How Does Self-Managed Super Fund (SMSF) work?

How Does Self-Managed Super Fund (SMSF) work?

Self-managed Super Fund or SMSF is a form of trust with the sole purpose of providing income to its members upon retirement or death benefits to a member’s beneficiaries. All SMSFs have their own Tax File Number or TFN and an Australian Business Number or ABN. They are also required to have their own bank accounts. Fund members can simply send their retirement contributions to their SMSF bank account just like what they do with a regular super fund.

Members or trustees of the self-managed super fund are responsible for the investment strategy that the fund should take and do, as well as implementing investment decisions for the fund. Investment objectives are usually discussed with a financial or investment expert or adviser and investment strategies are formulated together.

Self-Managed Super Funds have meticulous administrative and lodgement obligations which require regular and ongoing attention. These obligations include keeping minutes of trustee decisions, keeping copies of records, and preparing annual financial statements. Self-managed super funds must also submit an annual tax return and have their SMSFS financial records audited by an approved SMSF auditor. The operations of the fund for a particular period should be audited. These audits should be carried out annually.

Trustee Structures. There are two types of trustee structures for self-managed super funds. These are the individual trustee structure and the company trustee structure.

Individual Trustees. Every member of a fund must be a trustee. Where there is a single member fund, there should be at least 2 individuals that should act as trustee on behalf of the fund. The member must appoint a second person to act as a trustee or consider a company to act as a trustee.

Trustees are legally responsible to make decisions on behalf of the fund and make sure that the fund is compliant to Australian laws at all times. Individual trustees effectively hold the assets of the fund in their name on behalf of the fund. (This is like John smith and Jonah Smith as Trustees for The Smith Superannuation Fund.)

Company Trustee. Companies are often utilised as trustees when there is a single member fund (or when one person wants to be the only signatory or decision maker and member of the self-managed super fund and when there is nobody willing to act as the 2nd trustee). A company is set up with the member of the super fund acting as a director of the company.

For ease of administration, a corporate trustee is preferred by SMSFs. However, there are additional costs associated with establishing a company. There are also additional paperwork needed that should be made. These things should be discussed with an investment adviser as part of the decision-making on the trustee structure for a Self-managed Super Fund.

Who can be a trustee or member of an SMSF?

According to the law, anyone 18 years of age or over, who is not under a legal disability, are eligible to be trustees of an SMSF, unless disqualified. A person may be disqualified from becoming a trustee if they:

  • Have been convicted of dishonesty;
  • Have been subjected to a civil penalty according to the SIS Act;
  • Are insolvent under administration;
  • Are bankrupt;
  • Were disqualified by the regulator.

What should members do with their existing super?

Balances in existing retirement accounts can be transferred to a Self-managed Super Fund though a ‘roll-over form’. Funds will then be paid to the SMSF bank account and are available for to be invested through various investment strategies.

Can extra amounts be contributed to your Self-managed Super Fund?

Most definitely. Self-managed Super Fund members utilise their SMSF as a savings vehicle because of its tax effectiveness. However, there are limits to contributing to the fund. Specific rules and regulations also apply which is why you should discuss your options with an investment adviser.

What are the investment options of an SMSF?

SMSFs have access to a broader range of investments. This is one of the common reasons why people start their own SMSF. Through a Self-managed Super Fund you can invest in term deposits, shares, managed funds and property, hold alternative assets like artwork and antiques.

What happens if a member experiences memory loss or dementia?

As a trustee, you should plan for the possibility of impairment. It is best to have a contingency plan when you become incapable of making good decisions. If you are unable to run your fund you can transfer your SMSF assets to a managed super fund or appoint a person whom you trust to take your trustee responsibilities over and work as your legal personal representative.

Bankruptcy and SMSFs

Once a trustee becomes bankrupt, that person cannot remain as a trustee, member or director of the superfund. There is a 6-month grace period for him or her to be removed from the SMSF and make arrangements on how to deal with his or her super assets.

If you are the only member of the fund, a new director should be appointed to manage the fund for you while you are disqualified. It is also best to seek advice about actions to take when dealing with bankruptcy.

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  audit@