Take your superannuation into your own hands with a self-managed super fund.
A self-managed super fund (SMSF) gives you control over where your superannuation is invested, allowing you to take your retirement into your own hands. This guide will tell you all you need to know about SMSFs including a step-by-step guide on how to set one up. You can also compare a range of dedicated SMSF cash accounts.
What is a self-managed super fund?
Like the name suggests, a self-managed super fund is a fund that you manage yourself, unlike a retail or industry fund which is managed on your behalf. The purpose of the SMSF is to provide members (you plus up to three others) money in retirement. If you start an SMSF, you will be both a member of that fund as well as a trustee (unless you decide to appoint a corporate trustee – more on this below). As a trustee, you will have control over where your superannuation balance is invested, and as a member you will benefit from the fund’s investment performance. SMSFs are regulated by the Australian Taxation Office (ATO).
Compare SMSF accounts
SMSF vs retail or industry super fund
The main difference between an SMSF and other super funds is that you’re managing the fund yourself. With an SMSF, you choose where to invest your balance based on what you believe will provide the best performance and returns. With retail and industry funds, a fund manager looks after the fund and makes these decisions on your behalf. Therefore, you may not even know where your own money is being invested. With an SMSF you have complete control over your money; however, it’s important to remember that you have more legal responsibilities and admin duties also.
Is an SMSF right for me?
If you’re not happy with your current super fund it can be appealing to open your own SMSF. There are many benefits to opening an SMSF; however, there are also risks to be aware of. An SMSF may be right for you if:
- You have solid investment experience and have a good understanding of financial markets
- You want to invest your superannuation in less conservative options beyond shares, direct property and cash
- You want full control over where your superannuation is invested and are comfortable with a higher level of risk
- You have adequate time and legal expertise to manage the fund, and are confident you can meet all the legislative and taxation compliance regulations
- You have a large superannuation balance
The cost of an SMSF
SMSFs are usually more costly to operate compared to being a member of a retail or industry fund. The set-up costs alone can range over $2,000 if you choose a corporate trustee structure. Then there’s ongoing compliance and administration costs as well as investment fees to consider. Some of these costs include, but are not limited to:
|Up to 1.20% p.a|
According to the ATOs SMSFs: A statistical overview: 2014–15 report, the average total annual expense ratio of Australian SMSFs is 1.10%. With the average SMSF balance at $1.12 million, that’s an average annual cost of $12,200. You can read about the fees of an SMSF in more detail in our guide to SMSF fees here.
The tax benefits of having an SMSF
Superannuation is basically a tax structure to help Australians save for retirement, so there are tax benefits to any superannuation fund. Superannuation is generally taxed at the lower rate of 15%, much less than the standard tax rate you pay which is likely to be between 32.5% and 45% depending on your income.
You can gain a tax benefit by contributing to your SMSF through concessional contributions. This includes having your employer pay the compulsory super guarantee (9.5% p.a of your salary) into your SMSF, to be taxed at the concessional rate of 15%. You can also elect to add salary sacrifice contributions to your SMSF. This means that a portion of your pre-tax income will be added into your SMSF and charged the concessional tax rate of 15%, as opposed to the full tax rate. But remember, this is currently capped at $25,000 per year.
The most popular way SMSFs reduce the amount of tax they pay is by buying shares through the SMSF that are fully franked. This means that when you receive your dividends or interest payments, the public company has already paid the corporate tax bill of 30%, so you will receive a franking credit. As the tax rate for your SMSF is only 15%, you can use the franking credit to then claim this difference in tax as a deduction, reducing the amount of tax your SMSF is required to pay and potentially resulting in a tax refund.
Big retail or industry super funds can also invest in fully franked shares. However, as you are in control of your investments with an SMSF you can choose to invest a much larger percentage of your balance this way.
Setting up your own SMSF: A step-by-step guide
- Appoint professionals to help you. Appoint professionals to help with the set-up and ongoing administration of your SMSF. It’s a good idea to get an accountant, a tax agent, a fund administrator, a legal practitioner and a financial advisor.
- Choose your trustee structure. Either individual trustees or a corporate trustee. You can read more details on these structures below.
- Create and sign the trust deed. The trust deed is a legal document that outlines the rules of the fund, and lists the members. This needs to be prepared by a professional, and signed and dated by all trustees of the SMSF.
- Sign the trustee declaration. This declaration highlights the responsibilities of all trustees as regulated by the ATO. All trustees and directors of the SMSF need to sign and date the declaration within 21 days.
- Register your SMSF. You must register your SMSF with the ATO within 60 days. You can do this through the Australian Business Register by registering for an ABN and Tax File Number (TFN), and electing for your SMSF to be regulated by the ATO.
- Register for an electronic services address. This is where employers will send contribution data, and it’s separate to a regular email address. You should receive this from your fund administrator.
- Open a bank account. You need to open an account in the name of your SMSF; this cannot be one of the members’ personal bank accounts. This account is used for general cashflow of the fund, e.g. to pay any expenses or penalties. You can take a look at some dedicated SMSF cash accounts below.
How do contributions and rollovers work with an SMSF?
Rolling over your super is also known as consolidating your super and is the process of bringing your super balance over from your old fund or funds to your new fund. This super balance is not taxed in your new SMSF, as it has already been taxed in your previous fund.
To rollover your super from your previous fund into your SMSF, your SMSF must be registered with the ATO with all member details up to date. You then need to complete a Rollover Initiation Request form with the details of your SMSF and give it to your previous super fund (this form will be available on your fund’s website). Your previous fund will then transfer your superannuation balance into your SMSF, usually within a few business days. You’ll receive a rollover benefits statement from your old fund within 30 days confirming the rollover of your balance.
Your employer can contribute the compulsory superannuation guarantee into your SMSF like they would any other super fund. SMSF members can receive employer contributions at any time and at any age. In order to receive these payments you’ll need to provide the TFN of all members when registering the fund.
You need to provide your employer with your SMSF’s ABN, BSB and bank account number and the electronic service address you received when registering your fund. If you cannot provide this information, your employer will direct your super payments to their default fund (a MySuper product).
You can make personal contributions to your SMSF if you wish, and those contributions will be taxed at the concessional rate of 15%. As this tax rate is lower than the tax rate that would normally be charged on that income, you can claim this as a tax deduction. However, you can only do this if you’ve provided your TFN to the ATO and there is a limit to how much a member can contribute. As of July 2017, the contributions cap is $25,000 per person per year. This includes the super guarantee provided by your employer. Anything over this amount will not be taxed at the concessional rate of 15%.
Planning an investment strategy for your SMSF
Not only will a documented investment strategy benefit members of the SMSF, but it is a legal requirement. When deciding on an investment strategy it is important to consider the needs of all members, and remember that the ultimate purpose of your SMSF is to provide money to fund your retirement. Your investment strategy is not a set-and-forget plan – you need to regularly review the strategy as the needs of your members change and as the market moves.
The range of assets your SMSF can invest in are almost unlimited. Among the most popular assets for SMSFs to invest in are Australian shares, cash (such as term deposits) and direct property (residential housing and commercial property).
Some other assets you can invest in include, but are not limited to:
- Global shares and exchange traded funds (ETFs)
- Commodities such as gold and silver
- Shops and land
- Managed funds
- A business
- Antiques, rare coins, art etc.
Some asset restrictions to be aware of:
- You cannot combine your personal assets with your SMSF assets.
- Your SMSF assets cannot be for personal use. For example, if you invest in a property, you cannot live in that property.
- You must follow the “arm's length” rule. This means you need to invest in assets that are not tied to you or other members and assets need to perform in line with market expectations. For example, you cannot invest in a property and rent it to a friend at a lower rate.
- Assets need to be held in the name of the SMSF, not individual members.
Here are some things to consider when deciding on your investment strategy:
- Life stage. Consider the personal circumstances of members and what life stage they’re in. For example if the members are all quite young (e.g. under 40) you may want to invest in higher risk assets, while if you’re closer to retirement you’ll probably want less risk. This is because high-risk assets generally perform well over longer periods of time.
- Risk tolerance. Regardless of age, you should also consider how comfortable the members are with risk. You may be young, but there’s no point investing in high-risk assets if it’s going to keep you awake all night, every night.
- Financial markets. You need to consider what is happening in various financial markets when deciding on your investment strategy. You may want to invest heavily in Australian shares, but it’s important to do your research and see how the local share market has performed over recent years. You may find that international shares have produced stronger returns. You need to monitor financial markets and readjust your strategy on an ongoing, regular basis.
- Diversification. Don’t put all your eggs in one basket. You should invest in a range of different asset classes, and a range of different assets within those asset classes too. You can read more about the importance of diversification in our guide here.
Duties and obligations of an SMSF trustee
If you decide to set up an SMSF, you are personally liable for all the decisions made by the fund even if you get help from a professional or another member makes the decision.
Some duties include but are not limited to:
- Ensuring that the fund is run solely for the purpose of providing retirement benefits to its members
- Managing investments in accordance with the law and in the best interests of fund members
- Ensuring that personal and fund business affairs are kept entirely separate from each other
- Arranging an annual audit of the fund by an approved SMSF auditor and reporting to the ATO on the fund’s management
- Carry out the role of trustee or director, which imposes important legal duties on you
- Set and follow an investment strategy that ensures the fund is likely to meet your retirement needs
SMSF trustee structure
There are two types of SMSF trustee structures to chose between when setting up your fund. It’s important to choose the option that is right for you, as this will affect the cost of the fund and how it’s managed ongoing.
Individual trustee structure
If you are the only member of your SMSF, you still need to allocate at least one other person as a trustee who is not a member. With this structure, the assets are registered under the names of the individual trustees. This is usually lower in management costs but has more administration duties which can become expensive. For example, if any trustees leave or join the SMSF, you will need to pay to have the ownership documents amended. If the SMSF receives a penalty for not complying with legislation, each individual trustee will receive the penalty.
Corporate trustee structure
Here, the assets are registered under a company, and the trustees act as directors. If you are the only member of the SMSF, you can act as the sole director. As you need to appoint a company to be the trustee, this option can be more expensive. However, you will not need to amend the ownership documents when fund trustees join or leave, as the assets are simply registered under the company name. Also, if the fund receives a penalty, this is given to the corporate trustee and the directors split the cost between them.
Closing your SMSF
If one member of the SMSF wishes to leave the fund, they can do this at any time. The member will need to organise for their superannuation benefits to be rolled over to their new fund. If all members wish to close the SMSF, here are the necessary steps you should take:
- All members agree. Make sure that all members agree to close the fund, and document this so you have a record, should you need it later.
- Check the trust deed. The first thing you should do if you wish to close your SMSF is check the trust deed for any wind-up instructions and requirements.
- Roll-over super. You will need to roll-over each member's super balance into another super fund. To do this, it may involve selling assets owned by the SMSF.
- Final audit. You need to have a professional final audit completed by an approved SMSF auditor. They will check everything has been done correctly and let you know of any outstanding actions.
- Lodge annual return. You need to lodge your SMSF annual return with the ATO and pay any outstanding tax liabilities.
- Confirmation. When the ATO has checked you have met all your tax responsibilities you will receive a letter confirming that your SMSF has been closed and its ABN cancelled. You can now close your SMSF bank account.
Recent changes to SMSFs in 2017
There were many changes to superannuation legislation which took effect from July 2017. Some of the key changes that affect SMSFs include but are not limited to:
- The annual limit for concessional contributions has been lowered from $30,000 to $25,000, and the annual limit for non-concessional contributions (after-tax) is now $100,000
- If you earn over $250,000 your concessional super contributions will be taxed at 30% instead of the standard 15%. This has been reduced from $300,000
- The cost of penalties for SMSF trustees who break the rules or are non-compliant has increased
- If you earn under $37,000, the ATO will refund the tax you paid on super contributions (even the compulsory super paid by your employer). This is capped at $500 a year
- The age from which you’re eligible to start receiving your aged pension began increasing from July 2017. Previously 65, it will slowly increase and reach age 67 by 2023