Guide to self managed super funds (SMSFs)

A self managed super fund (SMSF) is different from a standard retail or industry super fund as it's a fund that you contribute to, invest for and manage yourself.

In this article, you will get an overview of what an SMSF is, how an SMSF works and how it's different to a typical super fund.

If you've already got an SMSF set up, we suggest you take a look at our guide on setting an investment strategy for your SMSF instead.

What is an SMSF?

An SMSF is a super fund you manage yourself and is regulated by the Australian Tax Office (ATO). The purpose of the SMSF is the same as a typical super fund; to provide members money in retirement. SMSFs can have up to 4 members, who are often family members (although members don't need to be related at all).

SMSFs come with the freedom and flexibility to invest your super however you want, though there are a number of costs involved and legal obligations to meet.

How is an SMSF managed?

If you start an SMSF, you will be both a member of that fund as well as a trustee (unless you decide to appoint a company to act as your trustee – more on this in our SMSF trustee guide). As a trustee, you will have control over where your superannuation balance is invested and will be responsible for the day-to-day running of the fund.

As a member, you will benefit from the fund's investment performance and be able to use the money generated from the SMSF to help fund your retirement when you're no longer working.

Your employer will pay your super payments into your SMSF, then it's up to you to decide how you'd like to invest that money. When you're retired you can start to access the money generated by these investments to fund your lifestyle.

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What are the benefits of an SMSF?

An SMSF may be right for you if:

• You have solid investment experience and have a good understanding of financial markets.
• You want to invest your superannuation in less conservative options beyond shares and cash.
• You want full control over where your superannuation is invested and are comfortable with a higher level of risk.
• You have enough time to manage the fund.
• You have some legal expertise and are confident you can meet all the legislative and tax compliance regulations set by the ATO.
• You have a large superannuation balance.

Expert insight: Think carefully before setting up an SMSF

"While SMSFs are often promoted by advisers and accountants as the ultimate choice for those seeking control and flexibility over their superannuation, they are not suited for everyone. The benefits of SMSFs come with significant responsibilities, costs and risks that need careful consideration. Think of it like owning a car. While car ownership offers freedom, the ease and practicality of alternatives like public transport or rideshare may outweigh the complexities and expenses of car ownership."

Antony Selby

Financial adviser, Financial Spectrum

What are the risks and disadvantages of an SMSF?

There are a number of disadvantages that might mean an SMSF is not suitable for you. These include:

• SMSF trustees are solely responsible for what happens with the fund and will be held responsible for breaches. This is the case whether you seek professional advice or not.
• You need to have a high starting balance to make an SMSF worthwhile. According to a report by the 2022 report by the SMSF Association, a starting balance of $200,000 was found to be a good benchmark.
• Running an SMSF is very time-consuming and complicated. There are options to lessen this burden, such as hiring an SMSF administrator, but this comes with a cost.

How do SMSF rules, admin and compliance work?

There are many rules applied to SMSFs and how you can invest. Here are some basic rules you need to be aware of:

• Your SMSF must have no more than 4 members
• Your SMSF must be registered in Australia with the ATO
• Members cannot be employees of other members (unless they're related)
• The SMSF must only be used to provide benefits to members in retirement
• Your SMSF needs to have a set investment strategy that is documented, kept on file and continually reviewed
• The SMSF assets have to be kept separately from your personal or business investments and those of the other members
• All investments made by the SMSF must pass the 'sole-purpose test', meaning the investments must be purely to provide retirement benefits to members.
• Property investment made by the SMSF must follow the 'arm's length' rule (you can't live in it or rent it to direct family members for cheaper rent)
• Your SMSF must be audited by an approved SMSF auditor each financial year.

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How to set up an SMSF

Here's how to set up an SMSF in 6 steps.

Step 1: Hire the professional support you need.

An accountant, tax agent or administrator will help set up the fund, manage its various accounts and finances and ensure you're meeting your reporting and admin obligations with the ATO. A legal practitioner can help set up your trust deed correctly (more on this in Step 3), and ensure your fund meets its ongoing legal requirements. You're not obliged to use a financial adviser but you might find it valuable to get professional advice regarding your SMSF's investment strategy.

Most importantly, you'll need to appoint an approved SMSF auditor to audit your fund each year. This is a requirement of all SMSFs.

Step 2: Decide your trustee structure

In an individual trustee structure, the SMSF assets are registered in the name of the individual trustees (the fund members themselves). However, with a corporate trustee structure, the assets are registered under a company (who acts as the trustee), and the SMSF members act as directors.

An individual trustee structure is lower in management costs but has more admin. A corporate trustee structure is easier if the fund frequently changes members, as assets are held under the company name rather than the individual trustees' names.

You can read more about SMSF trustee structures and trustees' responsibilities in our separate guide.

Step 3: Create and sign the trust deed and trustee declaration.

The trust deed is a legal document that outlines the rules of the fund, how it will be operated and lists all members. An accountant, administrator or tax agent must prepare the trust deed and ensure all SMSF members sign and date it. The trustee declaration is another document that highlights the responsibilities of all trustees as regulated by the ATO. Each SMSF trustee and director will sign their own declaration within 21 days to keep on file for a minimum of 10 years.

Step 4: Register your SMSF

You must register your SMSF with the ATO within 60 days. You can register for an Australian Business Number (ABN) and Tax File Number (TFN), and elect the ATO to regulate your SMSF through the Australian Business Register. Once you register the SMSF with the ATO, you can register for an electronic service address. This is an Internet address for your SMSF that your fund administrator will provide you. Your employer will use this address to send contributions to the fund.

Step 5: Open a bank account for your SMSF

You need to open an SMSF bank account in your fund's name that is separate from all your members' personal bank accounts. This account is used for the fund's general cash flow, eg to pay any expenses or penalties, and receive investment returns such as rental income.

Step 6: Roll over your super balance (if you want to)

You can now roll over any existing super you might have with another super fund into your new SMSF. You aren't required to do this by law, but it's definitely a good idea so you're not paying multiple sets of fees across numerous funds. Simply fill in a 'Rollover Initiation Request form (available on your fund's website) that transfers your balance over into your new SMSF.

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How to close your self managed super fund

If one member of the SMSF wishes to leave the fund, they can do this at any time. The member will need to organise for their superannuation benefits to be rolled over to their new fund. If all members wish to close the SMSF, here are the necessary steps you should take:

1. All members agree. Make sure that all members agree to close the fund, and document this so you have a record, should you need it later.
2. Check the trust deed. The first thing you should do if you wish to close your SMSF is check the trust deed for any wind-up instructions and requirements.
3. Roll-over super. You will need to roll over each member's super balance into another super fund. To do this, it may involve selling assets owned by the SMSF.
4. Final audit. You need to have a professional final audit completed by an approved SMSF auditor. They will check everything has been done correctly and let you know of any outstanding actions.
5. Lodge annual return. You need to lodge your SMSF annual return with the ATO and pay any outstanding tax liabilities.
6. Confirmation. When the ATO has checked you have met all your tax responsibilities you will receive a letter confirming that your SMSF has been closed and its ABN cancelled. You can now close your SMSF bank account.

More handy SMSF guides

SMSF setup costs

Read this guide to take a closer look at how much it costs to run an SMSF and how much money you need to invest to make it a viable option for your retirement savings.

How to plan your SMSF investment strategy

Find out how to effectively plan and set up your investment strategy, what you can invest in through your SMSF and all the factors you need to consider.

SMSF trustee structure

Learn about the two different types of SMSF trustee structures, decide which one is right for you and better understand your duties and obligations as an SMSF trustee.

How do contributions and rollovers work with an SMSF?

You can contribute to your SMSF by rolling over your current super balance into your new fund, having your employer contribute the super guarantee into your SMSF and/or making personal contributions yourself.

How to roll over your super

It's a good idea to roll over your current super balance into your SMSF, to save from paying multiple fees. You can easily do this online in less than 10 minutes. Plus, learn more about the benefits of making contributions to your SMSF.

Read this guide

Ryan is the founder and CEO at Tribeca Financial, a financial advice firm that listens, learns and then gets you on track. He's an accomplished financial advisor and financial wellbeing coach with over 15 years of experience.

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To make sure you get accurate and helpful information, this guide has been edited by Richard Whitten and reviewed by Ryan Watson, a member of Finder's Editorial Review Board.

Written by

Alison Banney

Editor

Alison Banney is the money editorial manager at Finder. She covers all areas of personal finance, and her areas of expertise are superannuation, banking and saving. She has written about finance for 10 years, having previously worked at Westpac and written for several other major banks and super funds. See full bio

Alison's expertise

Alison has written 625 Finder guides across topics including:

• Superannuation
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