A Self-Managed Super Fund (SMSF) is a super fund with no more than four members where each member is a trustee (or director, if a corporate trustee). As the name suggests the members are responsible for operating the fund and hence take on full legal responsibility. This includes fund administration and investment. Complying super funds, including SMSFs are eligible to receive concessional tax treatment. Unlike other super funds, SMSFs are regulated by the Australian Tax Office (Tax Office). SMSFs may have an individual or corporate trustee.
Before establishing an SMSF you should closely compare their possible advantages and disadvantages
SMSFs have a number of possible advantages. These include:
- Pooled family assets - SMSFs can be a great way to pool your super assets with a partner or extended family. With an SMSF, you can have up to four members. This means you are able to consolidate multiple super accounts to create a larger pooled balance.
- Control and flexibility - the fact that the members of an SMSF are also required to act as trustees makes SMSFs more flexible than other fund types as trustees have the ability to tailor their fund’s rules and to make decisions based on the members’ needs and circumstances. This flexibility can relate to a number of issues such as in-specie contributions, payment of retirement benefits for instance.
- Investment control and choice - SMSFs offer a wider range of investment options than typical retail or industry super funds. With an SMSF, you can invest in direct shares, high yielding cash accounts, corporate debt, direct property, unlisted assets, artwork and much more. In addition, SMSF’s can acquire business real property from members.
- In addition, more sophisticated investment strategies can be implemented, such as derivatives and hedging. Other examples include small business owners leasing their business real property (that is used by their business) from their SMSF, borrowing to invest via instalment warrants and direct property investments.
- Borrowing – SMSF’s may borrow via a limited recourse borrowing arrangement to acquire assets such as a property.
- Estate Planning – keeping in mind that your will does not automatically control your super benefits, an SMSF will allow you to exercise a higher level of control over the provision of any death benefits than public offer super funds. Further to this, SMSFs can make binding nominations that do not lapse, unlike public offer super funds which have to be continually updated.
- Cost - while SMSFs are not necessarily cheaper to run than public offer super funds, the real benefit trustees enjoy is greater control of their costs. With an SMSF, you will incur certain fixed costs. You’ll be required to pay for an annual tax return and audit, as well as any ATO fees. With respect to fixed costs, the larger your SMSF balance grows the more cost effective it becomes. The total cost of running your SMSF will depend on the investments you make within the fund and whether you decide to pay for any professional SMSF services or specialist advice.
- Tax control - even though SMSFs are not subject to different tax rules to other types of super funds, a major benefit of SMSFs is the control and flexibility that trustees have over the tax position of the fund. Through either strategic investment planning (such as maximising franking credits from Australian shares) or internal structuring, tax can often be legitimately minimised.
- Asset protection - assets held in super funds, including an SMSF, are generally protected from creditors. However, it is important to note that this exception does not apply where a member makes contributions to their super fund for the specific purpose of defeating claims from their creditors.
It should be clear from the above that there are several benefits in using an SMSF to save for your retirement. However, there are certain features of an SMSF which mean it is not the ideal option for everyone. These include:
- Increased time commitment - the very nature of an SMSF requires all trustees to take an active interest in the management of the fund. It is therefore certainly not a ‘set and forget’ investment and will require a certain time commitment from you. It should be noted, however, that this commitment can be reduced by making use of specialist SMSF service providers and professional advisers.
- Costs - cost savings can be one of the greatest benefits of making use of an SMSF. However, the opposite can also be true. Investors with very minimal funds to invest and those who are not familiar with the costs and investment options involved may find managing an SMSF prohibitively expensive.
- Risk of non-compliance - where a trustee fails to maintain their fund in accordance with the legal requirements, the ATO can impose a number of penalties. Where a penalty is applied, the trustee they will generally be personally liable and they will not be able to be indemnified out of the assets of the fund. A non-complying fund may be taxed up to 47%.
- Trustee/ member moves overseas - to qualify for concessional tax treatment, an SMSF must specific requirements in relation to residency. Where trustees permanently move overseas or where contributions are made for a member while they are living overseas this could result in the fund failing the Australian Superannuation Fund requirement and so become non-complying.
- Lack of investment knowledge and financial literacy - SMSF members should have a thorough understanding of the basics of investing and adequate financial literacy and investment expertise to properly manage the fund’s assets and undertake trustee duties.
- Fraud and theft - if an SMSF trustee loses their money as a result of fraud or theft, they are not entitled to receive government compensation, as may be available to public offer funds.
- Complaints and disputes - when resolving disputes, SMSF members don’t have access to the Superannuation Complaints Tribunal (SCT), as is available to APRA regulated funds. Instead, the parties in dispute may need to commence legal proceedings to have the issue resolved by a court, which can be extremely expensive and time consuming.
- Trustee duties and responsibilities - trustees should have an understanding of super and tax laws, as they are legally responsible to ensure that the SMSF complies with those laws.
- For more information on a trustee’s duties and responsibilities, please see the module: SMSF Trustee Responsibilities.
- Possible poor and costly outcomes - if trustee responsibilities are neglected, poor investment decisions made, or too much risk taken on, poor outcomes may result – and at a considerable cost too. Unexpected events such as relationship/ marriage breakdown or a member becoming a non-resident could have serious repercussions, such as the fund becoming non-complying.
To qualify as an SMSF, you must appoint either a group of individuals or a company to act as the trustee of the fund. The trustee structure you choose will influence how your fund is administered and the cost of setting up and running your fund.
|Feature||Individual Trustee||Corporate Trustee|
Change in membership
✗ Member leaving or joining fund must be removed or appointed as trustee. This requires:
You are not permitted to act alone as the single trustee of your fund.
✓ Member leaving or joining fund must be removed or appointed as director of corporate trustee. Requires:
Change of members & ownership of assets
✗ As the assets of the fund are registered in the name of the individual trustees of the fund, the fund will be required to re-register all assets held in the SMSF each time a member is added or removed.
✓ The assets of the fund are registered in the name of the company (corporate trustee).
If there is a change of fund members, it’s not necessary to change the name on the ownership documents for each fund asset as the trustee of the fund remains the same.
Reduces risk of fund assets being mixed with personal assets or of fund assets being inadvertently sold or offered as security for a personal loan.
Borrowing to purchase property
✗ Many banks will not lend to an SMSF with an individual trustee structure.
✓ Many banks require a corporate trustee structure when lending to an SMSF
✗ Members are jointly and severally liable for their actions. This means that you may be personally held responsible for losses incurred due to the dishonest, reckless or intentional misconduct of another trustee.
Trustee personal assets not protected where sued for damages.
✓ Director’s personal assets generally protected where trustee sued for damages. Liability is often restricted to assets held within the SMSF
Cost to establish and maintain
✓ No additional costs are incurred to set up an SMSF with individual trustees.
✗ Cost of setting up company to act as a trustee can increase fund establishment costs.
ATO administration penalties
✗ ATO administrative penalties applied against each individual trustee.
✓ ATO administrative penalty only applied against corporate trustee.
TIP: In the case of a corporate trustee it is considered best practice to use a dedicated trustee company to minimise the possibility of mingling of any of the fund’s assets with other assets belonging to the company or another related entity.
As a trustee of a super fund, the trustee of an SMSF must maintain the fund in accordance with the relevant super laws and regulations. SMSF trustees also have a range of duties and obligations under general law.
General Law duties of trustees
The factors influencing trustee’ behaviour come from the interpretation by the courts, general fiduciary law and the trust deed itself. These include the duty to:
- ensure he/she has been properly appointed and familiarises themselves with the property of the trust and trust deed
- adhere to the terms of the trust and not go against the trust
- invest the trust fund properly, which encompasses:
- act impartially toward beneficiaries and different classes of beneficiaries
- not engage in speculative / hazardous investments
- act in the best interests of beneficiaries
- take reasonable advice
- adhere to the requirements of the trust as an override to any of the duties listed above
- act personally
- keep proper accounts and provide information when required
- complete and lodge any required returns for the trust
- pay correct beneficiaries by transferring trust property to the persons entitled to it
- act gratuitously (not profit from the role as trustee)
Super legislation covenants
The application super laws and legislation contains covenants (rules) that are automatically deemed to be included in the trust deed of every regulated super fund in Australia. These covenants reflect the duties imposed on all trustees under general trust law, and require trustees to:
- act honestly
- act in the best interests of the beneficiaries
- keep the assets of the fund separate from other assets
- exercise the same degree of care, skill and diligence as an ordinary prudent person in managing the fund
- not enter into contracts or behave in a way that hinders trustees from properly performing their duties or powers
- formulate, regularly review and give effect to an investment strategy for the fund
- manage reserves responsibly where these are in existence
- allow beneficiaries access to information and documents.
A trustee who has breached their duty would be liable for any loss arising from that breach. Where a trustee has failed to comply with the terms of the trust a court can act to compel the trustee to comply.
Comply with sole purpose test
The purpose of an SMSF must be one or more of the core purposes; or one or more of the core purposes and one or more of the ancillary purposes, which include:
Sole Purpose Test – Core Purposes
- provision of retirement benefits
- provision of benefits after reaching an age specified in the regulations (such as preservation age)
- provision of death benefits for one or more core purposes and one or more of the ancillary purposes.
Sole Purpose Test – Ancillary Purposes
- provision of benefits after termination of employment
- provision of benefits after leaving work due to ill-health
- other benefits approved by the regulator, such as terminal illness, severe financial hardship or compassionate grounds.
The Tax Office may consider the following an indication of a breach of the sole purpose test:
- the trustees specifically sought out the benefit
- the decision making of the trustees was influenced by the benefits
- the provision of the benefit imposes a cost on the fund
While the Australian Tax Office is the principal regulator of SMSFs, other government bodies such as the Australian Securities & Investments Commission and the Australian Prudential Regulatory Authority also have regulatory roles in relation to SMSFs to the extent that the legislation they administer contains provisions relevant to SMSFs and the provision of SMSF advice.
Australian super fund
The SMSF must meet the definition of an ‘Australian super fund’ at all times in the income year to remain complying and so receive the taxation concessions afforded to super funds. The three tests to determine if a fund meets the definition of an Australian super fund are:
- The fund was established in Australia or any asset of the fund is situated in Australia.
- The central management and control of the fund is ordinarily in Australia.
Central management and control involves the strategic and high level decision-making processes and activities of the fund, for example:
- formulating, monitoring, reviewing, updating or varying the investment strategy
- formulating a reserve (if any) management strategy
- determining how assets are used to fund member benefits.
- The fund meets the ‘active member’ test. An active member is one that contributes to the fund or contributions have been made on their behalf.
A fund may have no active members.
If the fund has active members, at least 50% of one of the following amounts must be held by active members who are Australian residents:
- the total market value of the fund’s assets attributable to those super interests held by active members
- the total amount that would be payable to or in respect of active members if they voluntarily left the fund and so ceased to be members.
The above tests impact members who temporarily or permanently leave Australia and cease to be Australian residents. However, it is possible for a member who plans to live overseas for a period of time to pass the ‘central management and control’ test, provided they leave Australia with the intent to return.
Australian Taxation Office
The Australian Tax Office (Tax Office) is the principal regulator of SMSFs, aiming to:
- ensure SMSFs comply with the relevant provisions of the super rules, legislation and regulations
- provide information and forms to assist with set up and ongoing management of SMSFs
- take enforcement action where required for breaches of the super laws/ rules
- SMSF auditors are undertaking their checks on funds to the required standard.
However, the Tax Office does not focus on the prudential regulation of SMSFs as the members, being trustees, are responsible for protecting their own interest in their fund.
Australian Securities & Investments Commission
The Australian Securities & Investments Commission (ASIC) is responsible for regulating the relationship between consumers (such as SMSF trustees) and providers of financial products and services, such as financial advice and financial product providers; to ensure compliance with the Corporations Act 2001, such as disclosure.
In relation to SMSFs, ASIC is responsible for the registration of SMSF auditors and maintaining a register of these.
Australian Prudential Regulation Authority
The Australian Prudential Regulation Authority (APRA) is the regulator of all super funds other than SMSFs. Therefore, APRA does not technically have a significant role in relation to SMSFs other than in relation to data collection.
The Tax Office and APRA have entered into a Memorandum of Understanding to ensure the consistent application of super law by both agencies. This includes confirming that both agencies will consult each other on any proposed policy statements, technical documents, legislative modifications, publications, circulars or press releases which will have an impact on either agency.
Therefore, any relevant prudential standards, circulars and guidance notes that are published by APRA will also apply to SMSFs as both regulators have agreed to apply a consistent approach.
SMSFs are subject to numerous legislation, including the:
- Superannuation Industry (Supervision) Act 1993 (‘SISA’)
- Superannuation Industry (Supervision) Regulations 1994
- Income Tax Assessment Act 1997
- Income Tax Assessment Act 1936 and 1997
- Taxation Administration Act 1953.
Trustees also have an obligation to maintain their fund in accordance with the clauses of their fund’s trust deed. However, where a fund’s trust deed conflicts with the super laws, the super laws will take precedence and override the fund’s trust deed.
You must prepare an investment strategy for your fund that takes into account the members’ needs and circumstances before any investments can be made. The investment strategy needs to:
- set out your fund’s objectives, which should be meaningful and measurable, and
- outline the investments that will be made to achieve the objectives.
The trustees are also required to consider whether your fund should take out insurances on behalf of the members.
As soon as your fund is legally set up you should register it with the ATO and elect for the fund to be regulated by them. This election must be done within 60 days of establishing the SMSF otherwise the Tax Office may not accept your registration.
Funds that are not regulated cannot claim the super tax concessions associated. Members will also not be able to claim deductions for contributions that they have made to the fund. Once you have made the election it is irreversible and the fund will remain regulated until it is wound up.
Once you are officially registered with the ATO your fund will be allocated a Tax File Number (TFN) and an Australian Business Number (ABN). This will allow you to open a bank account and to carry out normal business functions.
The ATO will also place details of your fund on the Australian Business Register and on the ‘Super Fund Look-up’ website.
These entries will allow other super funds to ascertain whether you are operating a compliant fund for the purpose of transferring super benefits.
When establishing an SMSF with mysuper247, we automatically register your SMSF to be regulated by the ATO.
A super fund must register for GST where its annual turnover is greater than $75,000. For super funds, turnover includes income from the leasing of commercial property owned by the fund. When you establish a fund with mysuper247 we will not register your fund for GST, if you want to register for GST please contact us and we can arrange this for an additional fee of $99 per annum that will be payable in monthly instalments.
Amounts that are not included in the turnover of an SMSF include:
- member contributions
- investment income (other than income from the leasing of commercial property)
- administration fees
- fees charged for life and total and permanent disability insurance
- rents from the leasing of residential property
- receipts from the transfer of capital assets.
Most SMSF’s will not have to register for GST.
Cash contributions can be made into your fund. Money can also be rolled over (transferred) directly from another complying super fund. The fund that you transfer from will need to establish that your SMSF is a complying super fund by looking up your fund’s details on the Super Fund Lookup website. It would therefore usually only be possible to rollover money to your fund when it is up and running.
Concessional contributions are contributions where a tax deduction has been claimed, either by an individual or by an employer. Concessional contributions are commonly referred to as before tax contributions and include employer contributions, salary sacrifice contributions and personal contributions for which you claim a tax deduction. Tax is payable on concessional contributions made to a super fund at the rate of 15%. This is commonly referred to as contributions tax.
Types of Concessional contributions
Concessional contributions include the following:
- employer contributions
- salary sacrifice contributions
- personal contributions for which a tax deduction is claimed.
Employer contributions include the mandatory super guarantee (SG) and award contributions and voluntary (non-mandatory) employer contributions made in addition to SG and award contributions.
Salary sacrifice contributions
These contributions are made by your employer based on instructions from you. Salary sacrifice contributions are voluntary super contributions made by an employer over and above their SG obligations, in lieu of salary. These contributions are made to a super fund on your behalf instead of to you, as an employee receiving that amount as salary.
Personal contributions where a tax deduction is claimed
These voluntary contributions are made by you to a super fund, on which you claim a tax deduction for. You are only allowed to claim a tax deduction for personal contributions if you satisfy the 10% Rule.
You can only claim a tax deduction for a super contribution if less than 10% of your total income was derived as an employee from the following sources:
- assessable income (gross income before deductions), such as salary, investment and business income and net capital gains
- reportable fringe benefits
- reportable employer super contributions such as salary sacrifice contributions.
ATO Tax Deduction Notice
If you intend to claim a tax deduction for a personal concessional contribution, you will need to complete the relevant form from the Tax Office - Notice of intent to claim or vary a deduction for personal super contributions.
Personal contributions made into a super fund from after tax income or your bank account, on which no tax deduction is claimed are known as non-concessional contributions.
Other amounts are classed as non-concessional contributions, including the following:
- spouse contributions
- concessional contributions that exceed your concessional contribution cap (limit), and where you choose not to release this excess from your super fund
- a specific portion of a foreign pension transfer
- capital gains tax (CGT) contributions above the CGT cap threshold.
No tax is payable on a non-concessional contribution either at the time of contribution or when this amount is later withdrawn, for example, upon retirement.