What is a Self Managed Super Fund and How Does It Work?

Self Managed Super Funds control $868.7 billion in assets throughout Australia. These funds represent 26% of all superannuation assets. 

More than 605,000 SMSFs manage retirement savings for over 1.1 million members, making them a crucial part of Australia’s superannuation system.

A self managed super fund differs from traditional super funds in several ways. 

Regular super funds rely on professional trustees to manage investments, but SMSFs put you at the helm as both member and trustee. 

Your role includes making all investment decisions and ensuring legal compliance. Most trustees spend more than eight hours each month managing their funds effectively.

Let’s dive into SMSFs’ structure and day-to-day operations. This guide will help you understand setup requirements and management duties. You’ll also discover if an SMSF aligns with your retirement goals.

What is a Self Managed Super Fund (SMSF)?

A Self Managed Super Fund (SMSF) is a form of retirement savings. The Australian Taxation Office (ATO) regulates these private superannuation funds where members also serve as trustees.

Your SMSF can include up to six members. Most members come from the same family, though business partners can also team up. 

Many people set up SMSFs with their spouse or partner, while some run them solo. Every member must act as a trustee or become a director of the corporate trustee. 

This means everyone takes equal responsibility for decisions and for following the law.

You can structure your SMSF’s trustee arrangement in two ways:

• Individual trustees – members serve as trustees with assets in their names
• Corporate trustee – a company becomes the legal trustee with members as directors

Your SMSF works as a legal tax structure that aims to secure your retirement. Trustees must:

• Act honestly in fund operations
• Show skill and care in management
• Protect all members’ interests
• Keep fund and personal assets separate
• Create and follow an investment strategy

SMSFs differ from APRA-regulated funds mainly in how much control you have and what you need to do. 

Regular super funds have professional trustees handling everything, but SMSF members make their own investment choices, follow super laws, and work directly with the ATO.

These funds must follow strict guidelines. Trustees can only access their benefits under specific conditions, like reaching retirement age or paying dependents after death. 

Breaking these rules leads to heavy penalties – from administrative fines to mandatory education or losing the fund’s compliance status.

How Does a Self Managed Super Fund Work?

SMSFs operate through four main functions: accepting contributions, managing investments, following regulations, and paying benefits.

Contributions and Rollovers

Your SMSF journey starts with funding. The fund accepts employer contributions, personal contributions, and rollovers from other super funds. 

Trustees must document all contributions and add them to member accounts within 28 days after the month-end they receive them. 

SuperStream handles all rollovers electronically within 3 business days after getting the required information – this has been mandatory since October 2021.

Investment Management

SMSFs give you much more flexibility with investments than retail funds. Your fund can invest in:

• Shares (Australian and international)
• Property (residential and commercial)
• Cash and term deposits
• Bonds and fixed income
• Physical commodities
• Collectibles (with restrictions)

The rules around these investments are strict. You must conduct all transactions at “arm’s length” with market value prices. The fund usually can’t lend money to related parties or buy their assets. Borrowing options also face heavy restrictions.

Accessing Benefits

Members can only access their benefits after meeting a condition of release or retirement. Your super fund can be

• Pension or a recurring income
• A one-time payment of a hefty amount
• A combination of a pension and a lump sum amount

Members aged between preservation age and 64 who still work can use a Transition to Retirement Income Stream (TRIS). This gives limited access to super while working. 

TRIS needs minimum yearly payments but caps maximum withdrawals at 10% of the account balance.

The most important rule is that SMSF operations must serve one purpose – providing retirement benefits to members. Personal use of fund assets or breaking investment rules can lead to big penalties from the ATO.

Setting Up and Running an SMSF

Setting up an SMSF needs careful planning and strict regulatory compliance. The proper setup involves several key steps to meet superannuation law requirements.

Your first decision will be the trustee structure—either individual trustees or a corporate trustee. Individual trustees cost less and work simpler at the start. 

A corporate structure gives better asset protection and makes administration easier when members change. Corporate trustees should budget around $920 for ASIC fees plus $620 for documentation.

After choosing your structure, you must:

• Create a trust deed that sets out the fund’s rules and operation
• Select trustees who know their legal duties
• Register with the ATO within 60 days of setup
• Set up a separate bank account under the fund’s name
• Get an electronic service address (ESA) to receive employer contributions
• Create a documented investment strategy
  

Your SMSF comes with ongoing compliance tasks that take about 100 hours yearly or 2 hours each week. 

Each year brings the need to hire an independent SMSF auditor who checks financial statements and confirms compliance with superannuation laws.

SMSF costs change based on how complex your fund is. You’ll pay the ATO supervisory levy (about $400 yearly), accounting fees, audit costs ($460-1,070), and possible administration service fees.

Most trustees work with professionals to help manage their funds. Seeking professional SMSF advice is highly recommended by the ATO, who suggests getting help from:

• Financial advisers to develop investment strategies
• Accountants to handle financial systems and statements
• Tax agents to lodge returns and provide advice
• Legal experts to update trust deeds and ensure compliance

Record keeping plays a crucial role—you must document all transactions, member contributions, meeting minutes, and investment decisions. These records help satisfy audit requirements and ATO regulations.

Conclusion

Self Managed Super Funds give you amazing control over your retirement savings. This freedom comes with some of the most important responsibilities. 

You must think over time commitments, costs, and legal obligations before switching from traditional super funds.

Running an SMSF well takes about 100 hours each year. You’ll also need to work with financial advisers, accountants, and legal professionals. 

These mutually beneficial alliances help you stay compliant and tap into the full potential of your investments within regulatory limits.

Your role as both trustee and beneficiary creates unique obligations. 

This position means you must follow superannuation laws, keep detailed records, and make investment decisions that line up with the sole purpose test – securing retirement benefits for members.

A thorough review of your personal situation, financial goals, and ability to manage funds is crucial before starting an SMSF. 

People who enjoy hands-on retirement planning often find SMSFs rewarding. Others might be better off with traditional super fund arrangements.