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.
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