Self managed superannuation funds (or DIY funds) are privately managed superannuation funds with six or fewer members. Typically, these members are close family relatives, but they can also include business partners or close friends. Employees can only join the fund if they are also a relative.

If you plan to open an SMSF, carefully consider who else you ask to be a member and seek advice about the possible implications.

What is a Self Managed Superannuation Fund?

An SMSF can have six or fewer members and is regulated by the Australian Taxation Office (ATO). All members must be trustees of the fund or directors if the fund has a corporate trustee. The trustee is responsible for ensuring the fund is managed correctly.

If you are the only member of the fund, you need a corporate trustee (and can be the sole director or have someone else as an additional director), or you need someone else to be a trustee with you. Trustees cannot be paid for any services provided as trustees.

Control and Flexibility

With your own SMSF, you’re in control. Unlike public offer funds or employer-sponsored funds, you are the ‘captain of the ship,’ steering your SMSF towards retirement and beyond. As a trustee, you manage the day-to-day running of the fund, including investments, administrative tasks, and compliance obligations. While you can employ advisers to assist, trustees are ultimately responsible for all actions and decisions.

Advantages of SMSFs

1. Control and Flexibility:

• You choose the assets the fund invests in, including direct shares, property, overseas assets, and alternative assets such as artwork or antiques.
• An SMSF provides flexibility for investment strategies and estate planning, which can help transfer wealth to the next generation.

2. Tax Management:

• Superannuation savings are taxed at a maximum rate of 15% on contributions and fund earnings in accumulation.
• Share investments paying franked dividends may reduce the effective tax rate, and selling assets with accumulated capital gains after starting a pension may result in no tax on these gains.

3. Cost Savings:

• Cost savings may be achieved compared to public offer superannuation funds, depending on the type of investments, fund operation, and savings amount. However, fixed costs may make it uneconomical to run the fund with a low balance.

Disadvantages of SMSFs

1. Trustee Responsibilities:

• As a trustee, you are responsible for ensuring the fund is invested and administered according to superannuation law. Breaching superannuation law can result in harsh penalties, including high taxes, fines, and even jail sentences for severe breaches.

2. Administrative Burden:

• Managing an SMSF involves significant administrative and compliance tasks. Professional SMSF administration companies can assist, allowing you to focus on investments and strategy with your financial planner.

3. Dispute Resolution:

• SMSF trustees/members must resolve their own complaints and do not have access to the Australian Financial Complaints Authority (AFCA). Legal assistance may be required to resolve disputes, and SMSFs are not eligible for statutory government compensation for losses due to fraud or theft.

Investment Rules

Superannuation law sets an investment framework for SMSFs:

• The trustee must create a written investment strategy, considering risk, return, diversification, liquidity, and insurance needs.
• Investments must be made at arm’s length and solely to provide members with retirement or death benefits.
• Specific restrictions include not acquiring assets from a member or ‘related party’ (unless they are listed shares, units in a widely held trust, or business real property at market value), conducting transactions on a commercial basis, adhering to borrowing rules, and not providing financial assistance to members.

Costs of Running an SMSF

Costs can vary based on advice required, services outsourced, fund value growth, investment activity frequency, and trustee management. Some costs are unavoidable (e.g., establishing the trust deed, annual SMSF levy), while others are optional. Cost-effectiveness generally improves as fund assets increase.

Who are SMSFs Appropriate For?

SMSFs may be suitable if you wish to take greater control of your retirement savings and are willing to take on the role of trustee. Consider your ability to manage the fund, your financial goals, investment preferences, and the suitability of your current super arrangements.

A Note on ‘Small APRA Funds’

Small funds with six or fewer members that do not satisfy the definition of an SMSF must appoint an ‘approved trustee’ and are regulated by the Australian Prudential Regulation Authority (APRA). They offer flexibility similar to SMSFs but require an approved trustee for decision-making.

To determine if an SMSF is right for you, consult with your financial planner to explore the potential benefits and responsibilities.

The information contained in this article is general information only. It is not intended to be a recommendation, offer, advice or invitation to purchase, sell or otherwise deal in securities or other investments. Before making any decision in respect to a financial product, you should seek advice from an appropriately qualified professional. We believe that the information contained in this document is accurate. However, we are not specifically licensed to provide tax or legal advice and any information that may relate to you should be confirmed with your tax or legal adviser.