Self-Managed Super Funds

The essential guide to self-managed super funds

Last updated on May 4th, 2022 at 02:16 pm by Adrian Edlington

Compare Self-Managed Super Funds in Australia

Self-managed super funds are a type of superannuation fund which offers some unique possibilities, but can also come with risks if not managed with care. Compare SMSFs with other super options and work out if they’re the best choice for you with this comprehensive guide.

What are self-managed super funds?

Unlike conventional super funds which are managed by large central organisations that you become a customer or member of, a self-managed superannuation fund, or SMSF, is a trust set up by you to manage your own superannuation finances. Up to four people can become members and trustees of the fund, at which point you each take on the responsibility of managing and making significant decisions for the fund.

In a self-managed superannuation fund, you have absolute control over how your super is invested and grown (in accordance with certain ATO regulations). You’ll need to understand relevant tax and superannuation laws or guidelines and are ultimately responsible if something goes wrong or if you (or another trustee) break the rules, for which the consequences can be quite significant.

Self-managed super funds are becoming quite common nowadays, with more than half a million SMSFs in Australia and more than $700 billion in assets. They’re a big decision to make with a lot of responsibility, though, and not something to be considered lightly. Running an SMSF effectively is generally something that requires significant financial knowledge, as well as considerable time and resources.

How do self-managed super funds work?

If you have a SMSF, your employer can pay your super contributions into your SMSF, rather than into a regular retail or industry super fund. You can also – as always – make additional super contributions to increase your super balance quicker.

At that point, you and any other trustees are now responsible for the investment and management of those superannuation funds. This process is heavily regulated by the ATO and has strict guidelines. Even though you have control over how the money is invested, the idea is still that those funds must be explicitly and exclusively used to provide superannuation benefits to members when they retire.

As with any super fund, the amount invested in super will grow over time (if all goes well). Eventually, one or more members reaches retirement age and are eligible to access their super balance. If the sole member of an SMSF officially retires, they now have access to their SMSF funds, which can come as a lump sum (effectively shutting down the fund) or maintained as an income stream. This is more work, but it can be a very tax efficient way to manage your retirement finances.

If a fund has multiple members and only one retires, the other trustees are now responsible for providing the retired member with the super they’re entitled to. If they want it as an income, the SMSF must now provide them with a steady, ongoing pay check. If they want the money as a lump sum, the fund has to provide it. This can require some forward planning, as the fund might need to sell assets to free up that money.

There are many possibilities for what a self-managed super fund could invest its money in, but you do need to be careful. Investments for an SMSF must be guided by two key principles:

  • Arm’s length – This principal involves making investment in a professional, business-like manner without anyone receiving special consideration (especially anyone connected to you). You should be charging market rates for all assets, and getting the appropriate returns for your investments where possible.
 
  • The sole purpose test – This means that the things you invest your SMSF funds in must be for the sole purpose of increasing the retirement income of the fund members, and not serving any other purpose benefitting you, or anyone closely connected to you.
 

If the ATO decides that you’re using the funds from an SMSF inappropriately, they can apply significant penalties. Most significantly, if they declare your fund to be “non-compliant”, you could lose nearly half the assets in your fund.

How much money do I need for a self-managed super fund?

You’ll need a good amount of super saved up to make a self-managed super fund worthwhile. Because an SMSF tends to have flat annual expenses (rather than ones that increase with your super balance), they’re very cost effective when you have a lot of super set aside.

However, because flat costs are quite large, they’re only cost effective (compared to other super funds) when you have a lot of super saved up. Different authorities suggest different amounts, but even the more optimistic estimates suggest you’d need at least $200,000 worth of super to make an SMSF perform better than a retail or industry super fund. Other authorities such as ASIC recommend figures as high as $500,000.

If you’re wondering how much the average SMSF has invested in it, the table below (based on 2017/18 data from the ATO) might give you some idea.

Amount in Fund Approx. No. of Funds (in Australia) Proportion of total
$0-$50,000
32,584
5.6%
>$50,000-$100,000
16,874
2.9%
>$100,000-$200,000
41,312
7.1%
>$200,000-$500,000
130,335
22.4%
>$500,000-$1m
145,463
25.0%
>$1m-$2m
118,698
20.4%
>$2m-$5m
76,223
13.1%
>$5m-$10m
15,710
2.7%
>$10m-$20m
3,800
0.653%
>$20m-$50m
745
0.128%
>$50m-$100m
76
0.013%
>$100m
23
0.004%

As you can see, more than 80% of SMSFs have between $200,000 and $5M invested in them. This is really the range where they start to perform at their best.

What do I need to run a self-managed super fund?

The first thing you’ll need is knowledge. To run an SMSF, there are many things you’ll need to be up to speed on. Firstly, you’ll need to be familiar with the current laws, regulations and guidelines around superannuation, the administration of SMSFs, tax (particularly as is applies to super), and the ins and outs of financial investments.

Unlike retail or industry funds which are regulated by the Australian Securities and Investments Commission (ASIC), SMSFs are regulated by the Tax Office. As the trustee of a self-managed super fund, you’re ultimately the one responsible for making sure your fund is all above board and in good order. The ATO can bring down significant penalties on you if your fund is breaking the rules – knowingly or not.

You also need to be making decisions about how to invest the funds in your care. When you take on management of an SMSF, you’re effectively becoming your own investment manager – and that’s something you’d only want to do if you know your way around an investment portfolio.

Secondly, you’ll need time. On average, SMSF trustees spend more than 100 hours a year (that’s two and a half weeks’ full-time work, or more than a day every month) managing their fund. That’s a significant investment of time that can’t just be ignored if things get busy.

Thirdly, you’ll need money. Although the idea is that, eventually, SMSFs cost less to run, there are still significant expenses that come with running one. In 2017, the ATO reported that the average annual cost of running an SMSF is a little under $14,000 per year.

Is setting up a self-managed super fund worth it?

There are many advantages to a self-managed super fund if you have the knowledge and resources to make it work. A retail or industry super fund needs to be aware of what its returns look like every year, because a period of low returns will generally scare customers away. An SMSF doesn’t need to worry about this, because its customers are making the decisions. Because of this, you can make long term investments with lower short-term returns but a better pay-off in the long run, which is generally not an option for other types of funds. There are also ways to make SMSFs very tax-efficient if you know what you’re doing.

Although there are heavy restrictions on using SMSFs to invest in anything that gives any members a side benefit (other than super returns), you can still make investment choices that align with your interests. This can include investing in industries or areas that you and other members of the fund want to see supported, such as renewable energy, provided there aren’t any conflicts of interest.

Also, there are a number of options open to an SMSF that aren’t available with a standard super fund, such as purchasing a business property which you can then rent off your own super fund to use for your business. You need to be very careful to stay strictly within the regulations of such things, however – the consequences of getting it wrong and being declared “non-compliant” can be very bad.

The choice to set up a self-managed super fund is a big one, and the value of doing so really depends on your situation. They can be a lot of work, and there’s some risks if you don’t take the time to make sure everything is correct and above board. But they can give very good returns if you have a decent amount of super saved up, and offer a great deal of control over your retirement finances.

What can you invest in with a self-managed super fund?

Pros and cons of self-managed super funds vs a conventional super funds

PROS

Control – Managing your own super fund gives you complete control over managing and investing your super, as long as it’s within the restrictions set by the ATO.

Tax savings – An SMSF that’s compliant (i.e., following all the rules correctly) is very tax efficient: it’s taxed at what’s called the concessional rate (15%).

Transparency – Along with having control of your super, you also know exactly what your money is being used for and how your fund operates.

Lower fees at the high end – For large amounts of super (and managed by someone with a good understanding of investments), SMSFs can offer incredibly good returns.

Range of investments – You have a very wide choice of investment options (as long as it’s within the regulations) and also the flexibility to make investments aligned with your principles and preferences.

Pooling investment resources – If your fund has more than one member, you can potentially be pooling your super resources towards investments which might be out of reach for any one person’s finances.

CONS

Time – Managing your super fund is a significant time expense, involving more than a day’s work every month.

Personal responsibility – You and the other Trustees make the big decisions when it comes to your SMSF.

Risk of getting it wrong – If you or one of the other trustees makes a serious mistake in how the fund operated, the consequences can be serious. And they can apply to you directly – even if it was another trustee’s mistake.

Costs – You need a fair bit of money to get an SMSF up and running, as well as to maintain it. This also means SMSFs aren’t cost effective until you have a significant amount of super in the fund.

Member disagreements – For SMSFs with multiple members, breakdowns in relationships can make them very hard to operate effectively. This is especially messy if a marriage between two fund trustees breaks down.

Costs for assistance – While there is help available for running an SMSF and investing funds, making use of those services ads to the cost and raises the line at which the fund becomes cost effective.

Frequently asked questions about self-managed super funds

What is a non-compliant self-managed super fund?

If a fund has been declared non-compliant, it means it’s been found seriously in violation of ATO regulations. That means it’s taxed at the highest rate (nearly 50%), and loses almost half its assets to the ATO. However, the ATO has many different classifications when it comes to rule breaches and it might instead choose to ban someone from being an SMSF trustee or apply fines or tax penalties to specific members. A small unintentional mistake might not be penalised; you may just be ordered to fix the problem.

Can I get professional help for running an SMSF?

Yes. There are various professionals – including accountants, SMSF administrators and investment managers – that can help out with the administration and management of a self-managed super fund. These can make the process of running a self-managed super fund a lot simpler. The catch is that the more of these you use, the higher your costs and the less cost effective it is to have an SMSF. Remember that, no matter how well qualified the professionals helping you might be, the responsibility for your fund still rests with you.

Do you pay tax in a self-managed super fund?

You pay a small amount of tax, but as long as your fund is compliant (i.e., you’re following all the rules and keeping everything in order), you should only be paying the “concessional” tax rate of 15%, which is generally a lot better than income tax. However, if your fund is found to be breaking the rules and is declared non-compliant, you could end up being taxed at the highest tax rate – close to 50%.

Can I run a self-managed super fund on my own?

You can run a self-managed super fund for just yourself, and many people do; there are just a few extra legal steps involved. Effectively, you need to establish yourself as a one-person company in which you are both the entire board of directors and the only staff member. You’ll also need to foot all the bills yourself and the responsibility for running everything and getting everything compliant with the ATO is entirely on you. It becomes particularly important to make sure you don’t have any conflicts of interest, which follows the “arm’s length” principle.

If I make a serious error running an SMSF, should I tell the ATO or just try to fix it quietly?

It’s worth remembering that if you self-report any issues with your self-managed super fund, the ATO will take that into account when deciding how to respond – as well as how quickly you reported it. An accidental error that you reported as soon as you noticed it will generally be given a lot more leniency. However, if the ATO finds out you’ve been trying to hiding something from them, this won’t be the case.

What if the members of my SMSF are fighting?

Disagreements, or even relationship breakdowns, are significant issues for a self-managed super fund. SMSFs don’t really have in-built mechanisms for conflict resolution and you can’t force anyone to leave the fund – or stay – if they don’t want to. Choose your other trustees very carefully. Although it might seem nice to be in a SMSF with close family, this is something you’d want to think through carefully, as family members don’t always see eye to eye (especially when it comes to money). You need to maintain good relationships with your other SMSF trustees if you can.

What happens if an SMSF member dies?

Generally, part of setting up the SMSF involves each member nominating a beneficiary in case of their death. If that happens, it’s now the responsibility of the remaining trustees to ensure the person’s beneficiary receives their preferred super benefits. This might involve some planning, as a lump sum might require selling assets. In some circumstances, having only one trustee remaining is a problem for a SMSF (you can’t have a fund with only one “individual” trustee). In such cases, the last member may need to either appoint another trustee, change the structure of the fund or shut it down.

I’m interested in setting up a self-managed super fund. Where can I get more info?

Probably the first place to start asking questions is the ATO – who administrate and regulate SMSFs. In addition to having a lot of useful information on self-managed super funds on their website, they also have a number of helpful videos to help you get your head around where to start with setting up an SMSF.