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What is a Self-Managed Super Fund?

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February 10, 2023

Self-managed superannuation funds are private funds with no more than six members. Self-managed super funds are different to industry and retail funds. When you operate your super funds, you invest in your SMSF with the funds you invest in retail or business super funds.

The investment and insurance are your choices. You are the trustee of your funds, or you can hire a professional trustee. In both cases, you will be responsible for the funds. Though taking control of your funds can be attractive, it comes with risk and requires a lot of work. We suggest you create your super funds only when you know the consequences and have full knowledge. To understand more about what is a self-managed super fund? Here is a description of everything.

How does an SMSF Work?

SMSF forms to give the members financial benefits in their retirement and to their beneficiaries after their death. They obtain their TFN( tax file number), ABN( Australian business number), and bank account number. It enables them to take contributions and cash transactions. The trustee of the funds can control all the funds.

How Do You Set Up a Self-managed Super Fund?

To know how to set up a self-managed super fund, here are the steps to be followed:

1. Select an SMSF structure – the structure of SMSF needs to suit the members. The requirements of your funds are changed according to the structure of SMSF. It is only you who has to decide what to have:

  • Single member fund or multiple member funds
  • The individual trustee or Corporate trustee

Difference Between the individual trustee and Corporate trustee Structure

Individual Trustee Structure  Corporate Trustee Structure
  • They must have two members.
  • One of them should be a fund member.
  • And member cannot be the employee of another trustee.
  • They can have one or more directors.
  • One of them should be a fund member.
  • If two directors are there, a member cannot be the employee of the other director.
  • Members can be two – six.
  • Each trustee is a member.
  • Each trustee is a fund member.
  • Members can be two – six.
  • Each member should be a director.
  • Each director should be a fund member.
ESTABLISHMENT COST The funds are cheaper as you do not have to set up a different company to act as a trustee. There are ASIC charges so set up

  • Fees to register a trustee.
  • An annual review fee.
REPORTING Reporting duty is easier. But the change of trustee can lead to paperwork. There are a few more reporting duties.
  • If you have two trustees and one of them dies or leaves, you have to appoint another trustee in place of it.
  • If there is any change in trustee you need to inform ATO in 28 days.
  • If the director leaves or dies, the trustee does not change. It can be operated with one director.
  • If there is any change in director, you need to inform ATO and ASIC in 28 days.
RULES TO BE FOLLOW Trustee has to follow the rule: The tax law, the super law, and the fund’s trust deed Director has to follow the rules: The tax law, the super law, the fund’s trust deed, the company’s constitution and corporation act 2001.

2.  Appointment of the trustee – to appoint a trustee, you need to understand your responsibility. So those penalties are not imposed on you and your funds.

Appointment of the trustee

3. Creating a trust deed – they will legally establish your funds. Your trust deed is a legal document that sets the rules for establishing and operating your funds. Your trust deed cannot overrule the law, they form governing rules when your trust deep comes together with super law.

4. Check your funds that it is Australian super funds – to receive tax concession and to comply with super funds, your SMSF need to be an Australian super fund during the financial year.

5. Hold assets – your funds need to hold the assets. Because it will allow us to officially register the SMSF and open a bank account.

6. Registration of SMSF – registration is necessary so that it can operate effectively and receive tax concession.

7. Bank account – a bank account needs to be set up for your funds so that all the money and assets remain separate from personal and business finances.

8. Electronic service address – to receive employee contributions, an electronic service address will be required.

9. Investment strategy – everyone who needs to start an investment should have an investment strategy.

10. Plans for the future – always have a plan for the future to protect the fund members.

11. Exit plan – always have a plan for when to exit.

This is the way to Set up a self-managed super fund in Australia.

Who can be a member?

ATO (Australian tax office) puts rigorous regulations for SMSF compliance. You must fulfill specific requirements to become a member of SMSF. It’s crucial to understand the qualifying standards for both trustees and members. It is essential to recognize the procedures involved in establishing self-managed super funds in Australia.

To become a member person needs to fulfill the following criteria:

1. A person must voluntarily join and accept the necessary responsibilities.

2. Financial conditions should be stable means:

3. Not to be disqualified from SMSF

4. Not filed for bankruptcy

5. Not to have any connection of employer/employee unless they are related

6. Accountable to follow superannuation funds.

Why Have an SMSF?

To know more about what is a self-managed super fund and why to have SMSF. Here, you will know the advantages of SMSF. So that you will know why we require SMSF.

Investment strategy

  • Choice of investment – they provide a larger variety of investments as compared to other investments. With a few exceptions, SMSF can invest in almost anything. Direct real-estate investment falls under this category. An SMSF can borrow money to buy assets. But now it is a bit difficult as banks have removed their product from the market.
  • Flexibility and supervision – as the members are also trustees there will be flexibility to follow the rules to pursue their needs and requirements. By following the market changes, you need to make fast changes in your investments.
  • Tax management – it has the same tax rate as the other superannuation funds.
  • Accountability – as a trustee and member you have to be more aware and accountable. This is not a case of industry or retail super funds.
  • Amount to pursue your funds – initially, it s only used by wealthy people but now everybody can use this SMSF. These are very effective nowadays.
  • Protect you from creditors – creditors are prohibited from accessing a person’s superannuation. Unless someone has intentionally transferred their assets into SMSF to avoid paying the creditors.

Are there Certain Rules for SMSFs?

There are many rules for the SMSF and their trustees.

  • An Smsf auditor has to be appointed to audit your fund. And you need to pay the auditor.
  • Keep a record of at least five years and in some cases for ten years.
  • Keep your return ready annually.

Keep a detailed investment strategy to review.

Some Disadvantages of SMSFs

  • Live overseas – major members of SMSF reside in Australia. if you have any plan to move overseas this will make your fund non-compliance with the law.
  • Time investment – there is a huge time investment in SMSF. as you are the member and trustee, you have to look upon the funds and their management.

    The Risks and Responsibilities of SMSFs

    Some rigorous regulations govern SMSFs. As a trustee of superannuation, you will be liable for your investments. All the members are responsible for complying with the law. The responsibilities of SMSF lie in themselves. There comes the duty and risk with the SMSFs.

  • Time-consuming – starting your superannuation can be time-consuming. Though you can appoint a service of SMSF administration, then also have to look after the work. There are many activities that need to be accomplished throughout the year.
  • Requirement of skill – all superannuation members have to be skilled enough to manage their funds. They should have an understanding of the investment market. It is vital because the trustee has to make and execute the investment decisions. When you have SMSF funds, you need a regular review of your investment strategy. This will help you identify the risk, liquidity, solvency, and requirement of the funds.
  • Penalties for non-compliance – you are the trustee of your superannuation funds. You will have an obligation to comply with the rules. If you fail, the ATO(Australian taxation office) can pit a penalty for non-compliance. Always keep in mind that the liability will be severe for serious misconduct.
  • Scarcity of statutory payment – if SMSF suffers any kind of loss, the members of the SMSF fund will not be eligible for compensation. The losses are the result of theft or fraud in the investment assets.
  • Key to objection mechanism – There are many dispute resolution procedures, such as the External Dispute Resolution scheme. This is not available for SMSF members for their benefits. At the member’s expense, the conflict can be settled through an alternative dispute resolution procedure.
  • A consequence of insurance – the expense and complexity of obtaining life and disability insurance may be more for SMSF funds than the bigger superannuation funds.

Also Read: 10 Basic Tips To Manage Your Super Fund

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