Guide To Self-Managed Super Fund (SMSF)

A self-managed super fund is a DIY private retirement fund that you manage personally. Members or trustees have control on how their retirement funds are invested.

Overview of rules that govern SMSFs.

SMSF are set up for the sole purpose of giving retirement benefits to its members, trustees or beneficiaries.

Setting up a self-managed super fund involves creating a trust with either corporate or individual trustees. The trustees are the managers of the SMSFs assets and are responsible for ensuring that the fund is legally complying with superannuation and taxation laws. Compliance with Australian laws include reporting, annual audits, and compliance with tax obligations set by the Australian Taxation Office or ATO.

Who can become members or trustees of a Self-Managed Super Fund?

Members of an SMSF must also be the funds’ trustees. If an SMSF chooses to have a corporate trustee structure, each member must be a director of the company. The company should also be registered with the Australian Securities and Investments Commission or ASIC. Each director should also be a member of the SMSF.

In the past, self-managed super fund can only have a maximum of four trustees or members. These number will be increased to six starting July 1, 2019.

To become a member or trustee, an individual must consent to become one and accept their responsibilities by signing a trustee declaration. All members or trustees cannot be registered as bankrupt, have previously been disqualified as a trustee by a court, ASIC or the ATO, have an employer or employee relationship with another fund member unless they are relatives.

Minors can become members of a self-managed super fund if they are represented by a trustee and that the representative will do their part on their behalf.

How do SMSFs work?

Trustees manage SMSFs by deciding on which investments to invest in. There is also a legal requirement for an investment strategy documentation for all SMSFs. The investment strategy should satisfy the sole purpose test and be the guide for decision-making by trustees.

When developing an SMSF investment strategy, it is important to consider:

  • The distinct characteristics of the fund members (which may include the current financial situation, age and risk profile)
  • The benefits of diversifying the investments of the fund to reduce risk. Major investment options include shares, fixed interest products, and real estate.
  • How assets can be converted to cash easily to pay for members’ benefits when needed.
  • The present insurance needs of members to ensure that proper coverage is prepared.

Some benefits that can be derived from SMSFs.

  • Greater tax flexibility. Retirement funds can be tax-effective investment vehicles. SMSFs that comply with superannuation laws are entitled to have their member’s fund earning and contributions taxed at a concessional rate of 15% and benefits received after the age of 60 are tax-free. Tax strategies around capital gains, franking credits, and taxable income can also be implemented through SMSFs.
  • Greater control of investments. Trustees of SMSFs have greater control on how their funds are invested. They can invest in products available to public funds and others which are not. They can invest in commercial real estate or residential properties and are not restricted to property trusts. They can also potentially purchase commercial properties which can be leased to a related party.
  • Possibly lower fees on high super balances. Public retirement funds usually charge members a fee based on the amount of funds being managed. SMSF fees are not charged on fund balances. They usually only incur advice and service fees.
  • Estate planning. With SMSFs there is greater flexibility with a trustee or member death benefits. Self-Managed Super Fund members can arrange for death benefits to be paid to a dependent as pension than a lump sum. This allows the Self-Managed Super Fund to continue running. If also allows funds to be distributed to future generations tax-effectively, while non-cash assets like shares or property can be transferred directly to beneficiaries.
  • Protection of Assets. SMSFs protect their member’s assets against bankruptcy or other claims by creditors. Retirement funds are considered as ‘property’ according to the Bankruptcy Act.

A self-managed super fund can be a good option depending on your current super balance, you knowledge about investments and the time you have available to manage the fund and the kind of assets you want to make investments in.

Drawbacks of SMSFs.

  • The need for knowledge, funds and time to administer the fund.
  • The higher costs on lower super balances.
  • SMSFs have higher insurance costs.
  • Extra costs like compulsory annual audit fees. Audit costs can also be relatively high.
  • More responsibility handled by trustees.
  • Regulatory and compliance demands to comply with regularly.
  • Potential loss from investments.
  • Heavy fines and penalties for breaching trustee conditions.

How are SMSFs controlled by ATO and ASIC?

The ATO makes sure that SMSFs are compliant with financial reporting and tax obligations. ASIC, on the other hand, manages the registration process for independent auditors. The SMSF auditor is required to report breaches to the ATO and fund trustees. Penalties are imposed on self-managed super fund trustees if they do not comply with their legal obligations.

Conclusion. Setting up your own Self-Managed Super Fund or SMSF is a big investment decision that involves legal responsibilities that should be complied with. These obligations are time-consuming and costly. Therefore, it is best to seek independent professional advice to see if Self-Managed Super Fund is proper for your circumstances.

Kingston Knight Audit are the Auditor Melbourne experts to contact when dealing with your trust account audit, SMSF Audit, financial statement audit,  and internal audit requirements. Contact us today, Kingston & Knight Audit offers a free telephone consultation to establish how we can best help you achieve the assurance and compliance you require.

Call our Melbourne team today on 03 9088 2242, or email us via