The Pros and Cons of an SMSF

Published on: January 15th, 2024

A self-managed super fund (SMSF) is not for everyone. It can take significant time to manage, and you must have some knowledge and an interest in staying current on the markets and superannuation legislation and changes. But the control it offers can be worth it for those willing to invest the time. Here is a detailed look at the pros and cons of an SMSF.

Let’s start with the potential advantages.

  1. Control and broader investment choices 

Because you are managing the fund, an SMSF provides control over the investment strategy and choice. You can invest in a wide range of assets, including direct property, domestic and international shares, term deposits, managed funds, and commodities. Also, SMSFs offer opportunities for unique and tailored investment strategies, such as borrowing to invest, something not typically available in retail or industry super funds.

  1. Ability to pool and invest funds

An SMSF can have up to six members, meaning members pool and invest shared funds. This can be advantageous for couples or business partners, but it’s worth noting that splitting the SMSF in the case of a relationship breakdown can become onerous.

  1. Investing in business property

SMSFs allow for residential and commercial property investment, and when it comes to the latter, this can include your own business premises. Essentially, this means that business owners can purchase property to run their business through the SMSF and lease it back to the business at market rates. This can have tax advantages and continue to accumulate wealth in the fund.

  1. Buying and selling investments at the right time

Unlike traditional super funds, where your money is pooled with that of other members and investment decisions are made on your behalf, with an SMSF, you’re in charge. This control allows you to buy or sell your investments when you deem it appropriate.

This can have advantages when it comes to the tax treatment of your fund, allowing you to defer the purchase or sale of an investment to reduce the fund’s taxable income. It is important, however, to ensure you have sufficient knowledge and/or expert advice to put yourself in the best possible position for your circumstances.

  1. Cost-effective and beneficial for those with higher balances

For members with large account balances, SMSFs can be cost-effective compared to retail or industry funds. As the fund grows in value, the cost per member can decrease, making it a more attractive option. However, it’s crucial to consider the time and expertise required to manage the fund efficiently.

  1. Estate planning advantages

SMSFs allow members to create a comprehensive estate plan and provide a tax-effective distribution of assets upon death. By having a valid binding death benefit nomination (BDBN), members can direct the trustee on how to distribute their superannuation benefits to their nominated beneficiaries.

  1. Asset protection from creditors

SMSFs are generally protected from creditors provided they are held in a ‘complying superannuation fund’ – a fund that follows the rules set out in the Superannuation Industry (Supervision) Act 1993 (SIS Act). This can be helpful for business owners should their business experience a period of difficulty, but it is critical to ensure your SMSF remains compliant, or it may not be covered under the protections.

Now, let’s turn to some potential disadvantages of an SMSF.

  1. Investment of time and effort

Managing an SMSF can be time-consuming and requires a solid understanding of the fund’s legal and regulatory framework. Trustees must keep up-to-date with relevant laws, regulations and investment strategies. Failing to comply can lead to severe financial and legal penalties.

  1. Compliance requirements and accountability

As an SMSF trustee, you are responsible for ensuring that the fund meets all regulatory requirements imposed by the ATO. Some common compliance risks include:

  • failing to prepare and audit financial statements
  • not having an updated investment strategy
  • breaching contribution rules or pension minimums
  • investing in prohibited assets or breaching in-house asset rules.

Failure to comply can have significant financial, civil and even criminal penalties, and trustees bear ultimate responsibility, even if they have paid for advice.

  1. Risk of over-concentration

Although SMSFs offer flexibility in investment options, trustees may lack the knowledge or resources to create a well-diversified portfolio. Over-concentration in a particular asset class can increase the fund’s risk profile and limit potential returns.

  1. Limited access to government protections

SMSF members have limited access to government protections applicable to other superannuation funds, such as access to the Superannuation Complaints Tribunal (SCT) or being covered by the Australian Prudential Regulation Authority (APRA). In case of fraud or theft, there may be no compensation available for SMSF members.

  1. Living overseas can become difficult

If you decide to move overseas, there are increased risks of your fund being deemed non-compliant. One of the compliance requirements is that the majority of SMSF members must remain permanent Australian residents. If moving overseas is potentially in your future, discussing this with accounting and financial planning experts before starting your SMSF is important.

  1. Ongoing costs may not make sense for smaller balances

While an SMSF can be a cost-effective option for those with higher balances, research shows that they tend to be more expensive for those with $100k or less and break even for those with $200k when compared to retail or industry funds.

It doesn’t mean an SMSF should be entirely off the table if you are in these categories, as they can be a vehicle to grow your retirement savings. However, it’s important to be aware of the set-up costs as well as ongoing administration, tax, legal and financial advice to do the sums for yourself.

In summary

An SMSF can offer several advantages, including investment control, tax management, estate planning and potentially lower fees for large account balances. However, the downsides involve the time and effort to manage the fund, compliance risks, limited diversification and restricted access to government protections.

Before deciding to set up an SMSF, it’s essential to weigh these factors carefully and seek professional financial advice to ensure the fund suits your needs and circumstances.

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.