Should I start a self-managed super fund?

Self-managed super funds allow for up to four members who must all be trustees, and the fund’s sole purpose must be to providing for the retirement of members. This may include accessing a lump sum, an income stream, or death benefits.

If you choose to set up SMSF superannuation in Australia, you are responsible for all decisions relating to the fund, and are expected to be compliant with the laws governing super funds.

If you run a self-managed super fund you will need to:

  • Set and follow an appropriate investment strategy for your risk tolerance and retirement needs
  • Have the financial experience and skills required to make sound investment decisions
  • Have enough time to research investments and manage the fund
  • Budget for ongoing expenses such as professional accounting, tax, audit, legal and financial advice
  • Keep comprehensive records and arrange an annual audit by an approved SMSF auditor
  • Organise insurance, including income protection and total and permanent disability cover for super fund members

Where can I get help setting up an SMSF?

It is recommended that before committing to starting a self-managed super fund, you conduct thorough research, evaluate your financial position and seek professional advice.

Maintaining a self-managed super fund is likely to require a lot of time and specific financial knowledge and skills, so you may want to speak to professionals who can guide you through the administration requirements and assist with investment decisions as well.

Financial services professionals you approach could include:

  • An accountant, for assistance with the fund’s accounts and operating statements.
  • A tax agent, for assistance with logging tax returns and tax advice.
  • A fund administrator, for assistance with the running of your fund and following the SMSF rules.
  • A legal practitioner, for legal advice and assistance with your fund’s trust deed.
  • A financial adviser, for assistance with preparing and executing investment strategies.

Remember that even if you get help from professionals, you will still be responsible for ensuring all tasks are completed correctly and adhere to legislation surrounding self-managed super funds.

How do I set up a self-managed super fund?

According to the Australian Taxation Office (ATO), there are several steps that must be taken when setting up a self-managed super fund. Appointing professionals for assistance are among the most crucial.

Once this has been done, the following steps should be taken:

  1. Choose individual trustees or a corporate trustee: Self-managed super funds can have up to four individual trustees, or a company acting as a trustee. Costs, requirements and ownership of assets will differ for each option.
  2. Create the trust and trust deed: The trust deed is the legally binding document that details the arrangements relating to the trust and its beneficiaries, and how the fund is operated. It’s a legal document, so it must be prepared by someone qualified to do so, and must be agreed upon and signed by all SMSF trustees.
  3. Appoint your trustees: All trustees of the fund must submit their consent in writing, and sign a trustee declaration that confirms they understand all of their associated duties and responsibilities. Eligibility criteria applies to anyone hoping to be a trustee.
  4. Check your fund is an Australian super fund: It must be so for the entire financial year to be a complying super fund. If this is not the case, associated assets and income will be taxed at the highest marginal tax rate.
  5. Register your fund: Your SMSF must be registered with the ATO. During the registration process, you can apply for a TFN, ABN and register for GST if you feel necessary.
  6. Set up a bank account for your fund: This is necessary to pay the fund’s expenses and liabilities.

SMSF investments

Though it could be tempting for SMSF investors to start making investments right away, preparing an investment strategy for your self-managed super fund could be better for you and all trustees in the long run.

This strategy should be regularly reviewed and amended in case there are changes to your income, personal circumstances, diversification plans, the liquidity of the fund’s assets or the fund’s ability to pay benefits when members reach retirement.

To be eligible for the same tax concessions generally available to other super funds, your SMSF will need to meet the ATO’s “sole purpose test”. In other words, the fund must be maintained for the sole purpose of being used during the retirement of the member or members, and investments made should reflect this purpose.

There are also some restrictions from the ATO to consider when making your investments, such as:

  • The purchase and sale price of assets must reflect market value
  • The fund cannot borrow money (except in certain limited circumstances)
  • Assets cannot be bought from, and money cannot be loaned to, fund members (except in certain limited circumstances)

How to close a self-managed super fund

Before you can close an SMSF, requirements specified in the trust deed will have to be met and benefits will have to be dealt with.

Once this is done, the ATO recommends appointing an SMSF auditor to complete the fund’s final audit.

Then, the final annual return should be lodged, and outstanding tax and expected liabilities settled before closing the fund’s bank account and winding up the self-managed super fund.

Pros and cons of SMSFs

Setting up a self-managed super fund will give you more control over your investments and how you buy and sell assets, giving you the chance to try to outperform traditional superannuation funds. This could potentially allow you to retire with more money than you might with a more typical super fund.

That being said, SMSFs generally have high set-up costs and annual running expenses, so a large superannuation balance could be necessary for the fund to be cost-effective. Also, they require a high level of financial expertise to manage, as well as a significant time commitment, which may not suit your retirement planning.

Alternatives to SMSFs

If you feel a self-managed super fund isn’t the best option for you, you may want to compare other superannuation options in Australia, such as industry super funds or a fund managed by a financial institution or private company.

You can compare super funds at RateCity to get a better idea of which superannuation investment options, fees, features and benefits may best suit your financial situation. Be sure to check the relevant product disclosure statement (PDS) and/or financial services guide before making any decisions. 

Is an SMSF right for you? If you're not sure which super option may be right for your personal objectives, consider contacting a financial adviser or financial planner for more personal financial advice.

Fact Checked

This article was reviewed by Finance Writer Alison Cheung before it was published as part of RateCity's Fact Check process.

Frequently asked questions about SMSFs

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 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.

What contributions can SMSFs accept?

SMSFs can accept mandated employer contributions from an employer at any time (Funds need an electronic service address to receive the contributions).

However, SMSFs can’t accept contributions from members who don’t have tax file numbers.

Also, they generally can’t accept assets as contributions from members and they generally can’t accept non-mandated contributions for members who are 75 or older.

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

Can I carry on a business in an SMSF?

SMSFs are allowed to carry on a business under two conditions.

First, this must be permitted under the trust deed.

Second, the sole purpose of the business must be to earn retirement benefits.

How are SMSFs taxed?

Funds that follow the rules are taxed at the concessional rate of 15 per cent. Funds that don’t follow the rules are taxed at the highest marginal tax rate.

How are SMSFs allowed to invest their funds?

SMSFs can invest in conventional assets such as shares, term deposits, managed funds and property.

SMSFs can also buy ‘collectibles’ such as artwork, jewellery, antiques, coins, stamps, vintage cars and wine – although there are special rules that apply to collectibles.

Investments must be made on an arm’s length basis, which means that assets must be bought and sold at market prices, while income must reflect the market rate of return.

As a general rule, SMSFs can’t buy assets from members or related parties.

What compliance obligations does an SMSF have?

SMSFs must maintain comprehensive records and submit to annual audits.

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 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.

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