Your top 10 SMSF questions answered
Find answers to some of the most common SMSF questions, answered in 'laymans terms' — select a topic to learn more.
What exactly is an SMSF?
A self-managed superannuation fund (SMSF) is a super fund where you’re in control. You’re not only a member, but also a trustee. You choose the investment strategy and manage the investments.
An SMSF is flexible enough to allow you to invest in different assets like property, private companies and international assets.
An SMSF can have up to four members. Pooling your funds to build up the balance can give your SMSF more investment options.
How does an SMSF compare with traditional super?
Generally, an SMSF will provide more flexibility and control than an industry or retail super fund. With an SMSF you choose the investments whereas a traditional super fund tends to invest in default investments which may not suit your personal investment goals.
An SMSF can add family, friends and partners as members (up to 4 members are allowed). A bigger balance could give your SMSF more investment options and might be more cost effective. Traditional super funds only allow individual accounts.
The costs will depend on the investments and are based on what you choose to do. Your SMSF only pays for what it uses. This means you could reduce your super costs, but that’s up to you. You’re the one in control.
While a traditional super fund aims to act tax effectively for all their members, your SMSF portfolio could offer more options for reducing tax.
An SMSF also provides more certainty about who will receive your benefit should you pass away. There is the flexibility to direct how benefits are distributed to take into account the situation of the beneficiaries.
Do I have enough super?
You generally need a reasonable amount of super to justify the costs of an SMSF however there is no minimum balance required by law. The main considerations are comparing the costs incurred with those for industry or retail super funds, and ensuring that the balance, and any investment returns, are not absorbed by costs and fees.
The fixed costs, (such as the administration fee and audit fee) when measured as a percentage of the balance, will reduce as the balance increases. An SMSF can pool the superannuation accounts of up to 4 members to increase the total SMSF balance.
|SMSF balance||Cost comparison with industry and retail funds|
|Less than $100,000||Unlikely to be competitive|
|$100,000 to $200,000||May be competitive provided administration and investment costs are minimised|
|$200,000 to $500,000||May be equally competitive|
|More than $500,000||May be more competitive|
*This table is an estimate of the costs and is based on the Rice Warner report, ‘Costs of Operating SMSFs ASIC’ (updated on 3 September 2013, commissioned by ASIC). As it is an estimate, it is not a reliable indicator of the costs and fees that your SMSF may incur.
*The $100,000 minimum fund balance is merely a suggested guide based on the Rice Warner report, ‘Costs of Operating SMSFs ASIC’ (updated on 3 September 2013, commissioned by ASIC). The important consideration is to ensure that the start-up balance and any investment returns are not absorbed by costs and fees.
Do I like investing and have the necessary skills?
An SMSF may provide you with more investment options for your super. For example an SMSF can invest in direct property and collectables. You’ll be responsible for conducting investment research, keeping track of the investments and making the right decisions for your SMSF. Monitoring and controlling your SMSF’s transactions is directly done by you, which provides greater visibility of your SMSF’s investments and their performance at any time.
Do I have the time?
It will depend on what type of investor you are and how active you are when managing your investment portfolio.
As an SMSF trustee you'll need to:
- monitor your investment strategy
- research investment options
- keep abreast of how your investments are performing and adapt your strategy
- organise annual valuations (if required)
- stay on top of your reporting obligations and make sure you meet important deadlines
- keep up-to-date with changes to superannuation laws affecting your trustee responsibilities
While it might sound like a lot of effort, you can outsource many of these tasks to a professional provider and focus on the investing. It is important to understand that as the trustee of your SMSF you are responsible, and will be held accountable, for the compliance of your SMSF with the rules and regulations. You may delegate the duties, but not the responsibilities.
How much will an SMSF cost?
The costs will depend on how you choose to manage your SMSF and the investment strategy. The more complex you make it, the more it’s likely to cost. You control the costs. Your SMSF only pays for what it uses.
Administration costs are largely fixed whereas investments costs vary with the type of investments and the frequency of transactions. Also consider the net returns you’re expecting your SMSF to make (total return less costs to run).
In addition to administration costs and transaction costs, there is a set-up fee and some ongoing regulatory charges.
What is the sole purpose test?
The sole purpose test means that your SMSF and its assets are used solely to provide benefits to you and other members for their retirement.
For example, If you intend to use the investment property for your holidays, or hang the art piece in your home, you are likely to breach the sole purpose test.
Do I need someone to help me set up and run my SMSF?
You can set-up and run an SMSF by yourself, but most trustees engage an accountant or a professional SMSF manager (like us) to manage the bulk of the administration work.
We can also help you understand what an SMSF can and can't invest in – but we won't be able to recommend any investment strategies or financial products. If you need help with that please contact a financial adviser.
It is important to understand that as the trustee of your SMSF you are responsible, and will be held accountable, for the compliance of your SMSF with the rules and regulations. You may delegate the duties, but not the responsibilities.
Am I eligible to become a trustee?
Anyone 18 years or over can be a trustee of an SMSF as long as they are not:
- classified as an undischarged bankrupt.
- mentally incapacitated.
- charged with certain criminal convictions.
- disqualified by a court or regulator (e.g. by ATO).
An individual under the age of 18 can be a member of an SMSF, but not a trustee.
Where can I run my SMSF from?
SMSF residency rules can be complex. Generally:
- the SMSF must have been established in Australia
- the central management and control must ordinarily be carried out by trustees residing in Australia
- for the purposes of determining whether contributions can be made by non-Australian resident members, at least 50% of the value of the SMSF’s assets must be attributable to active members who are Australian residents, for the contribution to be able to be made.
If you are planning to leave Australia for more than two years you should seek professional advice.
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