What is an SMSF and should you get one?

A Self Managed Super Fund (SMSF) is, as the name suggests, a super fund that you manage yourself.

It’s a private super fund that is regulated by the Australian Taxation Office (ATO), rather than the Australian Prudential Regulation Authority (APRA).

There are many different super rules and regulations that apply to an SMSF that make it a very complicated and time-consuming venture.

However, if you have a lot of super and understand the financial and legal responsibilities, an SMSF could be of more benefit to you than an APRA regulated super fund.

How do Self Managed Super Funds work?

An SMSF acts as DIY superannuation, as it is a superannuation fund managed by the trustees of that fund that are also the members of that fund.

Members are responsible for complying with Australian superannuation and tax laws. They make investment decisions on behalf of the fund, and must generate market returns for the trustees and members retirement.

This means that all investments must be for the sole benefit of trustees and members when they retire, and not focus on generating value to be enjoyed in the present day.

Can you borrow money from your SMSF?

Setting up an SMSF for the purpose of accessing your super early is illegal, and if you do this it can cost your dearly.

As a general rule, SMSF trustees are not allowed to borrow money from their SMSF, especially when they are borrowing money to benefit any related parties. These related parties can include SMSF members (if the returns are for individual gain), friends, relatives or business associates.

However, an SMSF loan is legal when you arrange a limited recourse borrowing arrangement (LBRA).

An LBRA is a loan taken out by an SMSF trustee with a third-party lender, to purchase a single asset (or collection of identical assets that have the same market value) that provides investment returns to the SMSF.

Borrowing money with an LBRA can work, however it’s important that you follow all the rules and speak with an SMSF professional before you sign anything.

Find out more about limited recourse borrowing arrangements at the ATO website here.

What happens if you are caught breaking the laws with an SMSF?

If you are caught breaking the super and tax laws that govern an SMSF, the fund can be made ‘non-complying’ by the Australian Taxation Office (ATO).

This means you could lose access to up to half of the funds in your SMSF. You can also incur serious penalties, including thousands of dollars in fines and potentially, be sentenced to time in jail.

The ATO takes non-compliance very seriously, and there are various ways in which they will deal with non-compliant Self Managed Super Funds. This includes:

  • Education direction; written direction to undertake an education course that will improve the competency of trustees and reduce their risk of breaking the laws in future.
  • Enforceable undertaking; if you realise that you have broken the SMSF laws, you can initiate an undertaking to rectify your mistake and the ATO will decide whether your action to rectify the mistake is acceptable. If not, they may take further action.
  • Rectification direction; this is a direction in writing from the ATO that outlines a specific action you must take to rectify the contravention within a specified time, and you must provide proof of compliance with the direction.
  • Administrative penalties; Individual trustees and directors of corporate trustees may be personally liable to pay an administrative penalty if they fail to meet the super laws.
  • Disqualification of a trustee; in extreme cases, depending on how serious the contraventions are, how many have occurred and how likely it is that you will continue to be non-compliant, you may be disqualified from managing your super.
  • Civil and criminal penalties; if you have broken rules including lending to members, you may be taken to court by the ATO and civil or criminal penalties may be imposed.
  • Allowing the SMSF to wind up; depending on the situation, you may be required to wind up the SMSF and roll over any remaining benefits to an APRA regulated fund.
  • Notice of non-compliance; if the ATO finds your breach of the laws very serious, they may declare the SMSF as non-compliant, which could mean you lose up to half the assets in your SMSF and the responsible trustee may be fined thousands of dollars.
  • Freezing an SMSF’s assets; the ATO may provide notice to “freeze” an SMSF’s assets, if it appears that an individual trustee’s actions may negatively impact other beneficiaries of the fund. This is to preserve the retirement benefits for those who are not at fault.

Should I get an SMSF instead of an APRA regulated super fund?

Whilst the penalties for non-compliance are substantial, there are some benefits to having an SMSF, especially if you have a lot of superannuation, and are aware of the financial risks, regulations and laws involved.

ASIC Commissioner, Danielle Press, warns that whilst benefits can be alluring to Australians, there are considerable risks and responsibilities involved.

“SMSFs may be an attractive option for investors wanting more control over their superannuation investment strategy, but it requires real skill, care and diligence to manage your own superannuation,” she said.

“Our research found that SMSFs are not suitable for members with a low fund balance, particularly where they have limited ability to make future contributions. This is important because consumers starting off with a low balance need to be aware that they may not be in a better financial position in the future by holding an SMSF compared with investing in an APRA-regulated fund.’

Data from the Australian Tax Office shows that as at 30 June 2019, 599,678 SMSFs in Australia held nearly $748 billion in assets, making total assets held in SMSFs larger than those in either industry ($719 billion) or retail ($626 billion) funds.

However, further analysis from ASIC shows on average, balances below $500,000 have lower returns after expenses and taxes than APRA-regulated superannuation funds.

SMSF and APRA fund returns graphs

In short, if you set up an SMSF you need to be aware that you are personally liable for all decisions made by the fund. Regardless of whether you employ a financial adviser or SMSF professional to help you with your decisions, the onus is on you.

So, before you set up an SMSF, make sure that it’s the right decision for your personal financial situati

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Learn more about superannuation

How do I set up an SMSF?

Setting up an SMSF takes more work than registering with an ordinary superannuation fund. 

An SMSF is a type of trust, so if you want to create an SMSF, you first have to create a trust.

To create a trust, you will need trustees, who must sign a trustee declaration. You will also need identifiable beneficiaries and assets for the fund – although these can be as little as a few dollars.

You will also need to create a trust deed, which is a document that lays out the rules of your SMSF. The trust deed must be prepared by a qualified professional and signed by all trustees.

To qualify as an Australian superannuation fund, the SMSF must meet these three criteria:

  • The fund must be established in Australia – or at least one of its assets must be located in Australia
  • The central management and control of the fund must ordinarily be in Australia
  • The fund must have active members who are Australian residents and who hold at least 50 per cent of the fund’s assets – or it must have no active members

Once your SMSF is established and all trustees have signed a trustee declaration, you have 60 days to apply for an Australian Business Number (ABN).

When completing the ABN application, you should ask for a tax file number for your fund. You should also ask for the fund to be regulated by the Australian Taxation Office – otherwise it won’t receive tax concessions.

Your next step is to open a bank account in your fund’s name. This account must be kept separated from the accounts held by the trustees and any related employers.

Your SMSF will also need an electronic service address, so it can receive contributions.

Finally, you will need to create an investment strategy, which explains how your fund will invest its money, and an exit strategy, which explains how and why it would ever close.

Please note that you can pay an adviser to set up your SMSF. You might also want to take the Self-Managed Superannuation Fund Trustee Education Program, which is a free program that has been created by CPA Australia and Chartered Accountants Australia & New Zealand.

What is an SMSF?

An SMSF is a self-managed superannuation fund. SMSFs have to follow the same rules and restrictions as ordinary superannuation funds.

SMSFs allow Australians to directly invest their superannuation, rather than let ordinary funds manage their money for them.

SMSFs are regulated by the Australian Taxation Office (ATO). They can have up to four members. All members must be trustees (or directors if there is a corporate trustee).

Unlike with ordinary funds, SMSF members are responsible for meeting compliance obligations.

What should I know before getting an SMSF?

Four questions to ask yourself before taking out an SMSF include:

  1. Do I have enough superannuation to justify the higher set-up and running costs?
  2. Am I able to handle complicated compliance obligations?
  3. Am I willing to spend lots of time researching investment options?
  4. Do I have the skill to make big financial decisions?

It’s also worth remembering that ordinary superannuation funds usually offer discounted life insurance and disability insurance. These discounts would no longer be available if you decided to manage your own super.

How long after divorce can you claim superannuation?

You or your partner could be forced to surrender part of your superannuation if you divorce, just like with other assets.

You can file a claim for division of property – including superannuation – as soon as you divorce. However, the claim has to be filed within one year of the divorce.

Your superannuation could be affected even if you’re in a de facto relationship – that is, living together as a couple without being officially married.

In that case, the claim has to be filed within two years of the date of separation.

Either way, the first thing to consider is whether you’re a member of a standard, APRA-regulated superannuation fund or if you’re a member of a self-managed superannuation fund (SMSF), because different rules apply.

Standard superannuation funds

If your relationship breaks down, your superannuation savings might be divided by court order or by agreement.

The rules of the superannuation fund will dictate whether this transfer happens immediately, or in the future when the person who has to make the transfer is allowed to access the rest of their superannuation (i.e. at or near retirement).

Click here for more information.

SMSFs

If your relationship breaks down, you must continue to observe the trust deed of your SMSF.

So if you and your partner are both members of the same SMSF, neither party is allowed to use the fund to inflict ‘punishment’ – such as by excluding the other party from the decision-making process or refusing their request to roll their money into another superannuation fund.

This no-punishment rule applies even if the two parties are involved in legal proceedings.

Click here for more information.

Financial consequences

Superannuation funds often charge a fee for splitting accounts after a relationship breakdown.

Splitting superannuation can also impact the size of your total super balance and how your super is taxed.

Click here for more information.

How do I wind up an SMSF?

There are five things you must do if you want to close your SMSF:

  1. Fulfil any obligations listed in the trust deed
  2. Pay out or roll over all the superannuation
  3. Conduct a final audit
  4. Lodge a final annual return
  5. Close the fund’s bank account

What is an SMSF investment strategy?

All SMSFs are required to have an investment strategy, which should explain what assets the fund will buy and what objectives it will pursue. This strategy must be reviewed regularly.

Issues to consider include how much risk the SMSF will take, how easily its assets can be converted into cash and how it will pay out benefits.

How do you open a superannuation account?

Opening a superannuation account is simple. When you start a job, your employer will give you what’s called a ‘superannuation standard choice form’. Here’s what you need to complete the form:

  • The name of your preferred superannuation fund
  • The fund’s address
  • The fund’s Australian business number (ABN)
  • The fund’s superannuation product identification number (SPIN)
  • The fund’s phone number
  • A letter from the fund trustee confirming that the fund is a complying fund; or written evidence from the fund stating it will accept contributions from your new employer; or details about how your employer can make contributions to the fund

You might want to provide your tax file number as well – while it’s not a legal obligation, it will ensure your contributions will be taxed at the (lower) superannuation rate.

What superannuation details do I give to my employer?

When you start a job, your employer will give you what’s called a ‘superannuation standard choice form’. Here’s what you need to complete the form:

  • The name of your preferred superannuation fund
  • The fund’s address
  • The fund’s Australian business number (ABN)
  • The fund’s superannuation product identification number (SPIN)
  • The fund’s phone number
  • A letter from the fund trustee confirming that the fund is a complying fund; or written evidence from the fund stating it will accept contributions from your new employer; or details about how your employer can make contributions to the fund

You should also provide your tax file number – while it’s not a legal obligation, it will ensure your contributions will be taxed at the (lower) superannuation rate.

How is superannuation regulated?

The Australian Prudential Regulation Authority (APRA) regulates ordinary superannuation accounts. Self-managed superannuation funds (SMSFs) are regulated by the Australian Taxation Office.

Can I take money out of my superannuation fund?

Superannuation is designed to provide Australians with money in their retirement. The government has strict rules around when people can take that money out of their fund because it wants to prevent people eroding their savings before they reach retirement.

As a general rule, you can only take money out of your superannuation fund when you reach:

  • Age 65
  • Your ‘preservation age’ and retire
  • Your preservation age and begin a ‘transition to retirement’ while still working

That said, you can take money out of your superannuation fund early based on one of these seven special conditions:

  • Compassionate grounds
  • Severe financial hardship
  • Temporary incapacity
  • Permanent incapacity
  • Superannuation inheritance
  • Superannuation balance under $200
  • Temporary resident departing Australia

How do you set up superannuation?

Before you set up a superannuation account, you’ll need to check if you’re allowed to choose your own fund. Most Australians can, but this option doesn’t apply to some workers who are covered by industrial agreements or who are members of defined benefits funds.

Assuming you are able to choose your own fund, the next step should be research, because there are more than 200 different superannuation funds in Australia.

Once you’ve decided on your preferred superannuation fund, head to that provider’s website, where you should be able to fill in an online application or download the appropriate forms. You’ll need your tax file number (assuming you don’t want to be charged a higher tax rate), your contact details and your employer’s details (if you’re employed).

What are the risks and challenges of an SMSF?

  • SMSFs have high set-up and running costs
  • They come with complicated compliance obligations
  • It takes a lot of time to research investment options
  • It can be difficult to make such big financial decisions

What is a superannuation fund?

A superannuation fund is an institution that is legally allowed to hold and invest your superannuation. There are more than 200 different superannuation funds in Australia. They come in five different types:

  • Retail funds
  • Industry funds
  • Public sector funds
  • Corporate funds
  • Self-managed super funds

Retail funds are usually run by banks or investment companies.

Industry funds were originally designed for workers from a particular industry, but are now open to anyone.

Public sector funds were originally designed for people working for federal or state government departments. Most are still reserved for government employees.

Corporate funds are arranged by employers for their employees.

Self-managed super funds are private superannuation funds that allow people to directly invest their money.

How do you create a superannuation account?

Before you create a superannuation account, you’ll need to check if you’re allowed to choose your own fund. Most Australians can, but this option doesn’t apply to some workers who are covered by industrial agreements or who are members of defined benefits funds.

Assuming you are able to choose your own fund, the next step should be research, because there are more than 200 different superannuation funds in Australia.

Once you’ve decided on your preferred superannuation fund, head to that provider’s website, where you should be able to fill in an online application or download the appropriate forms. You’ll need your tax file number (assuming you don’t want to be charged a higher tax rate), your contact details and your employer’s details (if you’re employed).