Hundreds of thousands of Australians run their own super fund. Here’s what a self-managed super fund is, what it involves, and why it isn’t for everyone.
Most Australians have their super in a large fund, such as an industry or retail super fund, which invests their money for them.
A self-managed super fund, or SMSF, is different. It’s a private fund set up and run by its own members, who decide how the money is invested. An SMSF can have up to six members, and is often set up by couples or families.
SMSFs are one of the largest parts of Australia’s super system, holding a significant share of total super assets.
You’re in charge
Every member of an SMSF must be a trustee, or a director of a company that acts as trustee. That means members are legally responsible for running the fund and following superannuation and tax laws.
The most important rule is the sole purpose test. An SMSF must be run solely to provide retirement benefits for its members. That means members can’t use fund assets for personal benefit now, for example by living in a property the fund owns or holidaying in it.
SMSFs are regulated by the Australian Taxation Office. Each year the fund must prepare financial statements, be audited by an approved auditor and lodge a tax return.
What SMSFs can invest in
SMSFs can invest in a wide range of assets, including Australian and international shares, cash, term deposits, managed funds and property.
Property is a popular reason to set one up. An SMSF can buy residential or commercial property, and can borrow to do so under strict rules. Small business owners sometimes use their SMSF to buy the premises their business operates from and lease it back at market rent.
The trustees must have an investment strategy that considers risk, diversification and members’ needs.
The costs and risks
Running an SMSF involves costs for accounting, audits, administration and advice. Because many of those costs are fixed, SMSFs tend to be more cost-effective for larger balances. ASIC has warned that low-balance SMSFs can end up with lower returns than large funds after costs.
Trustees need time and knowledge to manage investments and meet their legal obligations. Breaking the rules can lead to penalties and tax consequences.
SMSFs also don’t have access to the Government compensation scheme available to members of large regulated funds if they lose money through fraud or theft.
Who they suit
SMSFs often suit people with larger super balances who want control over their investments and are willing to take on the responsibility, often with help from accountants and advisers.
For most people, a low-cost, well-performing large super fund will be simpler and cheaper. Anyone considering an SMSF should get professional advice first.
