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.

We go into more detail about the pros and cons of SMSFs here.

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 fund 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.

• 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

SMSF 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 $1,500–$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 ($2,000-$5,000); and

• SMSF audit fees ($500-$800).

You will also pay an annual levy to the ATO when you lodge your fund’s tax return each year (around $250-300).

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, SMSF 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 SMSF administrator, we help you understand your responsibilities while maximising your SMSF's potential.

Learn how to set up an SMSF

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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. Learn more about insurances.

• Choose your suppliers – At the very least you'll need to appoint an SMSF 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.

If you’ve chosen Heffron to set up and handle the ongoing tax and compliance work for your fund we will do most of these steps for you and prompt you when you need to do something. Learn more about setting up an SMSF with Heffron.

That's it! You're all set up.

Now the fun starts. Get started managing an SMSF.

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Getting money into your SMSF

If you haven’t already, now is the time to make sure all the SMSF’s members have directed their employer contributions into your new SMSF unless they’ve decided not to do that.

Types of contributions

Your SMSF can receive:

• employer contributions;

• personal contributions; and

• other types of contributions.

The rules vary depending on the type of contribution so it’s worth checking before you do something new. Learn everything you need to know about super contributions.

How to make a contribution

Some contributions require important paperwork at the time or before you make them. If you’re ever making a type of contribution you haven’t made before, check with your accountant, administrator or adviser first. 

Any member of the fund can also transfer their super from other super funds into the SMSF whenever they like (called a “rollover”). It doesn’t all have to happen when the fund is first set up. Read our guide for some handy tips on how to make this happen and some important checks to watch out for.

Note that only fund members are allowed to have contributions or rollovers added to the SMSF. If there’s someone you want to be part of your SMSF who didn’t join right at the start, they can join later. Just watch out for some important rules:

• SMSFs can’t have any more than 6 members;

• a new member has to formally join the SMSF (there are forms to fill in, documents to sign etc);

• anyone who joins will almost always have to become a trustee (or director of the corporate trustee) as well. This means they have the same responsibilities, and often the same power, as you do even if they don’t actually have much money in the fund; and

• the ATO will need to be told there’s a new member.

You should contact your SMSF accountant or administrator to set this up before the new member (or their employer) starts putting money into the SMSF.

Managing investments

An SMSF gives you direct control over your retirement savings and you can invest in a wide range of different things – we’ve described some of the asset classes available to an SMSF here.

But with that control comes significant responsibility. You’ll need to monitor the performance of your SMSF’s investments and make changes when required. Not everyone does this on their own. There are several ways in which people might get help with SMSF investments:

Professional Advice

Many SMSF trustees have financial advisers to help develop investment strategies and select investments. Others might have a stockbroker who helps with listed shares but they research other investment choices themselves. In both cases, the trustees are still ultimately in charge and have to make the final decisions but they have a lot of help along the way.

Investment Platforms

Some trustees use 'investment platforms'. These give access to different types of investments (listed shares, managed funds, term deposits, exchange traded funds etc) all in one 'place'. It can be very convenient for things like reporting as most investment platforms can provide reporting about performance of all investments together and consolidated reporting of all the tax information needed by your SMSF’s tax agent. They also make it easy to move between different investments as the platform will arrange the buys and sells for you.

Managed investment products

Many SMSFs hold investments like ETFs or managed funds, particularly when they first start. Those investments might then hold a range of different assets and asset classes. The trustee chooses (say) the ETF but then the trustee of the ETF chooses the underlying shares, bonds, property etc.

If these options don’t sound very 'self managed', don’t forget that SMSFs are really about taking control of your super savings rather than doing everything yourself at all times.

A few important things to remember before you start investing:

• Be sure to familiarise yourself with one of the main fundamental requirements of superannuation and SMSFs, the 'sole purpose test'.

• Keep SMSF money and assets entirely separate from your personal money and assets. Make sure you evidence that by owning your SMSF assets in the right legal name. Download our Guide.

• Make sure the investments line up with your documented investment strategy.

• Keep records of the transactions you make and decisions. Note that the amount of record keeping you do yourself will depend on how much information goes directly to your accountant or administrator each year.

Insurance

You may have kept your old super fund account open so that you can keep any insurance you have in super running. There’s nothing to stop you doing that indefinitely – just make sure you understand any rules you need to follow to keep the insurance in place. For example, does your old super fund require you to add to your account every now and again? Keep a minimum balance?

You can also set up insurance in your SMSF.

As with everything, there are pros and cons to having your insurance in super vs having personal insurance outside super. And there are also pros and cons to having your super insurance in your SMSF vs keeping it in your old fund. Weigh up your choices carefully before you do anything that would jeopardise any insurance cover you already have. Learn more about SMSF insurance.

Year-end compliance

There’s work to do at the end of each financial year (including the very first year) for your SMSF. Mostly this will be done by your SMSF accountant or administrator. But make sure you check with them so you know what they will do and what lies with you.

In particular, make sure you know what documents and information they need from you each year.

For example, some accountants will need you to provide copies of all bank statements, investment accounts, dividend statements etc for all your investments. Typically a specialist SMSF administrator will make sure this type of information comes directly to them via a data feed so you don’t need to gather it together yourself.

But even a specialist administrator will need some information from you. For example, if you make ad hoc payments from the SMSF (such as property expenses, insurance premiums etc) they will need to know what these were for and will need receipts or policy statements.

All this information is needed so your accountant or administrator can manage:

• Your SMSF’s financial statements. These are the financial accounts prepared each year for your SMSF that show how much it’s received in income or spent on its expenses (called the “Operating Statement”) and how much it has in total (called the “Statement of Financial Position” or people sometimes refer to it as a Balance Sheet). The financial statements also show other information such as how the fund is divided up between the various members. Even if the SMSF only has one member, these are still required every year.

• Your SMSF’s annual tax return. An SMSF must lodge a special return (which includes the fund’s tax return) every year. When it’s due depends on whether you lodge it yourself (generally 31 October) or whether you have a tax agent who does it for you. Even if you have a tax agent, the due date will depend on whether it’s your SMSF’s first year (in which case it will generally be 28 February) or subsequent years (in which case it’s 15 May for most SMSFs). The due date is brought forward if you didn’t lodge on time last year.

• Independent audit. All SMSFs are audited every year by an independent, ASIC-registered auditor. The auditor will be checking that your fund complied with the super rules as well as making sure your financial statements are right.

Learn more about EOFY requirements.

Making changes

Inevitably you’ll want to change things about your SMSF over time. You might want to:

• Add new members or trustees,

• Remove a member or trustee,

• Start taking money out of super because you’re retired,

• Make contributions you’ve never made before,

• Deal with the death of a member and more.

If and when you want to do some of these things talk to your adviser, accountant or administrator. They will be able to guide you through the legal requirements, help you understand your responsibilities and make sure you take advantage of all the opportunities you have now you’ve set up your SMSF. Learn about when things change in an SMSF.

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. Learn more about benefits.

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