Things to think about when considering an SMSF

There were more than 590,000 Self Managed Super Funds (SMSFs) in Australia as of June 30 20171. Maybe you’re thinking about starting one.

With so much information out there, what do you need to consider when deciding if an SMSF is right for your needs? The time and cost it takes to start and run an SMSF, as well as the expertise needed to deliver returns are key factors.

What is an SMSF?

An SMSF is a type of private trust created and operated to provide retirement benefits to its members. If you set up an SMSF and take on the role as the trustee of an SMSF, you’re ultimately responsible for:

  • Ensuring your fund complies with all the super and tax laws
  • Making investment decisions for the fund.

SMSFs are regulated by the Australian Tax Office (ATO) and do not enjoy the same regulatory oversight as funds like AustralianSuper. For example, in cases of investment fraud or theft, APRA-regulated funds are able to apply to the government for compensation (funded through an industry levy) while SMSFs cannot. In addition, SMSFs are also outside of the Superannuation Complaints Tribunal, where disputes over issues such as who receives a death benefit can be resolved at no cost2.

The ATO states that there are strict rules related to the management of a SMSF. For example, it is illegal to use an SMSF to get early access to your super, buy a holiday home or buy artworks to decorate your house3. Members of an SMSF can only access the money in the fund when they have reached ‘Preservation Age’4.

Understanding SMFSs

What are the costs of managing an SMSF?

As anyone who has decided to take on a DIY project can tell you, taking control doesn’t always mean doing things cheaper. The decision to take more direct responsibility for your super by establishing or joining an SMSF can be costly. There are costs associated with running and reporting on your SMSF, as well as costs related to how you invest the money in the fund.

Some of the SMSF costs may include:

  • Audit fees of an independent SMSF auditor registered with the Australian Securities and Investment Commission (ASIC)  
  • Reporting fees of a tax agent brought on to prepare your SMSF annual return report  
  • Fees related to valuation of SMSF assets  
  • Insurance and legal fees  
  • Broker and financial advice fees

Set-up and running costs can be high - one of the key reasons why ASIC recommends SMSFs are for those who have higher balances5. Data from the ATO suggests that for balances under $50,000 the average costs incurred to operate an SMSF during the 2016 financial year were $14 for every $100 in the fund6. The ATO data also highlights that for SMSFs with under $500,000 balance, the average return on assets for funds for the 2016 financial year was negative. This means on average, funds with less than $500,000 actually lost money, compared to returns for the average industry fund of 3.31% and retail fund of 1.64% during the same period7.

Do you have time to manage an SMSF?

In today’s always-on, fast-paced world, costs aren’t just measured in money. Before setting up an SMSF, it is important to evaluate if you have the capacity to focus on managing your fund. One study suggests that nearly half of former SMSFs regret setting up an SMSF in the first place, citing difficulty in managing the SMSF as the key reasons for closing the fund. Having an SMSF costs more and involves more effort than many people anticipate even if you use an outside service to administer and manage your fund.

Some of the common activities you’ll need to consider if you can take on include:

  • Researching investments  
  • Creating and monitoring your investment strategy  
  • Staying up to date with SMSF laws and your responsibilities as a trustee
  • Reporting requirements

Do you have the expertise to manage an SMSF?

With SMSF decision making power comes responsibility. Members of an SMSF are the trustees for individual trustee structures, or they are the directors of the company that is the trustee for corporate trust structures. As a result, it is the members either as trustees or as company directors - rather than a super fund - who bear the responsibility of making sure the SMSF meets all super and tax regulations. That means trustees could be held accountable if their fund breaches the law. Penalties may include fines and even jail time.

In setting up an SMSF, you are ultimately responsible for investment decisions - either directly or through advice you obtain. Choosing what to invest in has been acknowledged by SMSF trustees as the hardest aspect of running an SMSF in a report published by Investment Trends8. Making investment decisions requires a degree of expertise in how to manage investment risk. For example, too much of a single type of investment can increase the chances of substantial losses. Data from the ATO shows that, on average, SMSFs hold nearly 25% of their assets in cash - more than twice the percentage of cash assets held by APRA-regulated funds (see table 1 below). With the Reserve Bank’s official interest rate at 1.5% (as at May 1, 2018), cash investments and term deposits may not keep up with inflation, which highlights one of the risks associated with investing heavily in cash and fixed income asset classes.

Table 1 How APRA-regulated super funds and SMSFs are invested, as at 31 December 2017
Investment type All APRA-regulated super funds Self-managed super funds
Cash 11% 23%
Fixed income
21% 1%
Australian shares 23% 30%
International shares 24% 1%
Shares in unlisted companies 4% 1%
 Property 8% 15%
 Infrastructure* 5% n/a
 Other** 4%  28%

*Data on infrastructure investments is not available for SMSFs.
**'Other' investments for APRA funds include hedge funds. For SMSFs, 'other' investments include listed and unlisted trusts, managed investments and collectables.
Source: This data is sourced from the MoneySmart website

If you’re unsure about whether you have the financial knowledge to establish and run an SMSF, then ASIC has a questionnaire to help you decide whether an SMSF is right for you.You may also consider getting tax advice or financial advice.  

What next?

If you’re looking to take more control of your super, an SMSF is just one option. AustralianSuper’s direct investment option - Member Direct - gives members the opportunity to choose their own investments, with the benefit of low fees, insurance cover and the investment expertise of an industry fund.  

Just like buying a house or making the call on when to retire, the decision to set-up an SMSF is a big one. The advice of ASIC - the country’s financial regulator - is clear. It recommends an SMSF only for those who have a lot of super and extensive knowledge of legal and financial matters.

If you're considering an SMSF, here’s a checklist to help decide whether it's right for you:

  • What’s best for your super returns? Will a SMSF perform better than your current fund?
  • Would the running costs of your SMSF be more or less than a superannuation fund?
  • Do you have time and desire to administer and run the SMSF?
  • Do you have the financial and legal expertise to operate the fund?
  • Do you want the responsibility of running the fund, including the legal and reporting duties as well as facing potential fines if things go wrong?
  • Will you lose benefits from your current fund such as discounted life, income protection or disability insurance?
  • Will you be able to manage the SMSF in case of a relationship breakdown with other trustees?

Find more information here.
The Australian Financial Complaints Authority will replace the Superannuation Complaints Tribunal, and will start receiving complaints from no later than 1 November 2018.
SuperRatings' June 2016 Fund Crediting Rate Survey

Investment returns are not guaranteed. Past performance is not a reliable indicator of future returns.

Control over your super

Get to know your investment options through AustralianSuper and how they can help you achieve your best retirement.

Learn More

Face to face, online or over the phone, our professional advice can give you the perfect game plan for your super.

Find out more
Back to top