A comprehensive guide to self-managed super funds

A self-managed super fund (SMSF) offers a unique opportunity to take full control of your superannuation investments, provided you're ready for the commitment involved,

Here's a closer look at what sets SMSFs apart and the essential information you need to get started.

A self-managed super fund (SMSF) is a private superannuation plan where you have the control to manage your own retirement investments, rather than handing over control to a superannuation company.

An SMSF can be set up for an individual or a small group of up to six people, such as friends and relatives - and you can customise your investment strategy to meet the unique needs of these members. 

However, with this flexibility comes significantly more responsibility and involvement in managing the fund, while staying on the right side of the ATO’s guidelines.

And like all super funds, your SMSF is meant to provide for your retirement, so you generally can't access the money until you're retired outside of very specific early-release circumstances.

Let’s say you and/or five of your friends decide to set up an SMSF. While it’s certainly no walk in the park, once you understand its key elements, you'll begin to see how it works and realise it's a manageable feat.

We’ve laid this out in numbered points for clarity, but think of it as a roadmap rather than a strict step-by-step guide. If you want more detailed instructions, you should check out the ATO’s guide on setting up an SMSF or contact an SMSF advisor.

1. The SMSF trustee structure

First you’ll  need to decide on the trusteeship structure. A trustee is the person or entity responsible for managing the fund and making investment decisions:

• Individual trustee structure. Under this structure, each member serves as a trustee and shares management and decision-making responsibilities. 

• Corporate trustee structure. Under this structure, you’ll need to register a company with the Australian Securities and Investments Commission (ASIC), and the company (with all members as directors) will make decisions.

As you can see, both approaches ensure that all members are involved in the decision-making process.

2. Establishing your SMSF

Next you’ll need to register a trust deed with the ATO in order to receive an Australian Business Number (ABN) and a Tax File Number (TFN) for the fund. 

A trust deed outlines how the trustee intends to manage the fund’s assets “for the sole purpose of providing retirement benefits of its members,” according to the ATO.

Commit that to memory, because many of your actions in the course of setting up and managing an SMSF are subject to the ATO’s sole-purpose test.

Other requirements include:

• Bank account. The ATO also requires you to open a bank account, unique to the fund, where you manage the fund’s operations, accept member contributions, accept rollovers from other super funds, accept income from investments and pay expenses. 

• Residency conditions. Your fund needs to meet specific residency conditions at all times, otherwise you’ll be considered a non-complying fund. This could result in your funds being frozen and your contributions and earnings being taxed at the highest marginal tax rate. 

3. Investment Strategy

Your SMFS needs an investment strategy in more ways than one. First, the ATO requires it. Second, it would be folly to invest your members’ hard earned money without a strategy—you're likely to end up adrift.

But what does a strategy look like? There’s no one size fits all template for what a strategy should look like, but the ATO describes what they want to see here. An SMSF advisor can also come in handy here.

4. Active SMSF investment 

Now it's time for what you set out to do: invest and hopefully grow your funds. It’s beyond the scope of this guide to explain all the different ways you can invest your money (stocks, bonds, real estate, etc), but they do need to adhere to your strategy and follow the ATO’s requirements and restrictions.

Investment decisions are made by the trustee or trustees, who can either manage the active investing themselves or appoint a professional fund manager to execute the strategy.

5. Compliance and Administration

Now’s where it gets serious. The ATO will keep a close eye on whether or not you’re maintaining strict compliance with all relevant laws and regulations. To remain complaint you’ll be required to do the following:

• Lodge Annual Returns. Submit an annual return to the ATO, including financial statements and tax information.
• Manage Tax Obligations. Comply with all tax laws, including lodging annual tax returns and paying taxes as required.
• Conduct Annual Audit. You need to organise an annual audit by an independent third-party auditor, at your expense. The auditor will review your fund’s financial statements, adherence to your investment strategy, and overall compliance with superannuation laws.

As you can tell, you’ll need to maintain accurate records, and understand all that’s required to stay compliant. The ATO offers a handy compliance checklist, and an SMSF advisor can also be a valuable resource.

6. Accessing benefits 

Once a member has retired, or met another condition of release (eg, terminal illness or severe financial hardship), it’s time to disburse their funds to them. Depending on the circumstances, payments can generally be made in one of two ways (or a combination of both):

• Lump sum. The member receives a lump sum payout into the nominated bank account of their choice.
• Income stream. The member receives ongoing regular payments. This generally involves setting up a special pension account for this member, within the SMSF.

Payouts come with their own regulation and tax obligations, so make sure to check the ATOs website or consult with an SMSF advisor to brush up on what’s required.

7. Winding up the SMSF fund

At some point you may decide to close your fund. Maybe you decide you’d rather let a super company handle it, or maybe the last member remaining has retired and wants to pull all their money out. 

Well, there’s a formal process for this too. The process includes selling assets, paying off liabilities, distributing the remaining funds to the members and lodging your final returns with the ATO.

Before you go out and set up your own SMSF, it pays to be aware of some of the benefits and drawbacks. 

Managing a self-managed super fund (SMSF) is definitely not a 'set-it-and-forget-it' type of investment. It requires considerably more effort than a standard super fund to ensure everything operates smoothly and complies with legal requirements.Here are some tips to help you: 

• Record keeping: Meticulous record keeping is key to staying organised and staying on the right side of the ATO.
• Ongoing education: Make sure you keep up on the ever-changing nature of regulations, financial  markets and investment strategies.
• Contingency strategies: Plan for unexpected events to ensure the fund remains operational, for example if a member moves overseas or wants to leave the fund.
• Time commitment. Be prepared to invest a significant amount of time in managing your SMSF.
• Professional advice. Accountants, advisors, fund managers and legal experts can all be an immense help.
• Cost management. Budget for costs like audit fees, accounting fees, admin, trading costs, etc. Much is tax-deductible.
• Tech. Accounting software, investment tracking tools, and compliance management systems can make your life a lot easier.

According to the most recent ATO data, the average total annual expense for managing an SMSF in FY 20/21 was about $15,500, while the median total expense was around $8,600. Average operating expenses, which cover regular administrative costs, were about $6,400, with a median of $4,100. 

But the truth is, the cost of managing a self-managed super fund (SMSF) can vary widely based on the size and complexity of the fund, your investment decisions, the level of outside help you bring onboard and much more. 

Some of the costs you should account for include setup costs, compliance costs (audits, etc), investment fees, professional services (advisors, etc) and ongoing education.

While managing an SMSF can be cost-effective if your super balance is large enough, it's important to consider the potential expenses.

When you retire, you are now considered a beneficiary, and your SMSF transitions from the accumulation phase to the pension phase. Depending on your circumstances, you can choose a lump sum or regular pension payments (or combination of both), depending on your preference.

If you choose to withdraw all of your money as a lump sum, you’re effectively leaving the fund. As an individual, you’ll have to ‘wrap up’ the fund according to the process laid out by the ATO. If there are other members still in the fund, they’ll have to write you out of the fund, again as per ATO protocol. 

If you choose regular pension payments, these will generally go into a pension account within the fund, meaning you’re still a member. One advantage of going this route is that the earnings on your assets will continue to receive favourable tax treatment while they’re in that super account.

It can be a time-consuming endeavour to manage an SMSF and it might require you to have a sound knowledge of finance and the law. Before you make the choice to go down this route, it’s best to speak with a financial advisor or accountant. 

If after doing your research you find it’s something that you want to do, you might start to plan your next steps and work towards getting your SMSF established. 

The world of superannuation is vast. So if you’re interested in learning more about it, why not check out our superannuation guides to find out how you can better prepare for your retirement.