Self-managed super fund (SMSF)

Do it yourself super

Some people want the control that comes with managing their own super, but taking control means being responsible for managing your retirement funds, which involves significant time and effort. SMSFs can be suitable for people with a lot of super and extensive knowledge of financial and legal matters. 

You must understand your legal responsibilities and the investments you make because even if you employ professionals to help you, at the end of the day you are the one responsible.

What is a self-managed super fund (SMSF)?

An SMSF is a private superannuation fund, regulated by the Australian Taxation Office (ATO), that you manage yourself. SMSFs can have up to four members. All members must be trustees (or directors if there is a corporate trustee) and are responsible for decisions made about the fund and compliance with relevant laws. Set up costs and annual running expenses can be high, so you'll need a large balance to make the fund cost-effective.

How do self-managed super funds work?

An SMSF is a legal tax structure with the sole purpose of providing for your retirement. SMSFs operate under similar rules and restrictions as ordinary super funds.

When you run your own SMSF you must:

  • Carry out the role of trustee or director, which imposes important legal obligations on you
  • Set and follow an investment strategy that is appropriate for your risk tolerance and is likely to meet your retirement needs
  • Have the financial experience and skills to make sound investment decisions
  • Have enough time to research investments and manage the fund
  • Budget for ongoing expenses such as professional accounting, tax, audit, legal and financial advice
  • Keep comprehensive records and arrange an annual audit by an approved SMSF auditor
  • Organise insurance, including income protection and total and permanent disability cover for super fund members
  • Use the money only to provide retirement benefits.

Important

If you decide to set up an SMSF, you are personally liable for all the decisions made by the fund - even if you get help from a professional or another member makes the decision.

SMSF advisers

A professional who is licensed to provide SMSF advice can help you weigh up the pros and cons of running an SMSF and help you decide whether it's right for you. They may also be able to help with the administration and investment decisions for your SMSF. But remember, you cannot pass on the responsibility of being a trustee or director, so you must understand what your adviser is doing. 

Robo-advice and SMSFs

SMSF advice has traditionally been provided by an actual person but could also be provided by a robo-adviser. Robo-advice is financial advice that's delivered by a computer instead of a physical financial adviser. It may be cheaper than seeing an adviser however there are limitations to what robo-advice software can do, and it may not be subject to the same quality controls and monitoring that advice from a real person would be.

Ongoing SMSF advice

The type of ongoing advice you choose will depend on your needs, for example you may use a financial adviser or broker for investment advice or an accountant for financial management of the fund.

Before engaging a professional to provide advice on your SMSF, check they are licensed by asking for their Australian financial services (AFS) licence number. You can search for their name on ASIC's financial advisers register, to check what they are allowed to advise on. You can also find out more about the licensing of accountants on the ASIC website.

Find out what advice your adviser or accountant is licensed to give.

Financial advisers register

 

Video: SMSFs - You can't do it all yourself

Video about SMSF's.

SMSFs are often called 'do-it-yourself funds', but that isn't really the case. Meet the people who you will have to work with or who can help you meet your obligations as an SMSF trustee in this ATO video.

Don't forget that your accountant must have an AFS licence if they are advising you about your SMSF.

Transcript: SMSFs - You can't do it all yourself

Adviser authority over cash management accounts

Most SMSFs will use some type of deposit account, such as a cash management account, to hold surplus funds and allow for active management of your investments. If you are using a financial adviser, you may have given them authority to view and/or make transactions on your account on your behalf. This may be referred to as a 'third party authority'.

Types of adviser third party authorities

An authority that allows your adviser to operate your account can be classified by the amount of access you give them:

  • View access - your adviser can see the account transactions but cannot operate the account
  • Withdrawal access - your adviser can make transactions, including withdrawals, on the account
  • Complete access - your adviser can do all the things that you can do with the account, including changing contact details, changing or adding authorised signatories or closing the account.

The risks of granting an adviser third party authority

By allowing your adviser to operate your account (which may be referred to as an 'adviser-operated account'), you are placing a lot of trust in them. Some of the risks to be aware of include:

  • Your money being invested in products or schemes that may not be in your best interests
  • The possibility that your adviser could use their third party access to commit fraud.

While the risk of fraud may be remote, it could have serious consequences if it does occur.

Limiting the risks of adviser-operated accounts

These accounts may be convenient for your adviser, particularly if they are actively managing your investments, but there are steps you can take to limit the risk they pose to you. For example, you can:

  • Make sure you understand the extent of the authority you have given your adviser and the risks involved
  • Get all the details of the account, including any authorities you have provided, in writing
  • Ask to be notified each time your adviser makes a transaction on the account
  • Make sure all correspondence relating to the account comes to you, even if your adviser also receives the information
  • Check the account transactions regularly and speak to your bank if something doesn't look right.

Questions to ask before you set up an SMSF

Before setting up an SMSF, ask yourself these questions:

Have you considered other do-it-yourself (DIY) super options?

Many professionally managed super funds have DIY investment options which let you choose specific assets, such as shares, exchange traded funds and term deposits. This gives you some control over your investments without the legal and administrative responsibilities of running an SMSF.

Have you considered other super funds or investment options?

If you're thinking about setting up an SMSF because you're not happy with your current fund or the way your money is invested, consider changing to another fund or investment option first. See choosing a super fund.

Will your self-managed fund outperform your current fund?

Super funds use highly skilled professional managers to invest your super money. Can you choose investments that perform better than your professionally managed super fund, and are you confident you can accurately measure returns?

Have you considered the costs?

Like all super funds, an SMSF will have costs associated with running the fund, including investing, accounting and auditing. If these costs are higher than what you are currently paying, they could cut into your retirement savings.

Will you lose valued benefits?

Super funds usually offer discounted life and disability insurance. If you set up an SMSF you will have to purchase your insurance separately. Make sure you look into your insurance options before closing your current super account as age and health issues can limit your ability to buy a new policy and may increase your premiums.

Do you know enough?

Are you aware of all your legal responsibilities? Do you understand the different investment markets? Can you construct and manage a diversified portfolio of investments Do you know the tax implications?

Test your investment knowledge.

Investing challenge

What if your relationship with others in the fund changes?

If there is more than one member in your SMSF, have you written a plan outlining what will happen in the event of ill health, death, relationship breakdown, or waning interest?

Warning

If an SMSF member loses money due to theft or fraud, they do not have access to any special compensation schemes. Also, SMSF members do not have access to the Superannuation Complaints Tribunal to resolve disputes.

What should you invest your SMSF in?

Having access to a broader range of investments is often cited as a reason for starting an SMSF. Through a self-managed super fund, you can invest in the usual investments such as shares, term deposits, managed funds and property. You can also hold alternative assets such as antiques and artwork in a self-managed super fund.

Shares

The ability to choose your own shares may have been a driver for setting up an SMSF, but unless you have a lot of money to invest, you are unlikely to be as diversified as a fund manager, who has the advantage of using pooled funds to buy a broad range of shares. 

Property

Some people use their SMSF to invest in property. For information on the rules around property investment within super and the costs involved, go to our SMSFs and property webpage. 

Collectibles

Many SMSFs hold collectibles such as artwork, jewellery, antiques, coins, stamps, vintage cars and wine. There are very strict rules on holding these assets in your self-managed super fund.

These assets, when held within an SMSF, must be insured and they cannot provide a present-day benefit. This means that artwork cannot be displayed in your home or business, you cannot drive a vintage car, and you cannot wear jewellery or drink the wine.

For more information, see the ATOs webpage on collectibles and personal use assets.

Memory loss, dementia and SMSFs

Many of us will experience some form of memory loss as we age. However, when you run your own super fund, the financial consequences of significant memory loss, from illnesses such as dementia, can be very serious.

As trustee of your SMSF, you should plan for the possibility that some form of impairment could stop you from being able to properly manage your fund. It's better to make a contingency plan while you're capable of making good decisions than waiting until your health deteriorates.

If you're not able to run your fund, you could:

  • Transfer your SMSF assets to a managed super fund, or
  • Appoint a person you trust to take over your trustee responsibilities as your legal personal representative.

If you decide to nominate another person to act as trustee on your behalf, you will need to give them all the information required to perform this role. This includes:

  • Your SMSF documents (such as trust deeds, bank account details, tax returns)
  • Passwords to access your SMSF accounts
  • Contact details of any professionals you deal with, such as your SMSF auditor or adviser

Visit our page on Memory loss, dementia and your money for more information on what you can do now to protect your finances in the future and consider getting advice from an appropriately qualified professional before making these decisions.

Bankruptcy and SMSFs

By law, if you or another trustee of your self-managed super fund becomes bankrupt, that person can no longer remain a trustee, director or member of the super fund. SMSFs have a 6-month grace period to remove the bankrupt trustee and make arrangements to deal with their super assets.

If you are the only member of your SMSF, a new director will need to be appointed to manage the fund on your behalf while you are disqualified.

Seek legal advice about the actions you need to take to deal with bankruptcy and your SMSF.

Scams targeting people with SMSFs

Be wary of people who approach you to set up a self-managed super fund with the aim of withdrawing some or all of your super to pay off debts. These arrangements are illegal. See superannuation scams for more information.

SMSF courses and further education

If you're thinking of running an SMSF, consider completing a free Self-Managed Superannuation Fund Trustee Education Program designed to assist trustees in understanding their role and responsibilities.

The ATO has a section about self-managed super funds and a range of other useful resources listed below, that you can download from their website or order a hard copy.

If you do get SMSF advice, make sure you get it from an expert, for example a member of the Self-Managed Super Fund Association.

If you're thinking about setting up an SMSF, you need to be 100% committed. Before you make that decision, do some research and ask yourself what the real benefit is.


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Last updated: 06 Nov 2017