SMSF 101: What is a Self Managed Super Fund?

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Superannuation is all about building long-term wealth that will support you financially in retirement. A Self Managed Super Fund (SMSF) is a private super fund that you manage yourself, as opposed to putting your superannuation in an industry or retail fund such as REST, CBUS or Australian Super.

We have extensive experience with SMSFs at Aintree Group. We wanted to share some of the basic elements and decision making points so you know all the options available to you when it comes to securing your future.

What’s Involved?

A Self Managed Super Fund can be set up with either an individual as the SMSF Trustee or a corporate entity as the SMSF Trustee. Depending on what you choose, your fund will be structured differently. So you need to have a good understanding of how each structure works. You should speak to your accountant about the differences and what would suit you best.

As the Trustee of a SMSF, you are responsible for making all the investment decisions for the fund, and keeping the fund compliant to tax laws and regulations. Trustees can be held accountable if your SMSF operates illegally.

Legally, a SMSF must only exist for the sole purpose of providing retirement benefits for members and their dependants – i.e. you, your spouse, your parents and/or your children. For example, you cannot use a SMSF to access to your super before retirement age (unless a lawful exemption applies), or use funds for purchases such as a holiday house.

Source: ato.gov.au

Self Managed Super Funds Vs “Conventional” Industry Super Funds – What’s the Difference?

Members & Trustee Responsibilities

SMSFOther super funds
A SMSF can have a maximum of six members (as of 1 July 2021). All members are involved in managing the SMSF in some way.
Trustees are expected to have a working knowledge of tax and super laws to ensure their fund is compliant. They can be personally fined if their fund breaches any laws.
Usually no limit on the number of members.

Professional, licensed trustees are responsible for managing the fund and complying with tax and super laws and regulations.

Investment Decisions

SMSFOther super funds
Trustees make all investment decisions, usually with the help of an accountant and/or a financial adviser.

They develop and implement the fund’s investment strategy and level of risk, and can choose specifically what assets to invest in.

Some industry super funds allow you some control over the risk level of your super investments. But you generally can’t choose the specific assets your super will be invested in.

Insurance

SMSFOther super funds

Trustees decide whether to purchase insurance for their members. Insurance premiums can be higher.
Insurance cover is offered to members, and in some cases is added automatically and charged to the fund. Member insurance can costs less as larger industry funds can get discounts.

Regulation

SMSFOther super funds
Self Managed Super Funds are regulated by the ATO. Trustees and their financial advisers must engage with and report to the ATO.Regulated by the Australian Prudential Regulation Authority (APRA). Members don’t have to engage with APRA directly, it’s taken care of my the industry super fund.

Disputes

SMSFOther super funds
Any disagreements that cannot be sorted out independently must be resolved in court at the members’ own expense. It’s important when setting up your super fund to engage with an expert to ensure the Deed protects the members.
Members have access to the Australian Financial Complaints Authority (AFCA).
Any costs incurred may be eligible for statutory compensation.

Fraud & Theft

SMSFOther super funds
There is no government financial assistance available to SMSF Members or Trustees in the event of fraud or theft. Corporations Law may provide some options, but there is no guarantee of compensation for any funds lost.
In the event of fraud or theft, Members may be eligible for government financial assistance.

Advantages and Disadvantages of a Self Managed Super Fund

Advantages:

  • SMSFs offer a wider range of investment options. A SMSF can invest in almost anything providing that it adheres to certain regulations.
    • This includes investing in property. Commercial property can be purchased by their SMSF, which can then be rented to a business – which is often useful for small business owners and those who are self-employed.
    • Artwork and collectables, even gold, are all permitted within an SMSF (with very strict criteria and rules).
  • A SMSF can borrow money to purchase assets.
  • Flexibility: Members of the fund are the trustees, so you can ensure the SMSF suits your specific circumstances.  
  • You’re more aware of how your super is invested so you can make quick adjustments to your portfolio in response to market changes and new opportunities.
  • You can use software that to keep track of the real-time value of your super regularly so you can track funds and investments and make it easier to manage.
  • SMSFs have the same tax rates as other superannuation funds, however you can engage with an accountant to implement tax strategies.
  • SMSFs are becoming much more cost-effective and accessible to more income levels due to advances in technology and competition between service providers. Operational costs are mostly fixed, so as the fund grows in value, the costs reduce proportionally.
  • You can pool your superannuation with up to 5 other people, which opens up the opportunity to make investments that an individual may not be able to afford on their own.
  • Creditors cannot generally access an individual’s superannuation.

Disadvantages:

  • You take on the responsibility of all investment decisions instead of outsourcing this duty to an Industry or Retail Super Fund. This demands a lot of time and expertise to ensure investments are managed properly.
  • Trustees are also responsible for ensuring that their fund complies with the laws and regulations and can be held personally liable and subject to high penalties.
  • For SMSFs in Australia, the most members must be permanent Australian residents and cannot live overseas.
  • The fixed cost of running an SMSF can outweigh the assets held when the SMSF is low in value.
    • The consensus is often that you should have at least $250,000 in your fund to make a SMSF worthwhile, however an accountant will be able to give you tailored advice on this.
    • Some costs related to running an SMSF include:
      • Audit fees
      • Debts (e.g. mortgages, loans)
      • Reporting fees
      • Valuation fees  
      • Insurance and legal fees.  
      • Broker, accountant and financial advice fees

At the end of the day, Self Managed Super Funds aren’t for everyone. Running your own Super Fund is a major financial decision and you need to have the time and professional assistance to manage it correctly. You’ve got to weigh up the pros and cons, and how they would impact your own unique circumstances.

It’s certainly not a decision you have to make alone. Get in touch with us or book a Superannuation Consultation to chat with one of our experts about whether or not a SMSF would work for you.