimum requirement of 2.

 

 

2. Main Features Of An SMSF

 

  • An SMSF gives you flexibility and control over your retirement, provided that you invest adequate time and money to create and manage the fund appropriately. 

  • An SMSF can have no more than six members. 

  • SMSFs are governed by the ATO (directly) and ASIC (indirectly). The ATO ensures that SMSFs adhere to their financial reporting and taxation obligations. ASIC manages the registration for independent SMSF auditors who report breaches to fund trustees and the ATO, ensuring regulatory compliance. 

  • In the case of an "Individual Trustee structure", all the SMSF members must be trustees. However, in a corporate trustee structure, all SMSF members must be a director of the corporate trustee. 

  • The money in the fund can only be used for retirement benefits.

  • You don't need any minimum balance to establish an SMSF, but you need to pay the ongoing costs related to its setup and operation.

 

 

3. What Are The Pros And Cons Of SMSF?

 

Learning about the self-managed super fund pros and cons helps you gain clarity on this investment option.

 

First, we look at what is the benefit of a self-managed super fund:

 

  • The fund is run with the prime motive of providing retirement benefits for the members or their beneficiaries. All investment decisions made are in the best financial interests of the members.

  • Being an investor and trustee of the fund, you get the flexibility and control to manage your investment. SMSF trustees know where your superannuation funds are invested and how well those investments are doing.

  • You are in charge of making investment decisions that benefit your situation to maximize your earnings. For example, SMSFs have the right to invest directly in residential real estate, property trusts and public funds. However, your investment should conform to the investment strategy designed by the trustees and fulfil the sole purpose test. 

  • You relish higher tax flexibility using tax strategies, capital gains, franking credits, or taxable income. It can provide substantial tax benefits, such as income earned from an SMSF being tax-free when it is in pension mode.

  • Business owners can use their SMSF to buy a business premise or a commercial property that can later be rented out to a related party.

  • SMSF is beneficial for business owners and professionals as it protects its member's assets against any potential risk of bankruptcy or claims by creditors.

  • These funds can provide greater flexibility for member death benefits.  

  • SMSF is costlier than investing it in a retail or an industry fund, but it usually charges lower fees on higher balances, i.e., over $250,000 in your super. 

 

 

Cons

 

  • Being a trustee, you are accountable for complying with the super and tax laws, and any regulation violation can lead to severe legal repercussions. 

  • It is a critical financial decision that requires a reasonable amount of time and financial and legal skills. 

  • Your investments may not offer the returns you expect, so it is worth exploring other better options for your super savings.

  • You are accountable for managing the fund even if your situation changes — like losing a job.

  • A lousy health/death of an SMSF member or a relationship breakdown between members can adversely affect your SMSF.

  • There is no provision for investment protection against theft or fraud. SMSF members won't access any special compensation schemes or the Australian Financial Complaints Authority and will lose their money in the event of misconduct of a trustee or deception.

  • You could lose insurance if moving from an industry or retail super fund to an SMSF. 

  • Running and managing ongoing activities in SMSFs requires knowledge, time, effort, and money. 

  • Members with lower super balances need to pay higher costs to avail of SMSF services than other public funds.

  • Higher insurance costs than other public funds with huge memberships can negotiate discounted bulk premiums with insurers.

 

 

4. How Does A Self-Managed Super Work?

 

An SMSF is formed to provide financial benefits to its members in retirement and their dependents on death. A documented investment strategy that satisfies the fund's sole purpose test and guides a trustee in decision-making is a legal requirement for SMSFs.

 

The working of an SMSF is similar to any regular larger superannuation fund, except for how the government manages and regulates it. In the case of an SMSF, trustees manage the fund by making investment decisions.

 

An SMSF investment strategy considers the following factors before its implementation and execution:

 

  • The distinctive attributes of fund members, such as age, present financial situation, and risk tolerance 

  • The diversification of investment portfolio across major investment options such as fixed-interest products, managed funds, direct stocks, real estate, and listed property

  • The ease of asset conversion to cash to pay future member benefits when needed

  • The current insurance needs of SMSF members to ensure suitable coverage is organized.

 

With an SMSF, any contributions one receives from his employer or makes on their own go into their super fund instead of a professionally managed super fund. SMSF trustees control each aspect of the fund, such as:

 

  • How to manage their fund?

  • Where is the money invested? 

  • What type of insurance is needed? 

  • What are the admin requirements? 

  • How to wind up their SMSF and roll it into a professionally managed fund?

 

Those either retired or near retirement can consider making provisions related to the disbursal of a retirement income stream. 

 

 

5. How To Set Up A SMSF In Australia?

 

Before we start with the procedure to set up an SMSF, it is essential to note that you need to have enough money to bear the setup and running costs that, include:

 

  • Investing

  • Auditing

  • Tax advice

  • Accounting

  • Legal advice

  • Financial advice

 

In addition to money, you would also need to invest adequate time to set up the fund and manage ongoing activities, such as:

 

  • Research a broader range of investments

  • Develop and implement an investment strategy

  • Carry out record-keeping and accounting, and arrange an independent audit every year by an ASIC-licenced approved SMSF auditor

 

Managing an SMSF requires a good knowledge of fundamental investment principles and financial expertise to make the right investment decisions. If you don't have it, you will need to seek the professional assistance of a financial advisor. 

 

If you have solid financial and legal knowledge and are willing to devote money and time to set up and run your SMSF, follow the below steps to get started:  

 

 

Step 1: Decide On The Structure To Set Up Your SMSF 

 

You can set up an SMSF by opting for an individual SMSF trustee structure or a corporate SMSF trustee structure. Both these ways differ on various aspects, so you must understand each structure before deciding. 

 

If you decide to start an SMSF and take on the role of an SMSF Trustee, you get complete control over your investment decisions and how you manage your investments. As Trustees are solely responsible for making investment decisions for the fund, they can be held answerable and may have to suffer severe penalties, including prison, if their fund violates the law. 

 

Regardless of your type of setup, you need to create a trust (a legal tax structure) with individual or corporate trustees. You will need to appoint trustees that meet the eligibility requirements.

 

All appointed trustees will have to sign the trustee declaration within 21 days of their acceptance to become a trustee. Furthermore, you will have to create a trust deed that specifies how to run the fund and what it can do.

 

Additionally, you need to open a bank account for your fund so that it can hold assets. It must also be registered with the ATO within 60 days of being created to receive an ABN and TFN. Register your fund for an Electronic Servicing Address that you can get through your SMSF administrator.

 

 

Step 2: Create An Investment Strategy

 

Once you have set up an SMSF, the next thing is to develop an investment strategy while specifying the fund's investment objectives and the kinds of investments it can make. You don't necessarily have to follow a specific form for an investment strategy, but it must be in writing and should be reviewed regularly.

 

To develop an investment strategy, begin by gaining a good understanding of the markets that interests you. Compare and analyze investment strategies based on your retirement needs, the level of returns they can generate in your retirement, and your risk tolerance to find the one that meets your future goals.

 

This is where it becomes essential to have expertise in finance and law.

 

 

Step 3: Diversify Your Portfolio

 

Like any other investment, SMSF also involves certain risks, and portfolio diversification is the best way to minimize them. Instead of relying on one investment option, it is advised to identify multiple investment instruments that you can use to build and diversify your investment portfolio. 

 

 

Step 4: Make Your Fund Super Compliant

 

As the Australian Taxation Office strictly regulates SMSF, you must ensure that the fund you set up complies with Super regulations and tax laws.

 

Those who don't have strong financial and legal knowledge can get independent advice from a licensed financial adviser to comply their fund with the regulations.

 

 

6. Frequently Asked Questions (FAQs)

 

 

How Much Money Do You Need To Set up a Self-Managed Super Fund?  

 

You don't need a minimum balance to set up an SMSF, but you will have to pay different fees to run and manage your SMSF, such as audit fees, legal fees, administration expenses, financial advisory fees, etc.

 

However, it becomes cheaper once you have a balance of $250,000 or more.

 

 

How Much Does It Cost To Run an SMSF?

 

There is no minimum balance needed to set up an SMSF. However, there could be substantial yearly costs related to managing, running, and reporting on the SMSF and how you invest the money in your fund.

 

After your SMSF is created, the ongoing cost you pay depends on several factors that include:

 

  • The number of members

  • The combined member balances

  • The type of investments (for ex: SMSFs with direct property pay more investment fees than funds without natural property)

  • The frequency of trading (the more you buy and sell your investment, the more transaction cost you will incur)  

 

Here are some of the costs associated with running an SMSF:

 

  • Annual supervisory tax to the ATO

  • Accountant's fees to prepare the financial statements and file a tax return.

  • ASIC registered SMSF auditor's fees to conduct an independent audit.

  • Legal fees

  • Insurance premium cost

  • SMSF's Asset Valuation fees  

  • Reporting fees to prepare your fund's yearly return report. 

  • Broker fees

  • SMSF supervisory levy

  • Financial advisor's fee to offer financial advice on your investment strategy

  • Transaction fee that you pay every time you trade your investments

  • Fund management and administration expenses

 

The overhead costs can directly impact the returns you can expect to generate from your fund. Once you have a balance of $250,000 or more, you incur fewer expenses, making it affordable to own and run an SMSF.

 

It is a good practice to periodically check your fund's performance and ensure it generates enough income to cover the expenses and build up your fund long-term. 

 

 

Is a Self-Managed Super Fund Worth It?

 

Self-managed super funds give you control over your retirement savings so that you move through life with confidence. Though the authority and autonomy it provides you to manage your investment make it appealing, it also involves a good amount of work, expertise, and some risks.

 

An SMSF could be costlier to manage compared to the fees you would incur to operate a standard super fund. The additional costs, such as setup fees, yearly reporting fees, auditing fees, ongoing admin fees, and investment management fees, makes SMSF a less attractive investment option than other super funds.

 

The table below shows the yearly expenses and an average return on assets generated based on SMSF fund size in 2019-2020.

 

Fund Size Average Expense Ratio Average Total Expense ($) Average Return On Assets (%)

$1 – $50,000

17.6%

$4,390

-22.0%

$50,0001 – $100,000

7.9%

$6,027

-10.9%

$100,001 – $200,000

6.8%

$10,447

-5.9%

$200,001 – $500,000

3.8%

$12,854

-1.9%

$500,001 – $1 million

1.7%
   
$12,493   
   
-0.9%   

$1,000,001 – $2 million

1.0%
   
$14,518   
   
-0.4%   

$2,000,001 and higher

0.7%
   
$28,583   
   
0.5% to 3.3%   

 

 

How Is SMSF Different From Other Super Funds?

 

Here are the key differences between an SMSF and other super funds:

 

  • The ASIC and ATO govern SMSFs. On the other hand, public funds are regulated by the Australian Prudential Regulation Authority.

  • Unlike super public funds, SMSF members are both the investors and trustees of their funds. They manage the fund and are legally accountable for its compliance with tax laws and superannuation. In the case of public super funds, there are licensed trustees responsible for fund management and legal compliance.

  • SMSF trustees have the authority to develop the investment strategy and decisions of the fund. However, public super fund members don't have the autonomy to select the assets their funds are invested in but have some control over the combination and type of their investments.

  • There is a limit to how many people can own an SMSF. Usually, these funds can have up to 6 members. Public super funds do not have any such limitation.

  • Where SMSF members resolve their disputes via legal avenues, Public super fund members are eligible for a government compensation scheme. They can access Superannuation Complaints Tribunal to resolve disputes related to trustee misbehaviour or deception.

 

 

What Is The Difference Between A Self-Managed Super Fund and an APRA Fund?

 

Confused about which one to consider for investment - self-managed super fund or APRA. Learning the differences between them will ease the decision-making process.

 

  • APRA funds are regulated by the Australian Prudential Regulation Authority, whereas the Australian Tax Office regulates SMSFs. In cases of investment theft, or fraud, APRA-regulated funds can be entitled to compensation by the government, but SMSFs cannot.

 

  • Furthermore, SMSFs fall outside the Australian Financial Complaints Authority that resolves cases concerning the distribution of death benefits at no cost.

 

  • APRA funds and SMSF also differ in terms of returns. Historically, the performance of APRA-regulated funds has been much better than SMSFs, retail funds, or industry super funds.

 

Usually, the returns that SMSF offers are comparatively lesser than APRA funds. The same return that you receive from it depends on the balance you have in your fund. If your balance exceeds $500,000, you may get comparable returns to APRA-regulated funds.

 

Moreover, SMSFs require highly skilled professionals to manage investments. They should have the confidence that the investments they choose will perform better.

 

APRA funds have members and a licensed trustee; in SMSFs, the fund members are trustees. Usually, large financial organizations that have an Australian financial services licence issued by ASIC offer APRA funds. This isn't the case with SMSFs.

 

 

Is Self-Managed Super A Good Idea?

 

The Australian Securities and Investments Commission recommends that SMSFs aren't an ideal investment tool for those who:

 

  • Have a low level of financial literacy

  • Limited time to manage their financial affairs 

  • Want a simple superannuation solution

 

On the other hand, SMSFs are meant for people who:

 

  • Are fond of investing and learning about superannuation

  • Have extensive knowledge of "super" and legal and financial matters

  • Have financial expertise, strong investment risk management skills, and adequate time to make successful investment decisions. Investing wisely is essential, and ensuring it delivers the best possible returns.  

  • Are you willing to stay on top of what is happening in the markets and developments in superannuation legislation and learn about your SMSF requirements? 

 

If you want to start in SMSF as a beginner, it is advised to take the help of a financial adviser specializing in finance, tax, and SMSFs.

   

 

Are Self-Managed Super Funds For Dummies?

 

Planning to start an SMSF? You must know that a high level of financial expertise is required to set up and manage a successful SMSF. You may need to put in hard work to develop a solid fundamental knowledge of SMSF to perform the everyday activities that include:

 

  • Researching investment options

  • Designing and supervising investment strategies   

  • Staying updated with SMSF laws and duties as a Trustee

  • Reporting needs

 

Beginners may require the support of an adviser or outside service to understand what options will work best for your superannuation.

 

Key things to consider when starting a Self-managed super fund:

 

  • Fully understand the associated investment risks, including theft and fraud. 

  • Consider your financial knowledge and skills and whether it is adequate to plan your retirement savings.

  • Understand the costs associated with setting up and managing an SMSF

  • Analyze your daily routine and how much time you can devote to managing an SMSF

 

 

What Are The Rules For A Self-Managed Super Fund?  

 

  • The main motive behind establishing an SMSF should be to provide retirement benefits to its members (or to their beneficiaries in the event of the fund members' death before retirement).

  • It should have a legal tax structure as a "Trust" with either individual or corporate trustees. 

  • All SMSF members must also be the trustees of the fund. They should manage the SMSF's assets and ensure the fund's ongoing legal compliance with taxation legislation and superannuation. They are responsible for yearly auditing, reporting, and tax obligations to the Australian Taxation Office.

  • In a fund with a corporate trustee structure, each SMSF member has to be a director of the concerned company. The company must be ASIC registered, and its directors must also be a member of its corresponding SMSF.

  • To be an SMSF member, a person must consent to become a trustee by signing a trustee declaration to confirm the acceptance of the responsibilities of the role. 

 

As per the self-managed super fund rules from 1 July 2021, SMSF members/trustees can't:

 

  • Relate to other fund members as an employer/employee (unless they are a relative).

  • Be a registered bankrupt

  • Have been debarred as an SMSF trustee by the ATO, ASIC, or a court

 

Young people below 18 years can become SMSF members, provided they are represented by a trustee (parent or guardian) who approves of acting on their behalf.

 

SMSFs and SMSF trustees need to comply with several rules, regulations, and requirements. 

 

  • You must appoint and pay a licensed auditor each year to audit your super fund.

  • You must keep records for at least five years and sometimes even ten years. 

  • You need to assess the value of your assets and complete your yearly return every year.

  • You should conduct trustee meetings and minute them for any decision the fund makes related to investments.

  • You should have an elaborate investment strategy and review it regularly.

  • Do not set up an SMSF to purchase a holiday home, buy artwork to decorate your house, or get early access to your super. All these are considered illegal and strict penalties may apply.

 

 

What Are The Risks of A Self-Managed Super Fund?

 

SMSF can be risky depending on how you choose to manage it. You may suffer penalties for non-compliance, absence of legal compensation, and inferior access to conflict resolution channels in case of disputes.

 

Some of the heavy penalties imposed on SMSF trustees for non-compliance include the following:

 

  • Loss of concessional tax treatment

  • Disqualification from being an SMSF member role and starting a new fund

  • Fines or imprisonment, based on the seriousness of the statutory violation.

 

 

Can I Have A SMSF And An Industry Fund?

 

Yes. You can be a member of any number of super accounts as you wish. There are no restrictions on simultaneously holding a self-managed super fund and an industry fund. 

 

 

Is Hostplus A Self-Managed Super Fund?      

 

Hostplus is a national industry super fund, particularly for workers who work in the hospitality, recreation, tourism, and sports industries. It is an excellent super provider that provides index fund options with low fees and good performance.

 

By being an investor, and an SMSF trustee in Hostplus, you retain your control over your super while enjoying the advantage of investing with an APRA-regulated superannuation fund.

 

 

Is Rest A Self-Managed Super Fund?

 

REST Super is an award-winning Public offer Industry super fund. It is a profit-to-member super fund with low fees that focuses solely on profiting its members and doesn't pay commissions/ contributions to financial advisers.

 

It is a resident-regulated superannuation fund under the Superannuation Industry (Supervision) Act 1993.

 

 

What Happens To My SMSF When I Retire?

 

Just like other super funds, self-managed super funds provide you with a lump sum or pension benefits when you reach your preservation age which is generally between 55 and 60 years based on your birth date.

 

 

Can You Withdraw From an SMSF? 

 

There are strict rules regarding the management of an SMSF. It is illegal to use your SMSF fund to buy a holiday home or artwork to adorn your house before you are eligible. Generally, SMSF members can only access the money in their funds when they have reached their retirement Age.

 

SMSF members are allowed to withdraw the amount in Lump Sum from their SMSF at any time once they turn the age of 65 years or are aged between preservation age and 64 and "Retired".

 

However, SMSF members aged between preservation and 64 and aren't "Retired" can't make Lump Sum withdrawals from their SMSF account.

 

 

Do You Pay Capital Gains on SMSF? 

 

In the case of an SMSF, the net capital gain is the total capital gain for the year.

 

If an SMSF is in the accumulation phase, it is entitled to pay Capital Gains Tax on the annual net capital gain of the fund. The net profit is considered income for tax purposes and will be taxed at a flat rate of 15%.

 

SMSFs are entitled to a 1/3rd discount on capital gains tax if they own the relevant asset for at least 12 months.

 

 

Can I Sell My SMSF Property?

 

You can sell self-managed super fund property to yourself if the transaction is at market value. You may require to submit a documented independent valuation to support the buying price.

 

Any SMSF that plans to sell or transfer its property to a related party, like an SMSF member, should ensure that it does it on an arm's length basis.

 

The applicable legislation requires that the property be first valued, and the buying price should reflect the existing market value of the property.

 

It is worth noting that capital gains tax and stamp duty may apply, and you may need to seek financial advice from a financial advisor.

 

 

Can I Put My Investment Property Into My SMSF?

 

It depends on the type of property you want to transfer to your SMSF. You can do it in cases of a commercial property, a farming property, and a business premises at arm's length, but not for a residential property. This is because the regulation doesn't allow SMSF funds to acquire domestic housing property from a member.

 

Before you act, it is better to seek the assistance of a licensed professional to provide SMSF advice.

 

 

7. Conclusion

 

An SMSF is an excellent way to gain autonomy and authority over retirement savings. However, all these benefits come with a big responsibility, and it takes immense effort and time to ensure the fund is set up and managed correctly.

 

Getting professional advice from ASIC registered financial adviser will help you decide if an SMSF is right for you and ensure you adhere to all the rules and reduce the risk factors.

 

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