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SMSFs can provide flexibility, control and oversight of your superannuation whilst giving you choice when it comes to your investments. It is important, however, that when considering an SMSF you fully understand the rules and responsibilities that come with being a trustee.
Here are a few important things to understand about SMSFs.
What is an SMSF?
Self-managed super funds (SMSFs) are a way of saving for your retirement. The difference between an SMSF and other types of funds is that the members of an SMSF are usually also the trustees.
For over 35 years, backed by a team of leading industry experts, SuperConcepts has helped support thousands of individuals. Here are some of the most common queries we've seen.
A self-managed superannuation fund (SMSF) is a unique type of super fund that provides its members with a high degree of autonomy and control over their investments. In contrast to other super funds, an SMSF permits members to serve as both a member and trustee, thereby enabling them to independently determine the investment strategy and oversee the management of their investments.
The investment flexibility of an SMSF is a primary advantage, as members can invest in diverse assets, including property, private companies, and international assets. Furthermore, the ability to pool funds with up to five other members enhances the investment options available to an SMSF.
As of 1 July 2021, an amendment to Section 17A SIS Act defines an SMSF as a fund with less than seven members, allowing for the establishment of SMSFs with up to six members.
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 comprise family, friends and partners as members and can have up to six members. Pooling superannuation can results in a bigger balance which gives your SMSF more investment options and can also be more cost-effective. Traditional super funds only allow individual accounts and each member must pay fees.
Ongoing fees and costs will depend on your fund's investments and are based on the overall complexity of your SMSF. Pleasingly, your SMSF only pays for what it uses meaning you can often find ways to reduce your overall super costs - you’re the one in control.
There are also taxation benefits associated with SMSFs and effective tax management solutions can present significant benefit for trustees. This should be decided in consultation with a Registered Tax Agent or financial adviser.
Finally, SMSFs 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.
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 six members to increase the total SMSF balance.
Cost comparison with industry and retail funds
LESS THAN $100,000
Not cost-effective in comparison to a large superfund, unless the SMSF could grow within a reasonable time.
$100,000 to $200,000
Are competitive with APRA regulated funds provided the Trustees use one of the cheaper service providers or undertake some of the administration themselves.
Competitive with both Industry and Retail funds even for full administration.
SMSFs become the cheapest alternative provided the Trustees undertake some of the administration, or, if seeking full administration, choose one of the cheaper services.
MORE THAN $500,000
SMSFs are generally the cheapest alternative.
*The information provided on this table has been taken from the Rice Warner research report ‘Costs of Operating SMSFs 2020’. It does not take into account the personal objectives, financial situation, or particular needs of any individual and should not, therefore, be relied upon to make financial decisions. The cost of managing an SMSF is only one of the factors that needs to be considered when deciding whether an SMSF is right for you.
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.
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.
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.
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.
Anyone 18 years or over can be a trustee of an SMSF as long as they are not:
classified as an undischarged bankrupt;
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.
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.