What Are Self-Managed Super Funds? Your Complete Guide

If you want a helpful answer to the question, ‘what are self-managed super funds?’, you’ve landed in the right place. Settle in as we reveal all.

SMSF. 

It’s an acronym you’re likely familiar with. 

But what exactly are self-managed super funds? And are they the right choice for you? 

To answer these questions and so much more, we’ve created this ‘super’ insightful article that comprehensively explores the world of SMSFs.

We break down these oft-misunderstood nest eggs, explaining what they are, how they work, who they suit, and plenty else.

Here is your complete guide to SMSFs. 

What Are Self-Managed Super Funds?

A self-managed super fund (SMSF) is a type of superannuation fund where members also act as trustees—giving them full control over investment decisions and strategy geared towards building savings for retirement. 

Unlike traditional superannuation funds, which pool contributions from numerous individuals and are managed by professional trustees, SMSFs are managed directly by their members. 

This autonomy offers a degree of choice and flexibility around management and investment selection that is unparalleled in the field of retirement planning.

How Self-Managed Super Funds Work

In essence, the operation of an SMSF is relatively straightforward. 

Members establish the fund and act as trustees, meaning they are responsible for making investment decisions, complying with the various regulatory requirements, and managing administrative tasks.

This autonomy grants those members the freedom to tailor their investment portfolio according to their unique financial goals and risk tolerance.

Is a Self-Managed Super Fund a Trust?

Yes, an SMSF is indeed a type of trust. 

As trustees, members hold legal responsibility for managing the fund’s assets in the best interests of its beneficiaries—typically themselves and other members or their dependents. 

This fiduciary duty entails adherence to stringent regulatory requirements, including compliance with tax laws, investment restrictions, and reporting obligations to regulatory authorities such as the Australian Taxation Office (ATO).

What Can Self-Managed Super Funds Invest In?

One of the most appealing aspects of SMSFs is the breadth of investment options available. They include:

• Residential and commercial property 
• Shares
• Cash and term deposits
• Managed funds
• Gold and silver
• Collectibles

This variety allows for greater diversification within a portfolio, mitigating risk and potentially enhancing returns over the long term.

However, there are several restrictions with investments that must be accounted for, so it’s best to seek professional advice if you’re looking to head down this path. 

Are Self-Managed Super Funds Worth It?

There is no clear cut answer to this question, but there are distinct advantages for those who are looking to set up an SMSF. Notable benefits include:

More Investment Options

SMSFs grant members a level of choice and freedom to access investment options that are unavailable through a public super fund—such as collectibles and physical gold.

Additionally, an SMSF allows you to invest in property—using a Limited Recourse Borrowing Arrangement (LRBA)—which, again, is not an option with a regular super fund. 

This is particularly beneficial for a business owner who wants to operate from their own premises, as these premises can be owned inside the SMSF. See the ‘case study’ section below for more.

Flexibility 

An SMSF provides its members with complete control over their investment choices, and they can dictate how its earnings are paid upon retirement.

Tax Benefits

Although reduced tax rates are available to all members with a complying super fund, SMSFs create greater opportunities to leverage tax strategies aligned with capital gains, franking credits, or taxable income.

Better Access

As a general rule, an SMSF fund can include up to six members. With this pool of investor money, the fund provides greater scale to access investment opportunities than those available to individual investors.

While there are clear benefits to SMSFs, these funds do entail a degree of risk, and require ongoing and diligent management to ensure compliance with regulatory obligations.

So, are self-managed super funds a good idea? 

It really does depend on a wide variety of individual factors, including financial circumstances, investment knowledge, and a willingness to undertake the various responsibilities associated with trusteeship. 

We highly recommend reaching out to us at PrimeAdvisory to discuss your personal situation and how an SMSF might work for you.

Who Are Self-Managed Super Funds Best Suited To?

SMSFs are ripe for individuals actively engaged in their financial affairs and who have a sound understanding of investment principles. 

There’s particular appeal for those with substantial superannuation balances, business owners seeking to consolidate their super and investment assets, or individuals looking to incorporate alternative assets like property or unlisted securities into their retirement portfolio.

At PrimeAdvisory, our vast experience with SMSFs has shown us that there are four common categories of individuals who lean towards this type of investment strategy. They are: 

• The Savvy Investor: Backs themself to outperform those in charge of their employer or retail fund
• The Risk Adverse: Isn’t comfortable investing in the share market, so opts for an SMSF as a place to ‘stash cash’. Note: This strategy can only be adopted through an SMSF 
• The Property Investor: Not keen on share markets, either, but is confident investing in property—and the only way you can invest in property with super is via an SMSF
• The Advice Leverager: Wants an SMSF, but is not comfortable making the calls themselves. Requires a financial planner to advise

How Many Self-Managed Super Funds in Australia?

As at mid-2023, there were 610,287 SMSFs in Australia with total estimated assets of $876.4 billion, according to ATO data. 

These SMSFs are part of an estimated 23.2 million superannuation accounts in Australia. 

Self-Managed Super Fund Risks

While SMSFs offer unparalleled control and flexibility, they also carry a level of risk—as we’ve touched on. 

The likes of poor investment decisions, inadequate diversification (i.e. an ‘all eggs in one basket’ approach), and administrative errors can jeopardise a fund’s financial health and expose trustees to penalties and legal consequences. 

Where does the danger of penalties arise from?

Well, as we’ve mentioned, SMSFs come with a wide assortment of annual compliance requirements, including a completed tax return, the preparation of a set of financial statements, and an audit conducted by a qualified auditor. 

And non-compliance leads to heavy penalties. These include:

• A fund losing its concessional tax treatment
• The freezing of SMSF assets
• Member disqualification—meaning an individual can longer be involved with an SMSF
• Fines or imprisonment (worst-case scenario)

This is where a strong relationship with an accountant is vital—like our expert team at PrimeAdvisory. 

We are diligently and actively involved with our clients’ compliance requirements, ensuring nothing is missed.

Self-Managed Super Fund—Case Study

As we’ve established, the suitability of an SMSF is not a one-size-fits-all scenario. 

But here is an example of how such a fund could benefit an individual who is considering investing in an SMSF—with particular emphasis on business ownership.

This scenario is based on a PrimeAdvisory client…

Bob Baker bought a premises and moved his business—Bob’s Bakery—into that premises. 

During the last decade, Bob’s Bakery has become a well-oiled, successful business. While its rent bill is substantial (of course, the business pays rent rather than Bob himself) that cost is directed into Bob’s SMSF, rather than to someone else. 

Therefore, the cash flow within Bob’s super fund is excellent because it is collecting regular rent on top of the super guarantee (SG) contributions paid by his employer—Bob’s Bakery.

All this has put Bob in a strong financial position, with constant money flowing into his super fund—and that’s without mentioning the likely capital appreciation of the property. 

The news gets better… 

If Bob waits until he reaches 60 before selling the property, the sale will be completely tax free. And by this stage, Bob can convert his super to a pension. 

This example demonstrates that holding an SMSF can be a very efficient and clever way to ensure a business cost becomes an income. In fact, it’s a no-brainer in the right situation.

And it’s just one example of how an SMSF can benefit Australians.

Note: This example can work both ways. If you have enough money in your fund, you can purchase the premises outright; otherwise, you can get a loan and use the rent to pay it off.

How to Start Self-Managed Super Fund

Establishing an SMSF involves several steps, including:

• Step 1: Creating a trust deed
• Step 2: Appointing trustees and obtaining professional advice to ensure compliance with legal and regulatory requirements
• Step 3: Registering the fund with the ATO and obtaining an Australian Business Number (ABN) and Tax File Number (TFN)
• Step 4: Rolling over existing superannuation balances into the SMSF and initiating contributions
• Step 5: Formulating an investment strategy aligned with your financial objectives
• Step 6: Implementing appropriate administrative processes and investment structures to facilitate effective management of the fund

What Are Self-Managed Super Funds?—A Summary

Self-managed super funds are a compelling option for Australians seeking greater control over their retirement savings and investment decisions. 

But with autonomy comes responsibility, and prospective trustees must carefully consider the risks and obligations associated with managing an SMSF. 

Seeking professional guidance is highly recommended for unlocking the full potential of SMSFs and maximising the opportunity to create a financially secure retirement.

Looking for Help With Your Self-Managed Super Fund?

At PrimeAdvisory, we’re all over SMSFs. 

We know the importance of building strong relationships with our clients to ensure the various onerous compliance requirements of an SMSF are met.

But our expertise extends well beyond meeting your ATO and legal obligations.

Our talented team excels at creating SMSF investment and tax strategies that put our customers on the path to a strong financial future. 

We’re with you every step of the way. 

Reach out to us to get the ball rolling. Or get in touch with PrimeAdvisory via our website.