Self managed super pros and cons

For people who are committed and informed, a self managed super fund (SMSF) may be a powerful way to save for retirement. The SMSF sector is the largest super segment in Australia with assets totalling $589.9 billion.1

According to research2 by Investment Trends for Vanguard, the most common reasons people set up a self managed super fund include:

  • To exercise more control over their superannuation.
  • Dissatisfaction with current superannuation performance and charges.
  • At the suggestion of their accountant's or financial planner.

SMSFs are different from other superannuation funds as all members are trustees (or trustee directors, if the fund has a corporate trustee). Members are responsible for running the fund including investing the fund's assets, paying benefits and meeting the administrative and compliance requirements of the fund.

What are the benefits of SMSFs?

  • As a trustee you potentially have greater control over the investment strategy, asset mix and ongoing management of your portfolio.
  • You may have greater flexibility when it comes to investing your assets, retirement income options and estate planning.
  • By choosing your investments carefully and keeping transactions to a minimum, you may potentially reduce the ongoing fees of your SMSF.
  • You can take advantage of the standard tax concessions for superannuation within the flexibility of the self-managed super environment. Many SMSF trustees, for instance, choose to sell fund assets at the most favourable time from a tax and investment perspective. (Income and capital gains from superannuation assets are concessionally taxed in the accumulation phase then tax-exempt when supporting a superannuation pension.)

What are the disadvantages?

Setting up your own SMSF is not a decision to be taken lightly as it carries responsibilities and risks.

If you are considering setting up a SMSF, you will need a sufficient superannuation balance to make it worthwhile. The Australian Securities & Investments Commission (ASIC) suggests that the costs of establishing and operating an SMSF with a balance of $200,000 or less is unlikely to be competitive compared to a large super fund3.

You also need the skills and time to manage your own fund and meet your trustee responsibilities. As trustee, you are responsible for keeping records, meeting reporting requirements and investing assets according to your investment strategy. Failure to comply with superannuation laws may have serious consequences. You also need to remember the sole purpose of your self managed super fund is to provide for your retirement.

1 APRA June 2015 Quarterly Superannuation Performance.
2 The 2015 Self Managed Super Fund Report - published by Vanguard and Investment Trends.
3 ASIC information sheet 206 for guidance of Australian financial services (AFS) licensees. Issued July 2015.

Starting your self managed super fund

The process for setting up your self managed super fund (SMSF) includes a number of steps, including:

  • Establishing the fund and preparing a trust deed.
  • Appointing fund trustees.
  • Formulating an investment strategy.
  • Meeting ongoing management, administration and reporting requirements in accordance with super and tax rules.

Establishing the fund and preparing the trust deed

The first thing you must do is set up your SMSF as a trust and prepare a trust deed. Professional advice is needed to prepare the deed.

The trust deed sets out how the fund will operate and covers:

  • Who the trustees are and how they are appointed or removed.
  • Trustee powers.
  • Eligibility for fund membership.
  • How contributions are accepted and members paid.
  • How the fund will be wound up.
  • How to value the assets.

SMSFs are regulated by the Australian Taxation Office (ATO). Trustees must notify the ATO via a 'noitice of election to be a regulated superannuation fund' and request a Tax File Number and Australian Business Number within 60 days of commencing the fund.

To become a regulated fund, and qualify for tax concessions, the trustee/s must ensure the trust deed either appoints a corporate trustee (who is subject to the Corporations law), or states that the sole or primary purpose of the fund is to pay old-age pensions.

Trustees must also open a bank account for the fund. It is important to separate the fund's assets from personal and/or business assets.

Appointing trustees

SMSFs are different to other superannuation funds as all members must be trustees. Members are responsible for running the fund including investing the funds' assets, paying benefits and meeting the administrative and compliance requirements of the fund. Trustees must consent in writing to their appointment as a trustee.

DIY super funds must have four or less members. If the trustee is a company, all fund members must be directors of the trustee company. Other requirements include:

  • No person other than a member can be a trustee or a director of the trustee company. Similar rules with slight variations apply to single member SMSFs.
  • Trustees cannot receive any remuneration for their services and cannot be employees of the other members unless they are related.
  • You must be 18 years old or over (although people under 18 can be members of SMSFs once established), have no criminal convictions relating to dishonest behaviour and not be an undischarged bankrupt.

Formulating your investment strategy

As a SMSF trustee you must prepare an investment objective for your fund and choose an investment strategy. The investment strategy must reflect the fund's purpose and circumstances and detail how it will:

  • Maximise member returns within an acceptable level of risk.
  • Diversify across a range of assets (for example, shares, property, fixed interest).
  • Pay benefits and fees as required.

Remember, the sole purpose of your SMSF is to save for your retirement. The Australian Taxation Office has strict guidelines on what SMSFs can and can't invest in.

Ongoing management and compliance

The administrative requirements of running your own SMSF include:

  • Keeping accurate and accessible accounts for the fund.
  • Preparing an annual operating statement and annual statement of the fund's financial position.
  • Maintaining minutes of all trustee meetings.
  • Retaining copies of all annual returns and reports given to members for a period of 10 years.
  • Reporting all contributions made to the ATO by specified dates each year.

Your SMSF must appoint an eligible auditor to conduct an annual audit of the fund's financial accounts and statements.

Your role and responsibilities

Trustees are responsible for all decisions relating to their SMSF. As trustee you must ensure your SMSF is properly managed and meets its legal and tax obligations.

Penalties for mismanaging and breaching compliance obligations can be high, so it is worth making sure you understand the rules governing your fund.

SMSF trustees must act in accordance with:

  • The provisions of the Superannuation Industry (Supervision) Act 1993 (SISA).
  • The clauses of the superannuation fund trust deed.
  • Other general rules, for example those imposed under tax law and trust law.

Superannuation law contains rules that impose certain requirements on trustees. These rules reflect the duties imposed on a trustee under trust law in general. They require trustees to:

  • Act honestly in all matters.
  • Exercise the same degree of care, skill and diligence as an ordinary prudent person.
  • Act in the best interest of the fund members.
  • Keep the assets of the fund separate from other assets (e.g. the trustee's personal assets).
  • Retain control over the fund.
  • Develop and implement an investment strategy.
  • Allow members access to certain information.

Fund assets and accounting and banking records must be kept completely separate from those of trustees, members and related employers. Here is a list of the some of the paperwork you need to keep and maintain as trustee.

  • Keep receipts of all sales and purchases for capital gains tax purposes.
  • Keep receipts for all fund expenses.
  • Prepare an income tax return, regulatory returns and member contribution statements every year.
  • Document and follow an investment strategy.
  • Record minutes of all investment deliberations and decisions.
  • Document trustee consent and changes.
  • Keep operating statements, financial records and transaction records for five years.
  • Keep minutes of trustee meetings, trustee declarations, consents and changes and paper copies of all returns lodged electronically for 10 years.