According to the Australian Taxation Office (ATO), there are nearly 600,000* SMSFs with more than 1.1-million members, representing 30% of all super assets in Australia.
A Self Managed Super Fund (SMSF) is a private superannuation fund that you manage. The super contributions you’d normally make to a retail or industry super fund are instead paid into your SMSF and, unlike industry and retail funds, you get to decide how your retirement savings are invested.
There are a number of reasons why you might opt for a self managed superfund rather than an industry or retail fund; key among these is the desire for control over investment decision-making.
While the prospect of making your own choices about super investments might appear appealing, it’s important to note that self managed super funds can entail more work and greater risk than industry and retail super funds. It’s critical that you understand exactly what is involved, and that you’re fully committed, before you commit to setting up your own super fund.
So how do SMSFs work, why would you consider starting a SMSF, and how do they compare with industry or retail funds?
How does a self managed super fund work?
A self managed super fund comprises between two and six members, each of whom must also be a trustee of the fund. In some cases SMSF members may opt to appoint a corporate trustee for the fund. In those instances each member of the fund must be a director of the corporate trustee, and vice versa.
Whichever trustee structure the fund runs within, the members of the fund run it for their benefit, and are responsible for the fund’s management, investment decisions, choice of super insurance and complying with super legislation and tax laws.
There is no minimum amount required to setup a SMSF, but the fund must be run solely for the purpose of proving retirement benefits for the SMSF members (or their dependants if a member dies before retiring) and any decisions made by the trustees of the fund must be in the best financial interests of the members.
What should I consider when documenting my SMSF investment strategy?
Legally, every SMSF must have a documented investment strategy that guides the trustees’ investment decisions. Used to guide trustee investment decision-making, this strategy must demonstrate that fund is being run for the sole purpose of providing retirement benefits for the SMSF members and dependents.
Your SMSF strategy should take into account:
The unique circumstances of each individual fund member, including their age, financial position and risk profile.
Investment options such as fixed interest products, shares and real estate.
Ease with which assets can be converted to cash to pay member benefits when required.
Members’ insurance requirements to ensure sufficient coverage.
Diversification to reduce risk.
How do I set up a self managed super fund?
The decisions you make when starting up your SMSF can have significant impact on your fund down the track, so it’s critical that you set your SMSF up correctly from the outset. And, because of the legal and administrative complexities and obligations associated with SMSFs, it’s highly recommended that you work with professionals when setting up your fund.
For example, an accountant can assist you to set up your fund’s financial systems, and prepare accounts and operating statements, complete and lodge your annual SMSF tax return and provide tax strategy and advice. A financial advisor can advise you on your investment strategy, and investment and insurance products, a lawyer can prepare your fund’s trust deed and you will also need to engage a SMSF auditor to audit your fund. You could also look at appointing a fund administrator who can help you with the day-to-day tasks involved with a SMSF.
Setting up your SMSF correctly from the outset will not only make it as simple as possible for you to manage, it will also ensure the fund can receive contributions, and that you’re eligible for any tax concessions that are applicable.
Is a Self Managed Super Fund a good idea?
As with the majority of financial decisions, there are advantages and disadvantages to embarking on the self managed superfund route. SMSFs are a great way to expand an investment portfolio, giving their members the freedom to access investment options that may not be available through retail and industry funds, but there are also a range of restrictions and members are entirely responsible for all compliance requirements associated with their fund.
Read on for a summary of the pros and cons of self managed super funds…
The pros of self managed super funds
Members of compliant Australian SMSFs can have their contributions and fund earnings taxed at the concessional superannuation rate of 15% (up to certain limits).
SMSF benefits received after the age of 60 are tax-free.
SMSF earnings when in pension mode are tax-free.
Potential to leverage tax strategies around capital gains, taxable income or franking credits.
Control over investments
Greater control over how funds are invested.
Invest in products available to retail/industry funds.
Invest in products not available to retail/industry funds (for example,, real estate).
Invest in commercial property.
Flat fees for advice and services rather than a fee structure based on a percentage of the funds invested.
High super balances attract lower fees than industry/retail funds.
NB: critical to compare fees across funds – there is no standard fee and fees paid will depend on chosen investments and the professional support you engage to help you manage your super fund.
Greater flexibility with member death benefits than retail/industry funds.
Death benefits may be paid to a dependant as a pension (instead of a lump sum), so the SMSF can continue to operate.
Tax-effective way to distribute funds to future generations.
Non-cash assets (property or shares) may be transferred directly to a beneficiary.
Protect members’ assets against risk of bankruptcy and creditor claims.
Superannuation funds are not considered ‘property’ in by the Bankruptcy Act.
The cons of self managed super funds
Time and complexity
More work and greater risk than industry and retail super funds.
Complex SMSF compliance, legal and taxation obligations.
Cost of professional financial and legal advice.
Annual financial statements, tax return and independent audit costs.
Flat fees for SMSF may cost members with low balances more than if their money was invested in retail/industry funds.
NB: Fees paid depend on chosen investments and professional services engaged.
Lower insurance costs via retail/industry funds than SMSF.
No eligibility for government compensation in the event of trustee misconduct or fraud.
No access to superannuation complaints tribunal - obligation to resolve fund disputes, using legal avenues if necessary.
SELF MANAGED SUPER FUND FAQS
What are the differences between an SMSF and other super funds?
SMSF members are trustees of their own fund, or they can appoint a corporate trustee of their fund.
SMSFs can only have a limited number of members (between 1 and 6).
SMSF members/trustees develop their fund’s investment strategy.
SMSF members/trustees make all their fund’s investment decisions (or they can engage a financial advisor who can make these decisions for them).
SMSFs are regulated by the ATO and ASIC (retail and industry funds are regulated by APRA).
What are the reasons someone might set up a SMSF?
One of the key reasons Australians choose to set up SMSFs is to take an active and direct role in managing their own super, and to have control over the investment of their super contributions, maximising returns while minimising taxes and other super expenses. They may have been advised to set up a SMSF by a financial advisor or they may have experienced poor returns on a retail or industry fund.
What reasons someone shouldn’t set up a SMSF?
It is illegal to set up a SMSF for the purpose of accessing retirement benefits early, for example to pay bills, buy a car or pay for a holiday.
How much money do I need to start a self managed super fund?
While there is no legal minimum super balance you need to attain before setting up a SMSF, according to ASIC’s SMSF report a SMSF requires a balance of at least $500,000 to be cost effective in comparison to a retail or industry fund.
What should I think about before setting up a SMSF?
Be clear about your purpose for setting up an SMSF.
Understand whether a SMSF is the right vehicle for your retirement savings.
Calculate whether it’s cost effective to set up a SMSF with your current super balance.
Be candid about your depth of investment knowledge, and how much time you have to manage your fund.
Educate yourself on the type of assets you want to invest in.
Get clarity on the setup and ongoing costs of running a SMSF.
Understand the risks, time and resources required to manage your own SMSF.
Understand the compliance obligations of running an SMSF.
Can I withdraw money from my self managed super fund?
You can’t make lump sum withdrawals from your SMSF if you are aged between the preservation age, and 64, and you are not retired.
You can make Lump Sum withdrawals from your SMSF on turning 65, or if you are aged between preservation age and 64 and ‘Retired’ whether or not you have commenced a pension.
Who can’t be a member/trustee of a SMSF?
A registered bankrupt.
Someone previously disqualified as a SMSF trustee by the ATO, ASIC or a court of law.
Someone who employs, or is employed by, another fund member/trustee (unless they are related).
NB People aged under 18 can be members of a SMSF if they are represented by a trustee who acts on their behalf, such as a parent or guardian.
How are SMSFs regulated?
ATO ensures SMSFs comply with financial reporting and tax obligations.
ASIC registers independent SMSF auditors who manage regulatory compliance.
What are the penalties for non-compliance with SMSF legislation/obligations?
Loss of tax concessions.
Disqualification of members from fund, and from starting a new SMSF.
Fines and/or imprisonment (depending on seriousness of legislation breach.
While SMSFs give their members greater control over how their retirement savings are invested, the decision to set up a SMSF comes with ongoing legal compliance responsibilities which can be costly and time-consuming, and which shouldn’t be taken lightly.
The information provided is of a general nature only, and doesn’t take into account your personal objectives, financial situation or needs. It does not constitute financial, investment or taxation advice, and should not be relied on as such. Before making any decisions involving financial products or services, you should read the relevant Financial Services Guide (FSG) and any applicable Product Disclosure Statement (PDS). We also recommend that you seek independent professional advice as to the suitability of the products or services which is relevant to your particular financial circumstances.