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Should I set up a self-managed superannuation fund?

Our guide to taking control of your retirement savings with a DIY super fund. We walk you through all the pros and cons.

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Last updated: 20 October 2020
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Need to know

  • Being in a self-managed super fund (SMSF) gives you more control of how your retirement savings are invested 
  • There are significant legal and auditing requirements if you choose to start an SMSF
  • Being an SMSF trustee requires you to implement and regularly review your investment strategy 

Running an SMSF (or DIY super fund) means directing the money you would normally have in a super fund into your own fund. 

An SMSF performs the same role as other super funds: collecting and investing your contributions and making them available to you when you retire.

You will need to choose how your money is invested and what insurance you will take out.

These funds are jointly regulated by the Australian Taxation Office (ATO) and the Australian Securities and Investments Commission (ASIC).

The number of these funds has increased; the latest ATO data showed there were almost 600,000 with almost 1.1 million members across Australia. 

You might consider switching if you've done the maths and figured you're not getting back as much as you could. Or maybe your financial adviser has suggested you strike out alone.

An SMSF could make you more money, but it isn't the best option for everyone.

Should I manage my own super?

Self-managed super isn't for everyone. Here are some things to consider if you're thinking of taking the DIY route:

  • SMSFs can be expensive to run – ASIC reports that in 2018, the average cost of running an SMSF was $6152, not including insurance and investment expenses.
  • You need a lot of money to make an SMSF work well.
  • You need to know and understand the rules very well.
  • There may be complications if the relationships between people in an SMSF together change.

Ideally you'll have:

  • at least $500,000 in your account – according to ASIC, SMSFs with balances below this amount will often be uncompetitive compared with APRA-regulated funds. This means, in many cases, it is not in your best interests to set up an SMSF with a balance below this amount
  • investment expertise and an understanding of investment strategies
  • the time and interest to be involved with your fund (one report found that SMSF trustees spend, on average, more than 100 hours a year managing their fund)
  • discipline and understanding of the responsibilities of being a trustee.

Running your own SMSF means you're responsible

As a trustee, the buck stops with you. This means you need to be across the legal requirements and administrative responsibilities.

Each SMSF needs to be independently audited annually. The audit includes an assessment of the fund's overall compliance with the rules and a financial audit. Auditors report problems and breaches to the trustees who can take appropriate action, but they must also report them directly to the ATO, which means the ATO may prosecute you.

As a trustee, the buck stops with you. This means you need to be across the legal requirements and administrative responsibilities

Penalties can range from asking the trustees to offer an undertaking to the ATO to correct the problems, to civil and criminal actions with financial penalties and/or imprisonment.

The ATO can also make the fund non-complying, which has dire financial consequences for members as it means that the fund's assets and income may be taxed at a penalty rate instead of the concessional super tax rate of 15%.

Pros and cons of self-managed super

Pros

  • Self-managed super gives you the control to choose your own investments. As long as you follow the rules and the fund's investment strategy, you have a lot of flexibility.
  • It can be more cost effective than other types of super, but this depends on how much you have to invest and how much professional advice and administrative assistance you need.
  • It can act as a tool to minimise tax on your other investments. For example, you may be able to integrate your share portfolio into the fund. However, you won't be able to access the funds until retirement and access may be affected by changes in legislation.
  • You can also decide when to buy or sell investments to minimise Capital Gains Tax.
  • Under some circumstances an SMSF may help you to raise debt to invest in property.
  • You can invest in alternative asset classes, such as collectables (for example, art). Note, however, that any alternative assets you invest in must be for the sole purpose of generating retirement income for the fund's members and dependants. As the ATO says: "Don't set up an SMSF to … buy a holiday home or artworks to decorate your house. These things are illegal."
  • You have more flexibility with death benefits. For example,  you can make binding and non-lapsing death benefit nominations. Many super funds do not allow this.

Cons

  • Self-managed super needs continuous attention – you'll need to be able to devote at least a few hours to the fund each week.
  • High costs – in comparison with industry or even retail funds, a DIY fund can be expensive
  • It may only be worthwhile if you have a large sum to invest.
  • If you consult professional advisers, the fees will eat into your returns.
  • There's no guarantee you'll have better returns than other super funds. It can be extremely difficult to beat the market, as you'll still be selecting from the same investments and dealing with the same market ups and downs as every other super fund. ATO figures show SMSFs, on average, perform below regular funds.
  • If you choose to move your money into an SMSF, you won't have the same government protections (such as special compensation schemes) available if something goes wrong.

A retail or industry super fund may offer cheaper life insurance cover because their large membership numbers enable them to negotiate low premiums. ASIC found life and total and permanent disability (TPD)  insurance is "generally more expensive and harder to obtain for SMSFs than for larger APRA-regulated superannuation funds".

Setting up a self-managed super fund

The rules:

  • Each member must be a trustee.
  • Trustees can't receive payment for performing their duties.
  • A member of the fund can be an employee of another member only if they're related. For example, if you've got a small business that employs your son, he can be a member of your SMSF, however, another employee who isn't related to you can't join the fund.
  • As a trustee, you're responsible for the fund complying with the regulations.
  • The fund is a separate entity and needs to be separated from your own assets.
  • You need proper administrative procedures to comply with all requirements, for example, keep records of all meetings and decisions, prepare financial statements and lodge all required paperwork with the ATO.

What you need to do:

When starting up a self-managed super fund

  • Appoint trustees. All trustees must be eligible; people who are under 18 or who have committed certain dishonesty offences can't be appointed. You and any other trustees will also need to sign a trustee declaration, saying you understand the responsibilities. You must keep this paperwork on file for at least 10 years after the SMSF winds up.
  • Get a trust deed. This is a legally binding document setting out the governing rules of the fund.
  • Register the SMSF with the ATO by applying for an Australian Business Number (ABN) within 60 days of the fund being established.
  • Open a separate bank account in the fund's name.
  • Get an electronic service address (different from an email address) to receive employer super payments through the ATO's Superstream system.
  • Prepare an investment strategy.
  • Consider the insurance needs of everyone in the SMSF. 
  • Make an 'exit plan' for the SMSF. The ATO advises this should include thinking through how you will deal with a fund member who ends their relationship with the other trustee(s) or who passes away, making binding death nominations, and deciding who will take over if you become incapacitated. Remember this exit plan must be aligned with your trust deed as well as relevant tax and super laws.

What you have to do every year as an SMSF trustee

  • Record and value all assets held by the fund (as of 30 June).
  • Appoint an auditor at least 45 days before lodgement is due and have them look over your fund's financial statements.
  • Lodge an annual return once the audit is finalised.
  • Report any relevant 'events' (such as a member starting to receive the pension) that affect the transfer balances of any fund members.
  • Keep minutes of investment decisions and other necessary records.
  • Pay a supervisory levy to the ATO.
  • Review your investment strategy (legally, you are required to review it "regularly", but the ATO recommends this is done at least once a year to stay on top of your obligations).

When the SMSF ends

  • Follow wind-up instructions in the trust deed.
  • Pay out or move the remaining super in the fund. This may involve selling assets.
  • Complete a final audit before you lodge your final tax return and let the ATO know the fund is winding up.
  • Pay off any debts the fund has.
  • Close the fund's bank account.

There may be other compliance and reporting tasks that come up from time to time.

Things to keep in mind if you start an SMSF

  • An SMSF needs to meet the 'sole purpose' test. This means it can only be run for the purpose of providing retirement income to its members and their dependants.
  • Each member needs to nominate a dependent to receive their benefits if they die.
  • Proper records must be kept, some for up to 10 years.
  • SMSFs are prohibited from borrowing money other than in very limited circumstances.
  • An SMSF can't get 'mate's rates' on investments. Any investments with related parties need to be on 'arm's length' terms, for instance the same terms as if they weren't a related party.
  • SMSFs are, in general, prohibited from lending money to members or their relatives.
  • An SMSF can be run by individual trustees or a company acting as trustee for the fund. The ATO has weighed up the pros and cons of each approach. 
  • Research by the ATO indicates that SMSFs, especially those with smaller amounts invested, have a tendency to concentrate their investments in only one asset class. This goes against the basic investment principle of spreading risk over different asset classes.

What you need to look out for in an SMSF adviser

The ATO suggests speaking to an SMSF professional to see if  DIY super is right for you.

Be wary of advisers who:

  • make the process seem easy
  • look after only a handful of SMSFs
  • don't have proper industry qualifications
  • haven't kept their knowledge up to date
  • have worked with DIY super for only a short time.

A large range of professionals are offering DIY super services and their qualifications and charges vary widely. Look at whether they're licensed to give you financial advice and whether their advice is appropriate for your specific circumstances.

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