What is an SMSF and how does it work?

A Self-Managed Super Fund (SMSF) is a DIY super fund regulated by the Australian Taxation Office (ATO) and can have up to 6 members. In contrast, retail and industry super funds are managed by professionals and regulated by ASIC and consist of many thousands of members.

An SMSF is subject to the superannuation laws and regulations (SISA). An SMSF is subject to the following rules under SISA:

• an SMSF can have up to 6 members who are usually family members but can also be business partners or members who are friends but not employed by another member
• generally, each member must be an individual trustee or a director of a corporate trustee
• investments must be made with the sole purpose of providing for the members retirement
• keep the members super preserved until they meet a condition of release such as turning 65 or turning 60 (not yet 65) and retired or meet a condition of early release such as permanent incapacity, terminal medical condition or compassionate grounds
• all transactions must be made on an arm’s-length basis
• certain related party transactions known as in-house assets (INHA) are prohibited such as making loans to a related party, investments in a related party and leasing assets to related parties with some limited exceptions such as a 5% INHA threshold, non-geared unit trust and business real property
• prohibition on acquiring residential property from a member or related party unless an exception applies such as a property which is business real property
• prohibition on providing financial assistance to a member or a relative of a member
• borrowing is prohibited with limited exceptions such as a limited recourse borrowing arrangement (LRBA)

An SMSF is legally a trust and therefore it has assets which are set aside on behalf of the members, and a trustee is appointed to hold those assets and deal with those assets in the best interest of the members.

SMSF trustees are responsible for:

• looking after the members superannuation money for their retirement
• making decisions about the fund’s investments
• ensuring employer and member super contributions are allocated correctly to the member
• paying member benefits when allowed under SISA
• controlling the fund’s bank account
• deciding who can help with the fund’s annual accounts and audit
• compliance with SISA, the Tax Act and ASIC if the fund has a corporate trustee

Why would you want to have an SMSF?

Many people consider setting up an SMSF to control their retirement and make flexible investment decisions. It’s crucial to have time for market research, proper record keeping, and a fundamental understanding of SISA and tax laws.

Making the decision to have your own fund should be done after consultation with a licensed financial planner who can assist you in deciding if it is the correct decision for your circumstances.

A Self-Managed Super Fund (SMSF) enables a couple to consolidate all their superannuation funds into one, and direct future contributions to their SMSF. One compelling reason for individuals to establish their own fund is the ability to acquire residential or commercial property. Many business owners prefer to have their SMSF purchase business premises, as this allows rental income to contribute to their own retirement rather than servicing another party’s mortgage.

What are the steps to setting up your own SMSF?

• if you are unsure get advice to see if it is an appropriate structure for you
• engage a superannuation service provider to help you establish the fund such as:
  • arranging for the fund’s trust deed
  • organising the paperwork to appoint trustees and members
  • organise a corporate trustee if required
  • assist with registering the fund with the ATO to obtain a TFN and an ABN
  • obtain an electronic service address (ESA)
  • ensuring the trustee prepares an investment strategy
• have your service provider assist with rolling funds from other super funds into your SMSF after you have considered any insurance implications
• redirecting employer superannuation contributions to your SMSF
• consider ongoing operation and management of your SMSF
• consider engaging an ASIC licensed financial planner to assist with the fund’s investments