What is a self-managed super fund (SMSF)?

Self-managed super fund pros and cons

In Australia, superannuation represents one of the largest assets most people will accumulate over their lifetime. Here are the main advantages and disadvantages of SMSFs.

Self-managed super fund vs other super funds

There are three main types of super funds in Australia:

• Industry Funds – Historically tied to specific industries or unions but now often open to all

• Retail Funds – Operated by financial institutions and open to all

• Self-managed super funds – Made up of 1-6 members (usually family/close associates), a member controlled private fund

Not all retail funds are the same and there is also a lot of variety among different industry funds these days. However, there are some broad generalisations we can make about each type's distinct characteristics that make them more suitable for some people than others.

Super fund comparison

How does an SMSF work?

SMSFs operate under the same basic principles as other super funds – money goes in during your working years, grows through investments, and provides income during retirement.

A self managed super fund is unique in that almost everything about it can be changed without the members needing to move to a new fund. It's a super platform for life.

The key difference is that you are in full control and are liable for the decisions you make. You decide how fund investments are made and can invest in:

• Shares;

• Bonds;

• Managed Funds;

• Residential or Commercial Property;

• Term Deposits;

• Exchange Traded Funds (ETFs);

• or other approved investments including crypto currency and collectables.

This means you can implement investment strategies not available through traditional super funds.

Most people bring in specialist help rather than doing everything on their own – for example, an accountant or financial adviser (or both). At the end of the day however, you will be ultimately accountable. 

Additionally, SMSFs provide greater transparency – you know exactly where your money is invested and can access detailed reporting on all transactions and performance. For families, SMSFs allow you to invest your super together and give you more control and flexibility over how your super is dealt with when you die.

SMSF Rules you'll need to follow  

Like all super funds, SMSFs have to follow rules. Unlike other funds, you (as one of the trustees) are responsible for making sure they're followed. 

Your fund needs to meet:

• The sole purpose test

  • Your fund has to be operated solely to provide retirement benefits to its members. You can’t set up an SMSF because you want to use your super money to do things that benefit you personally <Link to sole purpose test>.

• Specific investment rules

  • There are some things no super funds (including SMSFs) are allowed to invest in. For example, no super funds can lend money to their members.

  • There are also rules about who your SMSF can buy certain assets from. For example, it won't be able to buy a residential property from you, but it could buy one from someone unrelated to you.

  • Your SMSF also can't let the members use the investments for personal purposes. For example, you can't buy artwork in your SMSF and hang it in the wall of your house.

  • If you intend to invest in things like listed shares, managed funds, term deposits etc you're unlikely to have any trouble complying with these rules.

• Rules for contributions into the fund

  • There are rules about when you're allowed to put money into super (for example, you have to be under age 75 for most types of contribution). There are also rules about how much you and your employer can pay into your super each financial year without creating a tax problem for yourself. (This is actually the same in any super fund but people often start increasing their contributions when they set up an SMSF so it pays to understand the tax rules.)

• Rules for paying money (benefits) out of the fund

  • You can only take money out of your super once you meet certain age or other requirements. Even in an SMSF, you can’t use your retirement savings personally before you’re allowed to. 

You’ll also be responsible for:

• managing the fund's investments;

• keeping the right records;

• arranging an annual audit;

• lodging annual returns with the ATO; and

• choosing who (if anyone) helps you with all of these obligations.

Failure to follow the rules can mean significant penalties and extra taxes, so understanding them is critical to your fund's success.

What does an SMSF cost

Costs are largely fixed regardless of your fund balance, which is why SMSFs generally become more cost-effective as your super balance grows. There’s no magic number that is “enough” for an SMSF. For some people, an SMSF is highly cost effective when their super balance is as little as $100,000. For others, it’s over $1m or even higher. It will depend on the choices you make such as:

• how much help you buy in to help you run your SMSF (and what that costs);

• who you engage for your fund’s accounting, tax and audit work;

• how you invest;

• and more.

SMSF set up costs

Set up costs typically range from $1,000-$2,000 depending on who you ask to do it for you and choices you make about the set up of your fund. For example, most people set up a special company as part of setting up a new SMSF and this alone adds around $1,000 to the cost.

Yearly SMSF operational costs

While SMSFs can be cost-effective for larger balances, they come with various ongoing expenses that you need to budget for.

Annual costs usually include services that are facilitated by an SMSF administrator (accountant):

• accounting fees for financial statements and tax returns ($1,500-$5,000); and

• SMSF audit fees ($500-$1,500).

You will also pay an annual levy to the ATO when you lodge your fund’s tax return each year (around $300).

Other potential costs may include:

• fees to other regulators such as ASIC if you set up a company to be the trustee of your SMSF;

• investment fees;

• insurance premiums;

• advice fees; and

• legal fees.

Before you do anything...

Remember an SMSF is not a set-and-forget solution and you'll always need to spend some of your time managing your investments, administration and documentation for compliance etc. The key to managing your SMSF success lies in being informed, staying compliant, maintaining good records, and choosing the right help at the right time.

Unwinding an SMSF can be time-consuming – so only set up an SMSF once you’ve thought about it carefully. Consider speaking with a financial adviser who can assess your individual circumstances and help determine whether an SMSF is right for you.

With proper support, anyone can successfully manage an SMSF. When you partner with Heffron as your administrator, we help you understand your responsibilities while maximizing your SMSF's potential.

Learn how to set up an SMSF

Before you do anything...

While some of these steps can happen very quickly (even instantly), you should allow at least 6-8 weeks even if you’re very prepared. This is because the ATO needs to formally approve your fund before it’s completely set up and ready to receive money.

• Check with your lender if planning to borrow to invest in property – If you’re already considering the purchase of property within the fund you should first speak with your lender to confirm they will be able to set up a special type of loan agreement (it’s called a “Limited Recourse Borrowing Arrangement” or “LRBA”) within your SMSF when the time comes. Doing this first can save you a lot of time and heartache if for whatever reason you’re unable to borrow money to invest.

• Consider your insurances – You might have insurance in your current super fund. Remember you'll lose that if you transfer all your super to your new SMSF. If you want to keep it, you'll need to leave some money inside your existing industry / retail fund.

• Choose your suppliers – At the very least you'll need to appoint a fund administrator / accountant for your new SMSF. IF you set up a fund with Heffron we will fill that role. If you want someone else to do it, you will need to find out how to set up a fund with them.

Steps to set up your SMSF 

Below we have outlined the steps you will need to take to start an SMSF including the decisions you’ll need to have made and the documentation you may be required to have ready in order to progress to registering with the ATO. You will also see in the right columns 'Who does what' and the approximate timings for each step.

That's it! You can now start investing.

Begin making investments in line with your investment strategy.

How Heffron can help

Many people who have an SMSF choose to work with a specialist firm like Heffron to manage the day-to-day ATO reporting and compliance so they have help meeting their ongoing obligations.

Follow this link to learn more about how to set up an SMSF with Heffron. <CTA>

Why choose Heffron?

If you set up your SMSF with Heffron you’ll have your very own Client Relationship Manager to guide and advise you to as you learn the ropes. Once your fund is all set up, we will also step you through the first year or two of managing your SMSF. 

Learn more about how to manage your SMSF in the first year.

Ongoing SMSF Operations 

What is a super contribution?

Making a super contribution means paying money regularly into your superannuation fund. There are several types of contributions you can make to your super, each with different tax treatments, contribution limits, and eligibility requirements. Understanding these can help you maximize your retirement savings while taking advantage of available tax benefits.

Concessional Contributions include all employer contributions and certain contributions you make yourself. They have that name because the person or business that made the contribution generally gets a tax deduction for them, but they are taxed at 15% in the super fund itself. 

The most common types are:

• Superannuation Guarantee (SG): Mandatory employer contributions of 11.5% of your pay.

• Salary Sacrifice: Pre-tax contributions made through your employer, reducing your taxable income.

• Personal contributions: Paid after tax these allow you to claim a tax deduction.

<Learn more – from Guide>

Non-Concessional Contributions are most other contributions you make yourself without claiming a tax deduction. They’re not taxed again when received by the fund. The annual cap is $120,000 for 2024-25, although some people can use multiple years’ caps at once and contribute up to three years’ worth ($360,000) in a single year.

Government Co-Contributions provide additional support for eligible low and middle-income earners who make non-concessional contributions. The government matches part of your contribution, giving you a “Government co-contribution” of up to $500 annually, helping boost retirement savings for those who need it most.

Other contribution types include:

• Spouse Contributions: Contributions made on behalf of your spouse, potentially eligible for tax offsets

• Downsizer Contributions: Special contributions of up to $300,000 per person from the sale of your family home if you're 55 or older <Learn more Net New>

Each type has specific rules around eligibility, timing, and tax treatment. So it's worth understanding which options suit your financial situation and retirement goals.

<Learn more https://www.heffron.com.au/knowledge-centre/superannuation-contribution-limits> 

What are rollovers?

A superannuation rollover is the process of transferring your existing super benefits from one super fund to your new SMSF. Simply complete a rollover request form from your existing super fund, or via the ATO's online services. Be sure to consider:

• Tax-free process: Rollovers between complying super funds are generally tax-free, so you won't lose money in the transfer itself.

• Timing: The process can take 2-7 business days, though sometimes longer if there are complex investments that need to be sold first.

• Insurance: Be careful about any insurance cover you have through your existing fund - it will typically cease if you roll over all your money. You'll need to arrange new insurance through your SMSF if you want to maintain cover.

• Exit fees: These are less common, but you should be sure to check if your current fund charges exit fees.

• Partial or full: You can roll over all your super or just part of it – some people keep multiple funds for various reasons.

Maintaining detailed SMSF records

Before you dive in and get started with investing, it’s important to raise that all trustees/members are required to keep and maintain records of all the transactions (in and out) made within your SMSF. This will help you become prepared for quarterly Business Activity Statements if required, and managing member statements in preparation for your end of year lodgement and audit.

Implementation of your SMSF investment strategy

One of the biggest attractions of SMSFs is the broad range of investment options available.  

What assets can an SMSF invest in? 

Here are the main asset types an SMSF (Self-Managed Super Fund) can invest in:

• Cash and Term Deposits – Low-risk investments including bank accounts, term deposits, and cash management accounts. These provide capital security and regular income but typically offer lower returns over the long term. 

• Australian Shares – Ownership stakes in ASX-listed companies. These can provide capital growth and dividend income but carry higher risk due to market volatility. Popular for their franking credit benefits in the super environment. 

• International Shares – Shares in overseas companies, providing portfolio diversification and exposure to global markets. Can be invested directly or through managed funds, offering growth potential but with currency and international market risks. 

• Property – Can include direct property investment (residential or commercial real estate) or property investment through listed and unlisted property trusts (REITs). Direct property investment requires careful consideration of borrowing rules and related party restrictions. <Learn more https://www.heffron.com.au/news/my-smsf-owns-a-property> 

• Fixed Interest Securities – Government and corporate bonds that provide regular income payments. These include Australian Government Securities, corporate bonds, and hybrid securities. Generally lower risk than shares but still subject to interest rate and credit risks. 

• Managed Funds and ETFs – Pooled investments managed by professional fund managers. These provide instant diversification across various asset classes and can include index funds, actively managed funds, and exchange-traded funds covering domestic and international markets. 

• Alternative Investments – Less traditional investments such as can all provide diversification benefits but often require higher minimum investments and carry unique risks. These types of investments include: 

  • Commodities

  • Infrastructure

  • Hedge funds

  • Private equity

  • Collectables (these come with strict rules)

  • NFTs and  

  • Cryptocurrencies.  

Each asset type has different risk-return characteristics and tax implications within the SMSF structure, so it's important to consider how they fit with your fund's investment strategy and risk tolerance.

Managing your SMSF investments

An SMSF gives you direct control over your retirement savings, but with that comes significant responsibility, which is why you will need to consistently monitor the performance of your assets. Here are three ways you can manage your investments:

1. Professional Advice – Many SMSF trustees use financial advisers to help develop investment strategies and select investments, while maintaining final decision-making authority.

2. Investment Platforms – Some trustees use SMSF-specific investment platforms that provide access to various asset classes with integrated administration and reporting.

3. Direct Management – If you have the skill and capability, you can be in the driver’s seat to research and select individual investments yourself. This requires significant time and expertise but gives maximum control and potentially lower fees.

Borrowing to invest in an SMSF – Limited Recourse Borrowing Arrangement (LRBA)

An LRBA allows a superannuation fund to borrow money to purchase an investment asset, where the lender's recourse is limited to the specific asset being purchased. This means if the borrower defaults, the lender can only recover their money by selling that particular asset – they cannot pursue other assets of the super fund.

How It Works in Practice

1. Setup – The SMSF arranges financing through an approved lender (If you’re planning on borrowing in your SMSF be sure to check your lender will agree to the loan prior to setting up your SMSF).

2. Purchase – Funds are used to buy the investment property or asset.

3. Ownership – Legal title sits with the bare trust; beneficial ownership with the SMSF.

4. Repayments – The SMSF makes loan repayments from its cash flow (contributions, rental income, etc.).

5. Transfer – Once the loan is repaid, legal title transfers to the SMSF.

Benefits and Considerations

Benefits:

• Allows leverage within superannuation.

• Potential for higher returns through gearing.

• Asset protection for other SMSF investments.

• Cannot improve or develop the property significantly during the loan term.

• Strict compliance requirements.

• Higher interest rates than standard investment loans.

• Complex documentation and ongoing obligations.

LRBAs are subject to detailed regulations and should always be set up with proper legal and financial advice, as non-compliance can result in significant penalties and tax consequences.

<Learn more https://www.heffron.com.au/knowledge-centre/borrowing-to-invest>

Tips to maintain compliance within your SMSF

In order to maintain the compliance status of your SMSF you should be sure to:  

• Maintain proper separation between fund assets and personal assets.

• Ensure investments align with your documented investment strategy.

• Keep detailed records of all transactions and decisions.

• Meet annual audit requirements.

• Understand borrowing restrictions if considering property.

The complexity of an SMSF means many people benefit from professional guidance, at least initially, to ensure they are meeting their obligations while pursuing their investment goals effectively. 

Year-end compliance

Annual tax return

An SMSF must prepare and lodge their annual tax return with the ATO every year. When it is due depends on whether you lodge it yourself (end of October) or a tax agent lodges it for you (end of February the following financial year).

Independent audit

An SMSF audit is performed annually by an independent, ASIC-registered auditor. It includes a financial audit and a compliance audit that verifies and signs off on the fund's compliance no later than 45 days before you need to lodge your annual return (SAR).

Financial statements

The financial statements for an SMSF must include several key components to comply with superannuation and accounting standards. Here are the essential elements:

• Statement of Financial Position (Balance Sheet)
• Income Statement (Profit & Loss)
• Statement of Changes in Member Benefits
• Cash Flow Statement
• Notes to the Financial Statements
• Auditor's Report

The financial statements must:

1. Be prepared in accordance with Australian Accounting Standards
2. Comply with the Superannuation Industry (Supervision) Act 1993
3. Be completed within 4 months of year-end (by October 31 for June 30 year-end)
4. Be audited by an approved SMSF auditor
5. Be lodged with the ATO via the SMSF annual return

The level of detail required may vary depending on the fund's size and complexity, but these core components must be present for regulatory compliance.

Compliance checks

Part of the audit includes confirmation that the fund and its trustees have operated in accordance with superannuation law. The auditor checks for breaches in any areas such as 

• Sole Purpose Test to confirms the fund is maintained solely for the purpose of providing retirement benefits to its members. 
• Loans to members to confirm the fund has not provided a loan or other financial assistance to a member or their relatives.
• In-house assets to confirm the fund's investments in related parties to ensure they do not exceed 5% of the fund's total assets.
• Related-party acquisitions to confirms that the fund has not acquired assets from related parties, unless specifically permitted by law and at market value.
• Borrowing restrictions to verify that any borrowing, such as a LRBA complies with the strict legislative requirements.
• Separation of assets to ensures that the fund's assets are held separately from the personal or business assets of the trustees.
• Investment strategy to ensure it has been formulated, documented, and regularly reviewed.
• Documentation to check that all required records, such as member reports and trustee meeting minutes, have been kept and retained for the required timeframe. 

When the time is right, access your funds

You can only access your superannuation benefits from the fund once you reach your preservation age or meet another condition of release.