Self-Managed Super Funds (SMSF) – Everything You Need to Know!

What is a Self-Managed Super Fund?

A Self-Managed Super Fund (SMSF) is a super fund that is similar to that of a standard superannuation fund, however, is a private trust run by the members of the super fund themselves, as opposed to having it managed by an external superannuation fund.

What is the difference between a self-managed super fund and an industry super fund?

Unlike industry funds, a Self-Managed Super Fund:

Is managed by its members;

Must have all its members as trustees or directors of any corporate trustee;

Manages the assets and investments of the trust themselves; and

Must comply with the requirements of the Superannuation Industry (Supervision) Act 1993.

This means that members (or the corporate trustees) are the trustees of the SMSF, meaning that members are wholly responsible for all investment decisions, insurance and compliance with tax and super laws. An industry or external fund normally does all of this for its members.

This also means that members are personally liable for all the fund’s decisions. Further, if the fund loses money through fraud or theft, it won’t have access to any special compensation schemes or the Australian Financial Complaints Authority (AFCA).

What are the advantages of a Self-Managed Super Fund?

The advantages of a SMSF are that you have control over your superannuation. You can choose what to invest in and have control over the assets such as buying or selling assets. If you are fully informed and involved, then your SMSF may be far more lucrative than an industry super fund, providing for better returns than what an industry fund receives. You also do not pay management fees to a super fund like most industry funds.

What are the disadvantages of a Self-Managed Super Fund?

The disadvantage of a self-managed super fund is that members are wholly liable and responsible for the fund performance and asset management, therefore they must be intimately involved with the management. Members should have a good understanding of investments and how to earn a return on those investments for the fund to benefit the members.

Self-managed super funds also have strict regulations including taxation regulations. Non-compliance with any tax or superannuation legislation can lead to severe penalties for the trustees. All members of a SMSF are trustees and are responsible for ensuring the SMSF complies with super and tax laws. If it does not comply there are a range of sanctions that may apply including disqualification, penalties, and tax consequences.

Self-managed super funds are liable for preparing the trust funds tax returns and audits. This is a factor that needs to be considered as an ongoing cost of the trust.

Super Fund Trust Deeds need to also be carefully prepared and reviewed regularly to ensure that the trust complies with legislation, particularly any legislative changes and that the trust is operating in accordance with the trust terms. It is crucial that the super fund trust deed contains clauses outlining what will happen in the event there is any illness, death or relationship breakdown of the members.

An improperly prepared super fund trust deed can cause issues with the management, trust operation and compliance with legislation if any of the above circumstances were to take place.

What assets can a self-managed super fund invest in?

A self-managed super fund can invest in any assets. There is generally no asset class that is excluded.

However, if a super fund purchases residential property, section 65 of the Superannuation Industry (Supervision) Act 1993 prohibits members of the fund or their family members from residing in the property, even for holiday period and it cannot be purchased from a member or a fund member’s family.

Commercial properties may be leased to a member’s company or business providing that it is done on market rate terms and not at a ‘lower than market’ rate.

Whatever asset the fund invests in or purchases, the objective of the purchase or investment must be to provide benefit for the members for their retirement.

What things should be considered before setting up a Self-Managed Super Fund?

Before setting up a self-managed super fund, members need to consider things such as;

Set up costs. Whilst transferring funds from an industry or standard super fund to another is generally free, setting up a self-managed super fund does cost money. You will likely need to pay an accountant or lawyer to assist with the set-up and obtain legal and financial advice to ensure the fund is set up correctly and in compliance with the relevant laws.

Ongoing costs. Whilst you will not pay management fees to an external super fund, self-managed super funds do have ongoing compliance costs such as annual taxation preparation costs and annual corporation fees if the trustee is a company. You will need to also obtain accounting or financial advice on investment options as they arise or legal advice on the legal compliance of the trust. They also have to be audited by an external auditor.

Time factor. As there is no external super fund managing the fund and the investments, consideration must be given to whether members of the funds have the time to effectively operate the trust including the management of investments and assets, obtaining financial or legal advice as required, ensuring the funds taxation obligations are complied with and the trust is operating in compliance with the funds trust deed at all times.
Knowledge to manage the fund. It is all good and well to start up a self-managed super fund. However it is crucial that the members have the knowledge and understanding of how the trust is to operate and be managed, investment options and how the assets are to be managed, ensure they stay up to date with any changes to legislation that may affect the fund, keep all records and ensure audits are carried out when required.

Borrowing costs. If the fund has to borrow money to purchase assets, consideration must be given to the cost of obtaining the finance, the ongoing costs of the finance and whether the funds receives income that is enough to cover the repayments. Members will most likely also be required to guarantee the borrowings, meaning that if the fund defaults on the loan, the members may be personally liable to repay the debt owed by the super fund.

What are the risks of Self-Managed Super Funds?

Self-managed Super Funds do carry risk. The difference is the members of the fund are directly responsible for the funds operations and investments and therefore carry all the risk and liability.

If members are not experienced or knowledgeable in investment strategies or make poor financial decisions, the funds could see itself at a loss with little to no recourse by the members. This also means the trustees can be held personally liable.

Self-managed super funds also do not have access to government assistance such as government-backed compensation if the fund loses money.

What happens if the trustees of the Super Fund do not comply with Super Laws?

Self-managed Super Funds are regulated by the Australian Taxation Office (ATO) who have the power to impose penalties for non-compliance or even wind up the super fund.

The ATO can impose penalties or consequences if there has been a breach of the Super Fund, such as:

Issuing a written direction to the trustees of the fund to rectify any areas that are not compliant with law;
Impose financial penalties on the trustees;
Disqualify a member from acting as trustee;
Freeze the super funds assets;
Direct trustees to engage in appropriate training;
Impose higher tax rates for the funds income and capital gains;
Revoke the funds compliance status leading to high tax penalties; and
Civil and criminal penalties including prosecution if the actions of the trustees were severe.

Is a Self-Managed Super Fund right for you?

A SMSF is not for everyone. If you are considering setting up a self-managed super fund, it is best to consult a lawyer and financial advisor or accountant to help you decide if a SMSF is the right investment vehicle for you.

Having a thorough understanding of the compliance obligations of the trust, investment options and strategies, insurance obligations, taxation and audit obligations and legal requirements is crucial before starting a self-managed super fund.

If you are ready to start up your self-managed super fund and require assistance, please contact our office on 03 9707 1155.