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Self-Managed Super Funds – or SMSFs as they’re commonly known – have grown in popularity, with more than 621,000 now active in Australia. But what are they? How do they work? Who is best suited to them? And what do you need to know if you’re exploring one?
Unfortunately, many Aussies have rushed to start their own SMSF without fully understanding what it involves or how to get the most out of it.
Let’s break it all down to help you decide whether an SMSF might be right for you and your retirement.
What is an SMSF?
SMSF is an acronym for Self-Managed Superannuation Fund. As the name suggests, you manage all the aspects of owning and operating the fund.
You become the trustee or a director of a corporate trustee and become legally responsible for operating it according to all relevant laws. In this way, it is similar to being the owner of a business.
Just like with a retail super fund, the assets and income within an SMSF can only be accessed once you reach retirement age.
Why would you consider an SMSF?
There are many reasons why you may be considering an SMSF. Commonly, SMSFs appeal to people who want:
the opportunity to invest in assets perhaps not available in other funds
direct control over investment decisions
to consolidate superannuation as a couple or family.
SMSFs are also popular with business owners because their super can directly own their business premises. This means their business pays rent to themselves through their super instead of to a third-party.
Looking at the ATO figures gives an insight into the types of people who have an SMSF:
more men (53%) than women (47%) are SMSF members
85% of SMSF members are aged 45 or over
the median value of assets owned by SMSFs is $877,498
only 37.8% of SMSF members have an annual income above $100,000.
What are the differences between an SMSF and a retail or industry super fund?
SMSFs are very similar to other types of superannuation funds. They are taxed the same and operate under the same laws and regulations.
The main differences are:
SMSF members are responsible for the legal management of the super fund. Retail and industry funds assume these responsibilities on behalf of their members and this is reflected in the fees they charge.
SMSFs must have between two and six members. Retail and industry funds usually only have one member.
The assets of an SMSF are usually standalone, while retail and industry funds are pooled with many others.
SMSFs can directly invest in certain types of assets that retail and industry funds cannot.
What investments can you have in an SMSF?
SMSFs are allowed to invest in a broad range of assets. These include the same investment types that retail or industry funds invest in:
shares
equities
cash and term deposits
bonds
property trusts (not individual properties)
some cryptocurrencies
alternative investments.
Additionally, SMSFs can invest in:
property – both residential and commercial
collectibles – such as fine art, wine, jewellery, cars, boats, antiques, rare coins and stamps, memorabilia.
Be aware: sure, an SMSF may be able to directly own certain types of investments that retail funds can’t such as property (albeit with strict rules). But that doesn’t mean you must have an SMSF to be able to invest in property.
Other options include property shares, Real Estate Investment Trusts (REITs) and so on. Alternatively, you could choose to invest in property yourself and use the rental income to make concessional contributions into your super (and potentially earn tax breaks in the process).
What are the costs of having an SMSF?
There are a range of costs associated with setting up and operating an SMSF.
These may include:
registration fees
annual independent audits
supervisory levy
accounting costs (eg preparing annual returns)
financial advice costs
legal fees (eg setting up or amending the trust deeds)
actuarial fees
asset valuation fees
insurances.
Sometimes, these costs can add up to more than you might pay in fees at a retail or industry fund.
There is also a time cost to you as a trustee in managing your investments and compliance requirements.
Be aware: SMSF’s don’t come with default life insurance built into them, unlike many retail or industry funds. While it’s not a legal requirement to have life cover if you set up an SMSF, it’s something that’s worth considering.
How do you set up an SMSF?
There are a number of steps to set up your SMSF according to ATO requirements. These include a mixture of administrative tasks and strategy planning.
Typically, you’ll need to:
Choose a trustee structure – whether you have individual trustees or a corporate trustee. This can be difficult to determine on your own, so talk to a professional for advice.
Appoint your trustees or directors – there are certain restrictions on who can fill these roles. Typically, they would be your spouse and/or other close family members.
Create the trust and trust deed (the governing rules of your SMSF).
Register your SMSF with the Tax Office.
Apply for an ABN.
Set up a bank account.
Set up what is called a SuperStream electronic service address (ESA)
Develop an exit strategy.
How is an SMSF managed?
An SMSF isn’t just set and forget – you are responsible for managing it. That covers both the investment side of things (where and how your money is invested) as well as the compliance side.
When choosing investments consider your:
age
health and any healthcare needs
income
retirement plans
risk appetite.
The operational side of managing compliance involves:
actively managing investments and assets
holding regular meetings of trustees or directors to maintain investment and compliance requirements
keeping minutes of trustee/directors meetings
seeking and implementing advice ongoing from your accountant, lawyer and financial adviser to ensure you meet all legal requirements
paying for an independent audit each year
lodging an annual return (just like you do a tax return each year).
Be aware: it is illegal to benefit from any assets owned by your SMSF other than drawing down income in retirement. What that means is you can’t:
access funds before you retire
live in an investment property or use a holiday home that is owned by your SMSF
decorate your home with any collectibles – such as artworks – owned by your SMSF
use wine, jewellery, vehicles or other collectibles for personal use.
The ATO actively looks out for illegal early access to super. If you are found to have breached these rules, you could face penalties, additional income tax and interest. These penalties could add up to be half the value of the fund!
Bottom line
When it comes to choosing an SMSF over a retail or industry super fund, the most important thing to remember is that with an SMSF you have full control on how your super is invested.
Whether an SMSF is right for you will depend on a range of factors, and if you’re willing to do the extra paperwork such as record keeping and compliance.
It’s a big decision that could deliver great results, but if you’re unsure talk to a financial adviser or accountant in the first instance.
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Disclaimer
The information in this article is of a general nature only and does not constitute personal financial or product advice. Any opinions or views expressed are those of the authors and do not represent those of people, institutions or organisations the owner may be associated with in a professional or personal capacity unless explicitly stated. Helen Baker is an authorised representative of BPW Partners Pty Ltd AFSL 548754.
