Self-managed super funds (SMSFs)
Are you thinking of managing your own super?
Super funds, such as LUCRF Super, are regulated by the Australian Prudential Regulation Authority (APRA). We take responsibility for:
- day-to-day administration of the fund
- all investment decisions that the fund makes
- ensuring that all legislative obligations are met.
In comparison, an SMSF is a private super fund which you need to set up and manage yourself. SMSFs can have up to four members who must be trustees of the fund or, where a corporate trustee is used, directors of the corporate trustee. Responsibility for the fund lies completely with you and the other trustees or directors (trustees 1). SMSFs are regulated by the Australian Taxation Office (ATO).
What are the costs of managing an SMSF?
It’s important to have realistic expectations about both the set up and ongoing operating costs related to managing your own super because, as trustee, you’re responsible for ensuring all costs are paid.
In 2018, the average operating cost of running an SMSF was $6,152. The median cost was $3,923.2 Operating expenses includes deductible and non-deductible expenses reported at the following SMSF annual return labels: approved auditor fee, management and administration expenses, other amounts and SMSF supervisory levy. It doesn’t include costs such investment expenses and insurance premiums.
You should consider the balance of your SMSF. A recent Productivity Commission report on superannuation 3 determined that many smaller SMSFs (those with balances under $500,000) have delivered significantly lower returns on average than larger SMSFs.
You should also consider whether the costs associated with running your own fund will be competitive compared to investing in an APRA-regulated fund.
How do they perform?
As an example, the table below shows that during the 2014 to 2018 financial years, the average annual return of our default MySuper Balanced option outperformed the average return of SMSFs.
|FUND||Average annual return for the 2014 to 2018 financial years 4|
|LUCRF Super MySuper Balanced (default)||8.41%|
The SMSF sole purpose test
Your SMSF needs to meet the sole purpose test to be eligible for tax concessions normally available to super funds. Essentially, your fund needs to be maintained for the sole purpose of providing retirement benefits to your members, or their dependants.
If you fail the sole purpose test there are serious consequences. Not only could you lose your concessional tax treatment, you and the other trustees could face civil and criminal penalties. Criminal penalties for dishonest or fraudulent contraventions - such as knowingly accessing your super early, or allowing illegal access to your super - may include a fine of up to $420,000 and/or up to five years’ imprisonment.
Is an SMSF the right option for you?
What are the advantages?
There are benefits to managing your own SMSF, but you must weigh the costs and benefits. Here are some common reasons why people choose SMSFs:
- Investment choice: An SMSF provides greater investment choice. For example, you can invest directly into shares, fixed interest and property investments. It’s worth remembering, however, that there are prohibitions on certain investments and you’re responsible for understanding what they are.
- Greater investment flexibility: You can have more control over how and when you acquire and sell your investments. If you commit time to your SMSF, you can adapt to market changes quickly.
- You can have an additional three others in your SMSF: By having more members in your SMSF, you may be able to invest in opportunities that wouldn't be available if you were investing on your own. They can also offer greater flexibility with your estate planning needs.
- Effective tax management: You’ll have control and flexibility over your investment decisions. You'll also have the ability and means to consider tax consequences when managing them.
What are the disadvantages?
While there are benefits of an SMSF, the technical and administrative responsibilities are burdensome. Some of the disadvantages can include:
- You’re responsible for decisions: You’re legally responsible for every decision and investment that your fund makes. You also need to be up-to-date and act in accordance with all relevant laws. It's important that you’re aware of any regulatory changes and ensure that your SMSF complies with them.
- It’s time consuming: Some of the common activities you’ll need to do if you take on an SMSF include developing and maintaining an investment strategy, researching investments, reporting (which can include lodging an annual return with the ATO), coordinating a financial audit of your SMSF and keeping accurate and accessible accounting, tax and super records.
- There’s no independent umpire: If something goes wrong, you won’t have access to the Australian Financial Complaints Authority and problems will need to be resolved between yourself and the other trustees.
- You need expertise: You’re responsible for every investment decision, which ultimately requires a degree of expertise in how to manage investment risk and choose investments. This can be one of the hardest aspects of running an SMSF.
Ask yourself the following questions if you’re considering an SMSF.
- Do I fully understand all the legal responsibilities that I’ll take on as a trustee?
- Do I have the time, expertise and motivation to actively manage my super?
- Am I confident that I have the expertise to create and implement an investment strategy?
- Is my superannuation balance large enough to make it worthwhile, considering all fees and expenses involved?
- If something goes wrong, am I comfortable with not having access to the Australian Financial Complaints Authority to resolve disputes?
Meet Bev and Dick. They’ve been married for 56 years and are both 78. We chatted with them about their super journey, why they went into an SMSF and why they eventually chose to become LUCRF Super members.
What did you both do for a living?
Bev: We were both teachers. I taught infants and Dick taught high school. In 1988, Dick retired early from the school yard, but soon saw an opportunity to start his own business, repairing and designing industrial cleaning machinery. After a health scare, he sold up and officially retired. I retired in 1997.
The rules around super were quite different when you were both younger. How did that impact you?
Dick: Well, we were both teachers and so we didn’t have a lot of money, but we wanted to buy a house. In 1971, we were able to cash in Bev’s super, which was allowed at the time, because I still had mine. We used the funds to purchase our first house. Well, actually a block of land.
Who was your super with?
Bev: We were both with NSW State Super which was the default for teachers at the time.
Dick: With the kick starter of funds we were able to do more things. We bought houses and renovated them, or we turned them into flats. We did that solely from Bev’s super. Which is how we got into the second phase of super.
Dick: That’s right. To get the tax concessions we had to have a super fund to manage it. We thought we were the best ones to manage our own money.
Bev: He didn’t trust anyone with his money except himself really!
Fair enough! Did you enjoy it?
Dick: We did for a while. It was especially exciting when things were going well! I’d sometimes log on to find I’d made $10,000 in one day, although that didn’t happen often.
What was involved with managing it?
Dick: Because I enjoyed it, I spent a lot of time on it. I’d probably spend about 10 hours a week managing it, and that’s not including the research involved.
Bev: He undertook a lot of research to prepare himself.
Dick: Including the research, you could probably double that time. We also used to subscribe and pay for shares advice; we had a wonderful expert who helped. As a result, we sold most of our shares before the GFC which was when things took a turn.
Dick: When we went into it, we knew the costs with managing it. But later, I guess as things started to change, the costs became a lot more. We had a lot of accountants who weren’t great at giving advice or doing the right thing. We went through maybe half a dozen. The costs were going up and the audits went up, but we weren’t making as much money and it didn’t feel worth the time or hassle. We decided then to wind up our SMSF and look at other options.
What research did you do?
Bev: We looked at a few options. I won’t name names, but we looked at a Big 4 bank. We spoke to them on the phone and looked online to see how they’d performed, and they wouldn’t give us any figures. I ended up bringing home a Money magazine from the library and we saw LUCRF Super had performed well on foreign investments. We were impressed that they were being transparent on their performance figures. We did more research online and we were happy to wind up our SMSF and roll into LUCRF Super.
Do you prefer it?
Dick: If we had our time again, we’d happily have an SMSF for a while but as we’ve gotten older, we’re happy not to worry about our super and have it managed for us. We’re happy to stay with LUCRF Super.
The ATO has strict rules around investing for an SMSF. For example, you can’t use an SMSF to buy a home that you or your family intend to live in. You also can’t buy an investment property for your family to lease from you. Other assets that are prohibited for an SMSF investment include:
- a holiday home for you or your family to use
- valuable artwork for your home
- any type of vehicle for your own use.
You also can’t use your SMSF to get early access to your super. Like other superannuation funds, money in an SMSF can only be accessed once you meet a condition of release such as:
- reaching your preservation age and retiring or commencing a transition to retirement income stream, or
- reaching 65 years of age.
However, unlike APRA-regulated funds, you cannot access your super early due to circumstances such as financial hardship or compassionate grounds.
Your preservation age varies depending on the year you were born. Find out what it is here.
1 We use the reference “trustees” in this article for ease of understanding. However, if the SMSF has a corporate trustee, the reference to “trustees” should be “directors”.
2 Self-managed super funds: a statistical overview 2017–18, Australian Taxation Office, Table 25: Expenses, viewed 22 August 2020
3 Australian Government Productivity Commission, Superannuation: Assessing Efficiency and Competitiveness, 21 December 2018. p 13.
Past performance is not a reliable indicator of future performance.
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