In this extensive guide, our financial planners summarise the pros and cons of Self-Managed Super Funds, the importance of ongoing financial advice and whether this investment strategy is right for you.

Table of Contents

What is a Self-Managed Super Fund (SMSF)?

A Self-Managed Super Fund is a private superannuation fund that you manage. From 1 July 2021, the maximum number of members for SMSFs increased from four to six.  The main difference between an SMSF and regular super funds is that all members of the SMSF are also directors and trustees, which means they can run it for their own retirement benefit and are responsible for complying with the super and tax laws. 1

What are the requirements to set up an SMSF?

If you want to set up an SMSF, you need to make sure that it’s done correctly so that it’s eligible for tax concessions and meets the ATO’s requirements.

To set up an SMSF you need to:

  • Ensure that an SMSF is right for you. You can do this by appointing professionals to help you.
  • Choose individual trustees or a corporate trustee (preferred)
  • Appoint your trustees or directors
  • Create the trust and trust deed
  • Check your fund is an Australian super fund
  • Register your fund and get an ABN
  • Set up a bank account
  • Keep comprehensive records and submit them to an SMSF-approved auditor
  • Develop an investment strategy
  • Prepare an exit strategy, and
  • Be capable of understanding how to correctly manage an SMSF (or work with a financial adviser that does). 2

What are the pros of SMSFs?

There are numerous advantages that come from running your own super fund. Here are just a few of the advantages of a Self-Managed Super Fund.

Better flexibility and control with an SMSF

The members of an SMSF have complete control over the fund and can decide the investment path the fund will take. This means you control your investments and can track and manage your own portfolio. Investments may include shares, residential investments and commercial property or ethical investments. This level of control can be crucial when deciding to take advantage of new prospects that otherwise seem risky for regular super funds.

Reduced costs for larger SMSF funds

Nowadays SMSFs are a much more cost-effective option for all levels of wealth due to advances in technology and competition between service providers.

Most of the operational costs of running an SMSF are fixed. Therefore as a fund grows in value, its costs will generally reduce proportionally. This is different to industry or retail super funds where the cost is usually taken as a percentage of your overall balance.

SMSFs bring greater access to investment options

SMSFs offer a wider range of investment options (and greater control) compared to other super funds, including investing in direct property. Direct property investment is a type of investment in real estate either through transferring ownership directly to your name (commercial) or the name of your business, or through purchasing units in what’s known as a direct property fund. 3

An SMSF can also borrow to purchase an asset and are also appealing to small business owners or sole traders as commercial property can be purchased by their SMSF. There are lots of rules surrounding commercial property and SMSFs so make sure you do your research and speak to your financial adviser.

Other investment benefits include artwork and other collectibles, physical gold and investments in some unlisted entities. However, setting up an SMSF to try and get early access to your super or to buy a holiday home or artwork to decorate your home is illegal. If you would like to withdraw money from your SMSF, certain rules apply, see more here.

The tax benefits of SMSFs

Like all super funds, SMSFs benefit from concessional tax rates. A complying SMSF normally pays tax at the concessional rate of 15%. An SMSF can receive further tax concessions once it begins paying superannuation income streams (pensions) that are in the retirement phase.

Investment income an SMSF receives from its assets is tax-exempt to the extent that those assets are supporting retirement phase income streams. This income is called exempt current pension income (ECPI).

You can claim ECPI in your SMSF annual return once your SMSF begins paying one or more retirement phase income streams. However, your SMSF is not automatically entitled to ECPI – there are steps that you must take to be able to claim it. You can read more about this on the ATO’s website. 4

Can share an SMSF fund with family members

You and up to five other members (such as a partner, spouse, children or other members of your family) can consolidate your super into a single account using an SMSF. This gives you the opportunity to increase your super’s overall balance, which in turn makes it possible for you to take advantage of more investing options. There are several other benefits that come with consolidating your super into one account including improving the financial literacy of the younger generation and the addition of more members to an SMSF should lower the cost per member.

Flexible estate planning

A Binding Death Benefit Nomination (BDBN) is a document that ensures that your superannuation benefits are paid to SIS dependants of your choice. The binding nature of this nomination leaves your superannuation with no discretion.

What are the cons of SMSFs?

It’s important to note that SMSFs are still regulated by the ATO and operate under the same regulations as super funds. It’s a major financial decision and takes both time and skill to manage. Here are some disadvantages associated with SMSFs.

Duties and responsibilities of being a trustee

When you manage your own super fund, you essentially take on all the responsibility for all investment decisions; compared to outsourcing this duty to an investment/fund manager within an industry or retail super fund.

If you don’t have the expertise, surround yourself with someone who does. If this is going to be an effective investment strategy, you need to make sure you are getting the support you need to make smarter investment decisions.

SMSFs can be time consuming

Researching suitable investment paths take a lot of time and running an SMSF can be a time-consuming process as you must keep records of your investment’s performance.

As a member of an SMSF, you’re responsible for conducting research to identify investment assets that are appropriate for your retirement strategy. While it may seem like a lot of work to set up your SMSF, once you start to passively generate income (from investing in real estate for example), you should have limited interaction with it on a day-to-day basis, unless something goes wrong.

Financial and legal risks in SMSF decision making

For SMSF members without a background in finance and tax, setting up and managing an SMSF can sound daunting. Poor decision-making could lead to financial and legal consequences, especially in matters of taxation. It’s essential that you have a clear understanding of the risks involved with SMSFs. Before doing anything, it would be wise to speak to an SMSF specialist who can go over the responsibilities of setting up and running an SMSF with you.

SMSFs aren’t eligible for government compensation schemes

If you lose money through theft or fraud, you won’t have access to any special government compensation schemes or to the Australian Financial Complaints Authority (AFCA). You could also lose insurance if you move from an industry or retail super fund to an SMSF. See more on the MoneySmart website here.

Additional expenses from running an SMSF

The cost of running an SMSF can be disadvantageous if the assets held within the SMSF are low in value. The general consensus is that you should have at least $200,000 to $400,000 in your fund to make the costs of running an SMSF worthwhile.

The set-up and running costs can be high. Ongoing costs include:

Living overseas can affect your SMSF

The majority of the SMSF’s members must be permanent Australian residents. If you intend to move overseas permanently or make contributions to your fund while living overseas, this could make your fund non-compliant with the law. Speak to an SMSF Specialist if you are looking to move overseas for an extended period of time to ensure keeping your superannuation fund compliant.

Importance of ongoing SMSF financial advice

If you’re thinking of setting up an SMSF or you have an SMSF but are looking for investment opportunities, it’s important that you seek a financial planner before making any decisions. Your adviser will be able to help you weigh the pros and cons involved with setting up and running an SMSF, and whether an SMSF is even the right investment strategy for you personally.

Additional benefits to having an SMSF specialist on your side include:

Better quality investment research

You don’t know what you don’t know, however, an SMSF specialist has years of experience and can help identify investment opportunities that you may not be aware of. Advisers can also help filter through the different investment opportunities to make sure the one you’re choosing is the best for you.

Stay compliant with the ATO

While there is a lot of flexibility when it comes to SMSFs, there’s no denying that it also brings a lot of responsibility for the fund owner. There are several legal restrictions and compliance rules that the ATO are keeping a close eye on and if you fail to abide by these rules, you can face penalties. You can still reap the benefits of having control over your investments but your financial adviser will be there to make sure you’re staying on top of all the SMSF compliance rules.

Easier day-to-day SMSF admin

On top of compliance, SMSF owners may choose to outsource their admin duties. SMSF admin is often the most time-consuming and complex area of SMSFs and with a financial adviser, this minimises the risk of failing to satisfy all the legislative requirements. Let your financial planner and accountant take care of your compliance and administrative duties so you can focus on growing your investments.

Are SMSFs worth it?

The question “is it worth it?” will depend on your individual circumstances and what your goals for retirement are. If you’re wanting to take control of your retirement savings and like having the flexibility to invest in assets of your choice, then an SMSF may be right for you.

Advice from an SMSF specialist

As leading specialists in the SMSF field, our team are here to discuss your options with you and help determine whether an SMSF is the right investment strategy for you. If you decide that you want to set up an SMSF, our team can also help make the process as easy as possible for you.

With so many rules and regulations surrounding super, it’s important to do things right from the start and that’s where our financial planners come in. We have a dedicated ‘super’ team that have a high level of technical expertise and are up to date with the latest legislative changes and investment strategies. Get in touch with our team today.

1 Self-managed super funds, Australian Taxation Office
2 Setting up, Australian Taxation Office
3 What is direct property investment? And should I invest? Properties and pathways
4 Tax exemptions in the retirement phase, Australian Taxation Office
5 Pros and cons of managing an SMSF, Klear Picture
6 Self-managed super funds (SMSF), MoneySmart
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