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An SMSF allows you to take the responsibility of overseeing and managing a superannuation fund into your own hands, as opposed to leaving this to a fund manager or business.

If you are interested in managing your own super portfolio, it is important to understand the basics of an SMSF (including what it is, how it works, how to set one up, and what your SMSF investment strategy might look like) before beginning the process yourself. We are here to provide you with some guidance on what there is to know about self-management of your super fund. 

What is a self-managed super fund?

A Self-Managed Super Fund (SMSF) is a superannuation fund that you manage yourself. Most super funds are overseen by a fund manager or a business in the superannuation industry, but some find the performance of these compulsory retail or industry super funds to be lacking, or prefer to have additional control over SMSF investment strategy. That is why many choose to manage their own super fund.

A self managed super fund (also known as an SMSF) allows you to manage your own superannuation investments for your retirement. Most people have their super with a fund that is managed by a third party – a fund manager, a large corporation or an industry body. You can also manage your own super fund – this is known as an SMSF. **

How does an SMSF work?

An SMSF works to provide those entering their retirement age, as well as their beneficiaries upon death, with financial benefits.

These personally-managed funds have their own Tax File Number (TFN), Australian Business Number (ABN) and transactional bank account. Through these, your SMSF can receive contributions and rollovers, pay out lump funds and pensions, as well as make investments. Any investment decisions host the name of the fund and are controlled by the trustees.

Due to it being a trust fund, an SMSF requires a trustee. You will automatically become an SMSF trustee due to it being your fund, but you can nominate up to six members, or choose to have a corporate trustee.

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The differences between these two trustee structures are:

  1. Individual trustee: You appoint up to five other members to act as trustees of your fund, with a minimum of two trustees needed at any time.
  2. Corporate trustee: A company of your choice acts as a trustee, with each member being a director.

SMSF benefits

Many choose to open their own SMSF due to the appeal of having control over their retirement fund. However, this is not the only benefit of setting up an SMSF. Others include:

  • Flexibility and control over your investments, including decisions on the fund’s investment strategy.
  • The ability to invest in investments not usually open to public super funds, allowing them to be customised to suit the requirements of members before and after retirement.
  • Power over the types of assets introduced and managed by your fund.
  • Taxation at a concessional rate, with the top rate for investment earnings being 15%, as set by the Australian taxation office.
  • Using your SMSF as a basis for a home loan.
  • Using your SMSF to purchase an investment property and obtain an SMSF home loan. **

SMSF risks **

By taking on the responsibility of managing your super fund, you are also liable for the risks that come with the fund’s decisions, including:

  • Being liable for all fund decisions, even if another member made the decision or you were given professional advice.
  • No access to special compensation schemes or the Australian Financial Complaints Authority if you lose money through fraud or theft.
  • Possibly losing insurance if you are moving from an industry or retail super fund to an SMSF.
  • Investments not bringing the returns you expected.
  • Potential negative impacts in your SMSF if the relationships between members break down, or if someone dies or falls ill.
  • Remaining responsible for the fund even when your circumstances change; i.e. losing your job.

How to set up a self-managed super fund: A step by step overview**

When it comes to a self-managed super fund set-up, there are plenty of factors to consider, and it is common to feel overwhelmed if you are going ahead without a plan. With this step-by-step overview, you can observe the full scope of managing an SMSF and what each step might involve. 

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Prepare for an SMSF

Although there is no set minimum balance required to begin an SMSF, it is strongly advised that a sizeable amount is set aside in preparation for the opening of your fund. The Australian Securities and Investments Commission indicates that a higher opening balance can allow you to avoid unbalanced levels of fund expenses and a lower net return.

Additionally, preparation includes making the time commitment to researching what structure you want your SMSF to be, what assets you wish to invest in, and what kind of exit plan you may need.

Choose an SMSF structure

You need to choose a structure of your SMSF that suits every member’s circumstances, namely by choosing between a single-member or multiple-member fund structure. You can then choose whether or not you wish your trustees to be individual or corporate, which affects the following costs and rules involved with setting up an SMSF:

  • Establishment costs
  • Governing rules
  • Administration and reporting
  • Trustee succession
  • Ownership of fund assets

Single-member  fund structure

Individual trustees must have:

  • Two trustees
  • One trustee must be the fund manager
  • The manager cannot be the other trustee’s employee unless they are also relatives

Corporate trustees must have:

  • One or two directors
  • One director must be the fund manager
  • In the case of there being two directors, the manager cannot be the other’s employee unless they are also relatives

Multiple-member fund structure

Individual trustees must have:

  • 2-6 members
  • Each of the fund members must also be a trustee and vice versa
  • Members cannot be another member’s employee unless they are also relatives

Corporate trustees must have:

  • 2-6 members
  • Each fund member must be a director and vice versa
  • Members cannot be another member’s employee unless they are also relatives

Appoint trustees

It is important to appoint trustees that are both responsible and trustworthy, as they will be playing a significant role in the management of your SMSF. However, not everyone can be an SMSF trustee as there are certain eligibility requirements in place.

Individuals who cannot be appointed as one of your trustees include anyone who has been:

  • Previously disqualified from acting as a trustee
  • Subject to a civil penalty under the superannuation legislation
  • Convicted of dishonest conduct
  • Insolvent under administration
  • Undischarged bankrupt
  • Under your or another member’s employment, unless they are related
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Create a trust deed:

Due to its status as a trust fund, an SMSF requires the creation and execution of a trust deed to legally establish itself. This deed sets out the governing rules for establishing and operating your fund, but it is still subject to super and Australian laws.

Your trust deed will focus on:

  • The rights of your members
  • Their powers, responsibilities and duties
  • What can and cannot be done within the fund’s scope

For this deed to be legally recognised and put into action, it must also:

  • Meet the requirements of and be properly executed under relevant laws
  • Be prepared by someone with legal experience to meet these requirements
  • Be tailored to the objectives of your fund members
  • Undergo regular reviews and updates to continue meeting members’ needs and complying with new or revised super laws
  • Be signed and dated by all trustees

Check your fund is an Australian super fund

To be a complying super fund and receive tax concessions, your SMSF must be recognised as an Australian super fund at all times. To do so, it must meet all three residency conditions:

  1. Be established in Australia, or at least have one of its assets located within the country
  2. The central management and control of the fund are regularly found within Australia; this includes formulating investment strategies, reviewing the performance of investments, and deciding how the fund’s assets can be used for member benefits.
  3. There are either no active members, or its active members are Australian residents that hold 50% of either:
    1. The sum of amounts payable to active members if they decide to leave the fund.
    2. The total market value of any assets attributable to super interests.
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Holding assets

To be legally established, your SMSF must hold assets. For many, trustees accept an initial contribution on behalf of a member and hold it with the trust deed, allowing them to register the fund and open a bank account.

From there, your fund’s assets can be built out through member contributions like the transfer of money or assets. These contributions and rollovers need to be properly documented and allocated to members’ accounts within 28 days after the end of the month during which you received them.

Register your SMSF

You will have 60 days to register your SMSF once your fund is legally established. To do this, you will need to apply for an ABN and TFN.

You can apply for an ABN and TFN simultaneously at the Australian Business Register website. Following that, you will need to ensure your individual affairs are to prevent any delay in registration. The ATO will consider factors like:

  • Any previous SMSF history
  • Potential cases of insolvency in the past
  • Personal lodgement and payment history
  • Super balance and income
  • If you have committed any crimes related to dishonesty
  • Any signs of fraudulent identities

Your SMSF will also require identification details of each trustee and member to be sent to the Australian Tax Office (ATO). This includes aspects like name, date of birth, and even their tax file number. Failure to do so means you will not be able to register your SMSF, as well as:

  • Members possibly being unable to receive super co-contributions
  • Your fund is unable to accept member contributions
  • Paying extra tax on some contributions
  • Some administrative delays will occur if the ATO cannot identify the relevant person

Set up a bank account

Your fund will require a unique bank account to keep assets and money separate from any business or personal finances. It must also be opened in your fund’s name, rather than a person’s name, to:

  • Hold any earnings or profits from investments
  • Accept members’ rollovers and contributions, which can then be used to:
    • Pay any expenses or liabilities that arise
    • Invest by your investment strategy, an alternative to an investment loan
  • Manage the fund’s operations

Although you will not require a separate bank account for all of the fund’s members, you will still need to keep a separate record of their entitlements. This is known as a member account, which shows any:

  • Super benefit payments like income streams or lump funds
  • Contributions made by or on behalf of the member
  • Investment earnings allocated to the member

To set up your fund’s bank account, you will be required to provide information on:

  • The fund’s name, address, TFN and ABN
  • Each member’s identification documents, as well as their name and residential address
  • If you have a corporate trustee, their name and Australian Company Number

Get an electronic service address

You will need an electronic service address (ESA) for your fund to receive monetary and data contributions from non-related employees through SuperStream. This service is also required to roll over super to or from the fund, but can only do so if your ESA can provide rollover services.

You may be able to obtain an ESA from your SMSF administrator, or you can use a SuperStream messaging solution provider.

Create an investment strategy**

While super funds are created with the intent of making investment returns, you cannot make the right investment decisions without having a strategy to follow. By having objectives and guidelines for what kind of investments your fund can make, you can formulate a strategy that will significantly increase member retirement benefits.

Fund trustees are the ones responsible for implementing this strategy, which should be written in writing and regularly reviewed for any changes to the law, or member needs. If any changes or decisions are made during this review, they will need to be documented.

More information on how to develop your investment approach can be found in the below section titled ‘your SMSF investment strategy’. 

Plan for the future

By planning for the future, you can protect your fund and its members from the unexpected. Namely, by preparing member and fund insurance to protect from potential financial loss, death, illness, injury, or income loss.

You may also be inclined to include in your fund’s trust deed death benefit nominations for members. This means the payment of a member’s super savings is given to a nominated beneficiary if the member dies.

Prepare an exit plan**

Just like other super funds, your SMSF requires you to think ahead about how you will finalise and exit your fund. There is a chance things can go wrong, so having an exit plan can allow you to stay on top of these changes. The plan should be agreed upon by your trustees and recorded alongside your fund’s records.

Your plan should include considerations on how to handle certain life events or mishaps; both in your own life as well as in your members’. You should consider the inclusion of:

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  • An appointment of an enduring power of attorney.
  • Each member’s instructions on how to deal with their benefits after they pass, including the validity of binding death benefit nominations.
  • Trustee access to the fund’s records and ETAs, while also confirming if there is a backup and who will keep the records once the fund has finished.
  • Estimated costs of finishing the fund, keeping the amount in mind when considering payments and rollovers.
  • The liquidity of assets for final costs, paying benefits and making rollovers.

The most common situations that require an exit plan include:

  • Trustee disputes, causing a breakdown in relations and the necessity of members leaving.
  • Every member has left the fund; whether it is by paying off their benefits, they have passed away, or they have rolled over their benefits to another fund.
  • Circumstances change, leaving you unable to manage the fund from lack of time or capability.
  • Residency rules are no longer met.
  • Your investments are performing poorly enough to incur a significant loss, meaning the fund can no longer meet ongoing costs.

Your responsibilities when setting up an SMSF

Taking your superannuation fund into your own hands makes you not only responsible for the fund and its set-up, but also for the other trustees involved in the fund’s management.

The major responsibilities involved in setting up an SMSF are:

  • Sole Purpose Test: You must test that your fund is capable of providing retirement benefits to members of the fund.
  • Separation of Assets: When managing a fund, you are also responsible for separating its assets from those of a business where other trustees are involved. Failure to do so goes against super legislation and associated regulations.
  • Investments: There are some rules around what investments an SMSF can make as it is meant to be focused on producing retirement funds. Responsibility around these investments includes diversity and sufficient liquidity of assets to meet expense commitments.
  • Fiduciary Responsibilities: By showing that you comply with all regulations, as overseen by the ATO, you show that your SMSF is appropriately managed. This includes maintaining the available funds gathered by fund members, which should sit between $200,000 and $250,000 to make the SMSF worthwhile.

Other considerations when setting up an SMSF

Although being aware of your responsibilities as a fund member is vital, there are further considerations to make when setting up an SMSF. You must remember to follow the laws around super funds, as well as make decisions on how you will choose to structure your fund and choice of members.

An individual trustee refers to a singular person who manages a trust, the benefits of which include:

  • A simple and cheap set-up process
  • Low management costs
  • No need to involve a company in the process, meaning they can immediately consent and sign the trust deed

In contrast, a company trustee utilises the experience of a company to act as a trustee. The benefits involved with this structure include:

  • There is limited liability for individuals
  • Greater asset protection
  • Simpler succession process
  • Easier separation of trust assets

Self-managed super fund rules and compliance

Financial and legal knowledge is necessary to ensure you comply with the numerous complex factors that are involved in a successful SMSF. Notably, the rules you must comply with in the name of your fund, as well as knowledge such as:

  • Tax, investment and super laws for textbook compliance
  • An understanding of different investments markets to build a diversified portfolio
  • Arranging fund member insurance
  • Creating an investment strategy with low risks that still meets your retirement needs

Self-managed super fund fees and costs

There are overall costs involved with setting up an SMSF, but only some of them, such as some investment property costs, will be tax deductible. The others will have to be paid as out-of-pocket expenses, which can add up without sufficient preparation.

The most common SMSF fees and costs include:

  • Tax/financial advice
  • Accounting
  • Auditing
  • Investing
  • Insurance premiums

Your SMSF investment strategy

You may choose to seek out professional advice from a licensed financial adviser to formulate your SMSF investment strategy, especially if you have no prior experience in investing. However, it is the fund trustees that are responsible for managing the investments according to the interests of the other members and the law. 

When creating your strategy, you should consider the purpose and circumstances of the fund itself, as well as its members, including:

  • The potential risks and returns from investments to maximise member returns
  • Diversification of assets and their classes
  • Members’ needs, circumstances, and retirement plans
  • The fund’s ability to pay off expenses and retiring members’ benefits
  • The liquidity of assets, especially when converting to cash to meet fund expenses

As soon as you start making investments, you are required to demonstrate how these decisions comply with your strategy and super laws alike. You must also regularly review your strategy to make sure it is abiding by current and future needs of your members. It is suggested that you do this annually, but there are other circumstances in which a review should be conducted:

  • When a new member departs or joins the fund
  • If there is a market correction
  • If a member begins to receive a pension – this ensures that the fund has enough cash flow and liquid assets to meet minimum pension payments prior to 30 June each year.

Additional SMSF investment strategy considerations**

To ensure the your strategy is remaining in successful effect, you can check that the following considerations are being met:

  • Understanding risk and return: Before making any investments, you should weigh the potential risks against the return to determine whether the acquisition is worth it.
  • Diversification and composition of assets: By diversifying your asset types, you can protect yourself against any potential losses in one particular market.
  • Liquidity of investments and cash flow: Make sure your SMSF has enough liquid assets as well as cash flow for the future of your retirement.
  • Insurance: Providing insurance not only for your fund, but also its members, protects you against risks.
  • Ability to meet liabilities: Your fund cannot proceed unless it is liable to super, tax and ATO laws. Failure to comply means potential fines or tax consequences.

SMSF investment options**

When choosing what investments you wish to make with your SMSF, it is important to diversify your options to lower any risks to your investment portfolio. The four main classes of assets to utilise in your SMSF are:

  • Shares, including individual company shares or exchange-traded funds
  • Property, done by taking out home loans for a residential or commercial building
  • Unique investments, which can be art, collectables, precious metals, wine, or even private companies
  • Cash, term deposits and debt securities, which require a bank account

Disclaimer: This article is not intended as legal, financial or investment advice and should not be construed or relied on as such. Before making any commitment of a legal or financial nature you should seek advice from a qualified and registered Australian legal practitioner or financial or investment advisor.  

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    Understanding more about SMSF

    What is a trustee?

    A trustee refers to an individual that is legally capable of holding a nominated trust property for the benefit of beneficiaries. In the case of an SMSF, they are holding the super fund for the benefit of the creator of the fund.

    What is a corporate trustee?

    A corporate trustee operates identically to an individual trustee, only a company is nominated as the trustee of an SMSF, with the company’s directors as members.

    APRA or SMSF?

    APRA stands for the Australian Prudential Regulation Authority, and they often oversee and regulate their own type of superannuation funds. These can be industry, corporate or company super funds, and are managed by professionals in the superannuation field. Many choose APRA over SMSF due to this expertise, while SMSF appeals to many due to the flexibility of making your own choices.

    Is there a minimum amount required to set up an SMSF?

    No, there is no minimum amount required to set up an SMSF. However, it usually becomes more cost-effective in the long run if you open your super fund with a balance of $250,000 or more.

    Can I have an SMSF and an industry fund?

    You can have an SMSF and an industry fund at the same time, keeping your money spread across two or more super accounts. However, having multiple accounts will accrue costs fairly quickly as both supers require you to pay several fees.

    SMSF vs RSA (Retirement savings account)

    A Retirement Savings Account (RSA) differs from an SMSF as it is not a super fund, but rather a savings account. While both are intended for your retirement, the RSA is provided by different benefactors, including a building society, bank, credit union or life insurance policy.