A self-managed super fund (SMSF) is essentially a private superannuation fund set up for individuals (up to six) to manage their own retirement savings. Today, according to ATO data, Australia has 606,217 SMSFs in operation, managing $889 billion in assets.
In contrast to regular superannuation funds, an SMSF gives its members a proactive role in investment decisions and strategies for retirement savings. For some people, this flexibility and control can be rewarding.
But SMSFs do come with different risks and extensive set-up and reporting requirements, and they are not right for everyone.
Here, we look at how they work and what you need to consider when deciding if an SMSF is right for you.
How does an SMSF work?
SMSFs are governed under the Superannuation Industry (Supervision) (SIS) Act 1993. They must adhere to strict regulations, requirements and reporting obligations, maintaining the sole purpose of providing retirement benefits to members.
SMSFs can have a maximum of six members, who must all be trustees of the fund or, where a corporate trustee is set up, directors of the corporate trustee.
Member contributions are invested per the fund’s documented investment strategy, which details the fund’s investment types and objectives and is reviewed by an external auditor annually.
Members or their appointed administrator/s are responsible for fund management, including all paperwork and compliance.
Why would someone consider an SMSF?
An SMSF can be worth considering if you want control over your investment decisions and strategies. SMSFs offer more bandwidth when it comes to investment types, including cryptocurrencies and collectables, such as antiques, art and wine. However, it is worth noting that there are strict rules around how the fund invests in these. An SMSF can also invest in commercial or residential property, including your current business premises.
It can also be a viable option for couples as it is the only fund type that allows both parties to invest in a single fund. It can have advantages when nearing retirement. (However, it is worth noting that it can become cumbersome if the relationship breaks down. It will typically be split, which can take some time and involve significant legal and financial advice costs.)
If you love investing and learning about superannuation, an SMSF might suit you. However, you’ll need to stay current on what’s happening in the markets, the latest SMSF regulations, and superannuation legislation. That takes time and is not going to be for everyone.
Are there cost advantages to an SMSF?
Sometimes, there can be some cost advantages. However, these days, they tend to be negligible and are not typically a primary motivation for setting up an SMSF.
And it’s also important to note that you need a reasonable balance to make it a competitive option. According to an SMSF Association report, an SMSF with a balance of $200K will offer a similar value to a retail fund, $100K is not competitive with APRA-managed funds, and $50K is typically more expensive than alternative options.
The same report found that SMSFs with balances of $250K+ only become competitive when trustees undertake some of the administration or outsource to a cheaper service.
What are the disadvantages of an SMSF?
You are taking on responsibility for your retirement savings. If you get it right, you can put yourself in a much better position. However, if you get it wrong, it can have far-reaching consequences for you and your loved ones.
As mentioned earlier, you must stay up to date with the markets and relevant superannuation legislation to ensure you are making the right decisions. This can be cumbersome, particularly if you don’t have existing knowledge and/or an interest in the space.
Setting up an SMSF also means you are taking on accountability for the fund’s compliance. It involves obligations such as annual audits, detailed record-keeping and an investment strategy compliant with the law.
Preparation is key in this area, so be proactive about staying informed and diligent, as breaches of these rules can result in significant financial, civil or even criminal penalties for the trustee/s. It’s important to note that you, as the trustee, are ultimately accountable, regardless of whether you have engaged professional advice or services.
How do you set up an SMSF?
The first step involves considering which structure best suits your SMSF: individual trustees or a corporate trustee. While individual trustees may seem like the cost-friendly option, a corporate trustee offers various benefits, including simplified reporting and ease of member changeovers.
Then, a Trust Deed must be drafted, acting as your fund’s ‘rule book’. This vital document outlines how your SMSF will operate. A qualified professional should prepare it to ensure it complies with the Superannuation Industry (Supervision) Act 1993 (SIS Act) and relevant super laws.
You must then appoint trustees, bearing in mind that all members must become trustees or directors if a corporate trustee is appointed. Keep in mind that trustees are responsible for the management and compliance of the fund with super regulations.
Next, you register your SMSF with the Australian Taxation Office (ATO). During the registration process, you will get a Tax File Number (TFN) and Australian Business Number (ABN) for your SMSF.
Then, you must establish a unique bank account for your SMSF. It should be separate from the trustees’ personal accounts to keep track of contributions, investment earnings and super payments.
Trustees also need to develop, review and execute an investment strategy that considers the diversification of assets, liquidity, and the risks and returns of their investments. The strategy must also factor in the members’ individual needs, circumstances and risk appetites.
What are the rules around SMSF?
As a superannuation fund, your SMSF must meet legal rules and requirements. Some of the fundamentals include:
- Meeting the sole purpose test that ensures the fund is maintained with the primary goal of providing retirement benefits to its members.
- SMSFs are restricted to six members, and each must serve as a trustee or director of the corporate trustee.
- Trustees must abide by the governing rules outlined in the fund’s trust deed and are responsible for ensuring that the fund complies with super laws and regulations. Duties include formulating an investment strategy, maintenance of appropriate records and arranging regular audits of the fund.
- SMSFs must undergo an annual audit by an approved auditor before lodging their annual return. The audit examines both financial and regulatory compliance aspects. Trustees must submit the fund’s financial statements, tax returns and regulatory documentation to the ATO.
- SMSFs enjoy concessional tax rates on their investment earnings when compliant with the ATO’s regulations. However, non-compliance can lead to loss of tax concessions, deeming the fund to be non-complying, and imposing significant penalties on fund assets.
So, is an SMSF right for you?
An SMSF might be right for you if you wish for greater control over your super and are willing to put in the time and responsibility required. However, always consider your personal circumstances, the responsibilities involved, the associated costs and the risks. It’s always best to seek expert financial advice before making any moves.
General Advice warning
The information provided in this blog does not constitute financial product advice. The information is of a general nature only and does not take into account your individual objectives, financial situation or needs. It should not be used, relied upon, or treated as a substitute for specific professional advice. Apt Wealth Partners (AFSL and ACL 436121 ABN 49 159 583 847) and Apt Wealth Home Loans (powered by Smartline ACL 385325) recommends that you obtain professional advice before making any decision in relation to your particular requirements or circumstances.