Setting up a self-managed super fund (SMSF) can give you more control over your superannuation, but it comes with its own set of responsibilities and regulations. Here’s an overview of some of the things you should know about SMSFs in Australia, including some of the benefits, considerations, rules and regulations around setting up an SMSF.
Key topics covered
- How SMSFs work
- Benefits and considerations
- Risk and responsibilities
- Setting up an SMSF
How SMSFs work
An SMSF is a private super fund enabling you to take charge of your retirement savings. Unlike other super funds, a member of an SMSF is also a trustee (where the SMSF has individual trustees) or a director of the SMSF’s corporate trustee (where the SMSF has one), meaning an SMSF member also manages and makes decisions about the fund.
SMSFs can have up to six members, though the exact requirements may differ slightly depending on where you live in Australia.
The big appeal of SMSFs is greater control. You help to decide where to invest your super and to create a strategy that works for your members’ financial goals.
Some SMSF benefits
-Allows more control over your super investments. With an SMSF, you get greater control over how your super is invested and what insurance you have. Unlike industry or retail funds, you have more direct control. If market conditions change, you can adjust your investments as needed.
-Broader investment choices. SMSFs may offer a much wider range of investment options compared to traditional funds. You can choose to invest in things like SMSF term deposits, property, shares, commodities, and even collectibles like artwork.
-Potential tax advantages. Broadly speaking, money invested in an SMSF is likely to be taxed at a lower rate than your personal income tax rate. Speak to your taxation adviser to work out the tax implications of an SMSF for you.
-May have estate planning benefits. SMSFs also offer flexibility when it comes to planning how your super will be passed on after you die. This may give you more options for estate planning compared to retail super funds.
Some responsibilities and potential risks of SMSFs
As a trustee, or director of a trustee, of an SMSF, you’re in charge of the fund and must follow rules set out by the Superannuation Industry (Supervision) Act 1993 (Cth) (SIS Act), among other applicable laws.
While SMSFs may offer more control, they also come with greater responsibility
-Personal responsibility: As a trustee, you are legally responsible for all decisions made by the SMSF. That includes making sure the fund complies with tax and super laws, for example.
-Investment risk: Just like any investment, the assets you choose for your SMSF may not perform as expected. This could impact your retirement savings.
-Ongoing management: Even if your personal circumstances change (such as losing your job or relationship breakdown between members), you are still responsible for managing the SMSF.
-Compensation for losses: Unlike members of super funds regulated by the Australian Prudential Regulation Authority, SMSF trustees generally aren’t covered by government compensation schemes if their fund suffers losses due to fraud or theft. However, if a financial firm was involved in the loss through misconduct, you may be able to lodge a complaint with the Australian Financial Complaints Authority (AFCA). Keep in mind, though, that AFCA doesn’t step in for disputes between SMSF trustees themselves.
When might an SMSF be suitable?
An SMSF might potentially be suitable for you if
- You enjoy being actively involved in managing your finances
- You fully understand your duties and responsibilities as a trustee or as a director of a corporate trustee
- You’re confident that an SMSF may help you achieve your financial goals
- Running an SMSF would be cost-effective for you, considering the setup and ongoing fees
FAQs
Do you need financial knowledge to manage an SMSF?
Yes, managing an SMSF requires a good understanding of investments, compliance, and insurance. You’ll need to develop a strategy that aligns with your retirement goals while balancing risks. Staying compliant with super, tax, and investment laws is also a key responsibility. Additionally, you may need to arrange insurance for yourself and any other fund members.
What is the minimum balance required to set up an SMSF?
There’s no official minimum, but industry experts commonly suggest at least $200,000 to cover costs and make it financially viable. Lower balances may reduce the cost-effectiveness due to fees and administrative costs.
Can I transfer my existing super into an SMSF?
Yes, you can roll over funds from other superannuation accounts into your SMSF. This is often done to consolidate super accounts into the new fund. However, you’ll need to follow ATO guidelines for rollovers.
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