A Guide To Self-Managed Super Funds (SMSF)

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    One thing all Australians have in common? We're all looking to save money on our taxes! The good news is that with an SMSF, you could potentially save up to 15% more than those who use other methods.

    The Self-Managed Super Fund (SMSF) is a unique investment vehicle that provides the ultimate control over investments, asset allocation and capital gains tax.  An SMSF can be established with as little as $1.00, but it may take time to accumulate the necessary funds for an adequate retirement fund.

    The disadvantage of a self-managed superannuation fund (SMSF) is that it is subject to a greater number of laws than other types of superannuation accounts. Because of this, it is essential to have everything in order before you go ahead and establish one!

    This article will explain how a self-managed super fund (SMSF) operates and the benefits that come with it if you are thinking about starting your own SMSF or if you want to take charge of your retirement funds. Both of these scenarios are good reasons to read this article.

    In addition to this, we will walk you through the steps necessary to establish an SMSF as well as the procedure for switching over from a conventional superannuation account.

    A self-managed super fund, often known as an SMSF, is a type of personal superfund that is administered by trustees on behalf of members who have chosen to take responsibility for their own assets.

    It is possible for a member to serve in both the role of trustee and beneficiary. People utilise self-managed super funds for a variety of reasons, the most common of which are to minimise their tax burden, achieve financial independence, secure their assets, and have more freedom with their investments.

    It can seem unclear to understand the different types of available super funds. Self-managed super funds (SMSF) are one option that can offer more benefits than traditional managed funds due to their low-cost structure.

    This article will provide an overview of self-managed super funds and highlight the advantages of using this sort of fund for your retirement savings, which are some things you should think about before making that decision.

    One variety of retirement savings is known as a self-managed super fund (SMSF). It is the process through which a person or group of people establish their own superannuation fund and take responsibility for its management.

    This can be useful for anyone who wishes to have more control over their retirement assets; however, it also has some negatives that should be addressed before setting up one's own SMSF. Having more control over one's retirement investments can be beneficial.

    There is a wide variety of choices available to a person working in the financial sector. On the other hand, a self-managed super fund is an alternative that is frequently disregarded (SMSF). In today's article, we'll take a look at what a Self-Managed Super Fund (SMSF) is and how it might be useful for investors.

    Following the completion of this post on this blog, you should have a greater understanding of how an SMSF operates and whether or not you could benefit from using one.

    Let's get started!

    A Summary of SMSF Regulations

    A SMSF must be established with the sole objective of giving its members retirement benefits (or to their dependants if any of the fund members die before retiring).

    Creating a self-managed superannuation fund, often known as an SMSF, requires the establishment of a trust, which is a type of legal and tax structure.

    The assets of the SMSF are managed by trustees, who are ultimately responsible for ensuring the fund continues to comply with all applicable superannuation and taxation laws. This compliance involves annual auditing and reporting duties to the ATO, as well as taxes obligations.

    What Is An SMSF?

    Managing your own superannuation requires you to invest the same amount of money in your own self-managed super fund (SMSF) as you would in a retail or industrial super fund. After that, you will have complete discretion over how you will invest and handle the money.

    Your SMSF can have as many as six members, who can be people you know from personal or professional circles, such as friends or relatives. It is organised through a legal document known as a trust deed, and all of the participants will often serve as trustees of the fund. This implies that you will be jointly accountable for the administration of the fund.

    You also have the option of appointing experienced corporate trustees to handle your fund on your behalf. This can be done as an alternative.

    How Do SMSFs Operate?

    Trustees are responsible for managing funds held in SMSFs and making investment decisions. Because of this, it is essential for self-managed super funds (SMSFs) to have a written investing strategy. In addition, the only purpose test should be satisfied by this investment plan, and it should be used to drive trustee decision-making.

    When designing an investment strategy for an SMSF, important considerations to consider include the following:

    • The specific attributes of each fund participant, such as their age, present financial condition, and risk profile
    • The advantages of lowering the fund's overall risk exposure by diversifying its investments. The most common types of investments include fixed-interest products, direct shares, managed funds, listed property, and real estate. Other alternatives include listed property and managed funds
    • How readily its assets may be turned into cash to pay for future member benefits, if and when they are obliged to do so
    • The current requirements of the members for their insurance in order to guarantee that suitable protection is arranged.

    What can't I Purchase?

    Real estate slated for development and resale

    The purchase of property with the intention of redeveloping it constitutes a violation of the "sole purpose" test since it could be construed as the fund engaging in a property development enterprise or a one-time profit-making endeavour rather than exclusively providing for the retirement of its members.

    The previous home of your good friend

    In most cases, an SMSF is not permitted to purchase assets from either a member of the fund or an associate of a member. The term "associate" has a fairly broad meaning and can refer to a variety of parties that are connected.

    A vacation house you want to rent out to a friend or use yourself


    Owning a vacation home that you intend to use privately (even for a single weekend a year) violates the in-house asset rule and the sole purpose test because you are now receiving a current benefit from the asset and leasing it to a fund member or associate.

    Overseas real estate

    Even if your SMSF is legally allowed to invest in any kind of property, including properties situated in other countries, in practise it is extremely difficult to obtain the necessary money to do so. According to Morgan, you will have a difficult time locating Australian lenders that will finance an overseas investment or locating an overseas lender with the expertise to comprehend the complexity of Australian self-managed super funds (SMSFs).

    Caution: If you believe that you can get away with any of the above by remaining undetected, you should reconsider your position. The fine for failing to comply with the terms of the agreement can amount to as much as 46.5% of the total value of your money.

    How much money may be saved on taxes?

    If your SMSF buys an investment property and sells it while fund members are in the "pension phase," capital gains tax won't be due. Taxes could be avoided, possibly saving hundreds of thousands of dollars.

    Consider John. John, who is 45 years old, is thinking of investing in a $500,000 rental property. Comparing the costs of investing through his SMSF versus a "typical" negatively geared structure, he assesses the costs of each option.

    The CGT savings might be around $116,250 if John's SMSF buys the home and sells it 20 years later, when he and the other fund members have stopped making contributions and are in the "pension phase."

    Predicted sale price

    Predicted value = purchase price + appreciation rate + time held.

    $500,000 x 5% pa x 20 years = $1m

    Capital gains

    Capital Gain or Loss = Sale Price - Purchase Price

    $1m - $500,000 = $500,000

    Capital Gains Tax

    50% capital gain multiplied by the marginal tax rate

    46.5% x $250,000 = $116,250

    Overall tax advantage of SMSF structure: $116,250

    Major Tax Advantages

    How significant is the role that SMSFs play in the field of tax-efficient investment? Chris Duffield, an analyst with Dixon Advisory, characterised the situation as "huge would be an understatement." People who have SMSFs are more likely to participate with their retirement savings, which is something that industry and retail funds have never been able to accomplish.

    Additionally, the tax benefits that come from having investments in a super fund can contribute hundreds of thousands of dollars worth of capital gains to your retirement savings instead of giving it over to the taxman. This is because super funds are considered to be tax-advantaged vehicles.

    Tax on capital gains to a range of 0% and 15%

    Earnings from SMSFs are subject to taxation at the same maximum rate (15%) as earnings from other kinds of super funds. This indicates that the highest rate of tax that can be levied on the income generated by the property is 15%. The SMSF is eligible to claim tax deductions for any and all expenses, including interest payments, council rates, insurance premiums, and maintenance costs.

    If a fund retains the property for more than a year, the capital gains tax is capped at 10%, and there is a possibility that there may be no CGT payment at all if the property is sold after you retire and your SMSF is in the "pension phase."

    Negative gearing to lower the amount of earnings tax paid

    Large industry or private super funds are subject to an annual interest fee on earnings, which is withdrawn directly from members' accounts.

    Now that SMSFs are allowed to borrow money in order to purchase assets like property, negative gearing can be used. This allows the fund to offset the interest and other costs related to holding the property against other taxable earnings, potentially bringing the total amount of tax that the fund owes to an amount that is lower than zero.

    Key Benefits

    • In order to safeguard your retirement and the financial future of your family against the volatility of the stock market.
    • It is possible to acquire a property for investment purposes without spending a single cent from your personal funds.
    • Borrowing money through your SMSF will not affect or influence your ability to borrow money outside of superannuation.
    • Have access to a level of leverage in your superannuation that is unavailable to any other retail or industry superannuation fund.
    • When you reach the age of 60 and enter Pension Phase, you will no longer be required to pay income tax or capital gains tax on the income that is generated from your investment properties.
    • Take advantage of loans with limited recourse, which mean that other assets held within your SMSF cannot be used as collateral for the loan.
    • To be able to share expenses with up to three other members of the group. Because of this, you could potentially have enhanced buying power, which gives you better access to a wider range of investing options.
    • Get the most out of the Land Tax reductions that are available for properties that are purchased via an SMSF.
    • Your SMSF should be able to claim a tax deduction for any and all ongoing costs, including interest, rates and taxes, as well as repairs, insurance, and depreciation expenses. In addition, the deductions can be applied to offset any contribution tax that has already been paid, which can contribute to an improvement in the performance of your super fund.
    • In most cases, assets that are held in an SMSF are shielded from any charges that may be associated with bankruptcy.

    Key Disadvantages

    • Diversification. It's possible that the property is the sole asset that the SMSF, which is managed by the trustees, actually owns. Not being diversified has dangers. Notably, if the price of the property drops, you risk losing potentially all of the capital that you have invested in it, just as you risk losing all of your money if you buy the wrong property in your own capacity as an individual.
    • Leverage. You've probably come across the idiom that leverage can be like a double-edged sword at some point. When purchasing an asset with borrowed money, known as leverage, there is a possibility that any gains or losses will be magnified, whether in super or in your ability.
    • Liquidity. One of the most important responsibilities that trustees of SMSFs have is to ensure that the fund has sufficient funds to cover its ongoing operating expenses (whether it be fees or pension payments). If you have all of your money invested in an illiquid property investment (and you are unable to make cash injections into the SMSFs), you may be required to sell the property at a loss or at a price that is less advantageous for you in order to satisfy these criteria.
    • Ongoing documentation obligations. When it comes to ensuring that your SMSF is in compliance at all times, keeping up with all of the initial and ongoing documentation may become quite a challenge for trustees of SMSFs. However, if you work with a qualified SMSF provider like Sequoia Superannuation, they can assist you in conquering these challenges.
    • Tax risk. Since the regulations governing superannuation are subject to constant modification by the government, you should always be ready for any changes that might have an impact on your SMSF plan, whether for the better or for the worse.

    Which Pieces of Real Estate Are Available for Purchase?

    An SMSF has the ability to make investments in any kind of real estate, including residential, commercial, and industrial real estate as well as listed and unlisted property trusts.

    Principal Limitations

    Because of the limits placed on SMSF loans, certain types of transactions are unable to take place. Take, for instance:

    • Construction finance may not be available. On the other hand, the SMSF is only permitted to use its own resources to pay for improvements; it is not permitted to borrow extra funds for this reason. Please refer to the Borrowing Arrangements Flyer for more information on the constraints that apply when using loans to purchase property with your retirement savings.
    • It is not permissible to use your self-managed super fund (SMSF) to purchase a residential property in which you intend to make your primary residence. The acquisition can serve no other function than that of an investment (owner-occupied business premises are acceptable).
    • It is not possible to sell a residential property that either you or one of your linked parties owns to your SMSF. (The use of commercial property is permitted.)

    What Expenses Are Associated With An SMSF?


    The following types of expenses are generally associated with SMSFs:

    • Costs associated with the initialisation of an account
    • Ongoing expenditures
    • Costs of investments
    • Reducing expenses to a minimum

    We can also differentiate between expenditures that are necessary and costs that are optional. The ASIC guidelines for revealing the costs of self-managed superannuation funds provide a definition of these terms.

    In a nutshell, the following is how the ASIC categorises expenses incurred by SMSFs:


    • Unavoidable: Trust Deed
    • Optional: Expenses associated with the establishment of a corporate trustee and a corporate identity


    • Unavoidable: ATO levy for supervisory purposes
    • Each year, an impartial audit
    • Tax returns and annual financial statements
    • actuarial certification every year (when required)
    • Optional: Changing the SMSF's trust deed
    • It is strongly suggested that one or more members obtain personal insurance, and the ATO will closely monitor the advice that is offered in this regard


    • Unavoidable: Investing expenses
    • Optional: Investment guidance from trained professionals (unavoidable for some assets)
    • Management fees for investments.

    Winding up:

    • Unavoidable: Costs of conformity
    • Realisation fees for the assets
    • Fees for brokers or agents

    The word "optional" does not imply that it is not necessary. It's possible, for instance, that trustees will take care of these responsibilities themselves rather than paying a third party to do so.

    However, they should take into account the level of their financial and legal skills as well as the "opportunity cost" of the time that would be necessary to fulfil the tasks of fund administration.

    When Are the Costs of a Self-Managed Super Fund Too High?

    We are aware that some people's eyes glaze over when they are presented with tables and figures. I ask that you kindly indulge me for the next few moments.

    These are some of the findings from the evaluation of Self-Managed Super Fund Costs for 2018-19 that was conducted by the Australian Taxation Office.

    The performance of funds with less than $200,000 in assets is poor. Those with incomes of less than $50,000 are projected to have a negative return of more than 20%. This is not an isolated occurrence because the pattern has remained same since 2014.

    The results have been skewed as a result of the higher funds. Only investors with assets worth more than $1 million are able to earn the "average" return of approximately 7%.

    A significant influence on ROA is provided by costs.

    As it turns out, the difficulty is not the amount of money that it requires. In its place, the ratio of the costs to the total amount of the fund is what matters.

    When it comes to funds with a value greater than $500,000, costs account for less than 2% of the total value. The proportion ranges from roughly 7% to 17% for funds that are less than $200,000 in total value.

    If the ROA is negative due of operational costs, this can reflect on the SMSF trustees' commitment to guarantee that their decisions do not lower the value of the fund, which is why it is important to monitor these expenditures.

    It is hardly surprising that the authorities are worried about the situation.

    • The Productivity Commission has taken note of the increasing expenses of SMSFs and the impact that these increased costs have on smaller funds in comparison to APRA-regulated funds.

    In addition to this, they are worried about the "questionable" quality of the financial advice that is being provided to SMSFs. Particularly due to the fact that persons who had SMSFs had a "substantially" higher likelihood than other people had of trusting their counsel.

    • The Financial Complaints Authority has received a greater number of complaints recently. Advice had not, in most instances, been given with the clients' best interests in mind.

    Trustees and anyone who are considering becoming trustees need to exercise caution when selecting financial advisers.

    Additionally, they should carefully investigate whether the probable operating costs would be large enough to justify not setting up an SMSF at all.

    What Amount Is Required For An SMSF Fund?

    When we examine the ATO from earlier, we discover that the required minimum fund balance for a fund is $200,000. The Australian Securities and Investments Commission (ASIC) and the Productivity Commission both believe that an SMSF fund with assets of less than $500,000 will "in general" be uncompetitive when compared to super funds that are regulated by the Australian Prudential Regulation Authority (APRA).

    If this is the amount of money that is required, then we have to question why there are so many different kinds of funds and why more of them are getting started.

    These data revealed from the ATO's investigation of costs appear to be unexpected:

    • 24% of the total SMSF market is comprised of funds that have produced negative returns
    • 37% of the newly created SMSF funds in 2018-19 had assets of less than $200,000 each.

    Why is this the case?

    When asked about their decision to establish an SMSF, many individuals cite the desire for greater transparency and control over their financial situation, as well as the possibility of consolidating the financial resources of their business partners. Having said that, it is imperative that the choice be one that is financially viable.

    Perhaps it would be beneficial to conduct additional research on the data.

    Why It Is Important That SMSF Fund Balances And Complexity Are Considered

    The following are some of the most important conclusions from a study that compared the expenses of APRA-regulated funds against those of SMSFs:

    • The retail and industry funds have a competitive advantage over SMSFs with less than $100,000 in assets. They were only acceptable if it was anticipated that the balances would increase within a reasonable amount of time. (Later on in the study, it is shown that the majority of these funds actually do increase.)
    • SMSFs with between $100,000 and $150,000 in assets can compete in the market if their trustees take on some of the fund's administrative work and seek out cheaper service providers.
    • Even with the expense of the entire administration service, SMSFs with between $200,000 and $500,000 in assets are competitive. The least expensive choice could be to invest in a fund with a minimum of $250,000.
    • In general, SMSFs with more than $500,000 in assets are more cost-effective than any APRA-regulated fund.

    One of the most important things that we discovered was that smaller funds frequently have their service provider fees cut (this is a good reason for SMSF trustees to shop around to find the best advice at the best price).

    The level of complexity of the fund has an impact on the charges as well. Rather than the size of your investment money, your investment strategy will define the level of complexity.

    For instance, there is a possibility that basic funds will not be subject to interest or investment management fees. On the other hand, funds that hold direct property typically pay two to three times as much as funds that do not.

    Because of this, the analysis came up with a variety of possible prices, including the minimum, the average, and the maximum, as well as various other scenarios.

    The more straightforward SMSFs, those for which the trustees have a need for merely transactional services, will fall at the lower end of the range. When the funds are larger and more complicated, and the trustees either have no choice but to use more assistance or opt to do so voluntarily, the associated costs rise.


    For example, the costs for a $100,000 fund with no direct property are: 

    • $592 (low)
    • $2,220 (mid)
    • $6,337 (high)

    The range for a similar $500,000 fund would be $1,029, $3,207 and $15,908.

    It will be much easier for trustees (and advisers, for that matter) to take control of their funds and make an accurate comparison of fees if they know which range they fall into.

    There Are Additional Cost Considerations That Must Be Made

    There are more elements that have an effect on both the costs and the feasibility, including the following:

    • When the monies contributed by each member are pooled together, there is the potential for huge financial gains.

    It is vital to acquire individual financial counsel before making such a transition, however if members move their savings from an industry super fund to their SMSF, amounts as low as $100,000 could be competitive. However, it is necessary to have personal financial advice before making such a switch.

    • During the accumulation stage of a self-managed super fund (SMSF), costs are often lower than when the fund is in the pension-paying stage. On the other hand, APRA-regulated funds and SMSFs of any size are comparable in terms of their pension phase operations.
    • The higher costs may be mitigated by the rental revenue and considerable tax benefits associated with direct property ownership.

    Every person's circumstances are unique, and making mistakes in one's financial approach can be quite expensive. As a result, it is most likely in your best interest to seek the counsel of a specialist regarding your SMSF.

    Examination Of SMSF Financial Advisers By ASIC

    When the fund size is less than $500,000, the Australian Taxation Office will review the first advice provided by financial advisers more closely.

    They will be on the lookout for

    • Reasons, according to the consultant, why the customer will be in a better position in the future
    • Why the investment strategy is suitable and can be implemented successfully
    • Why establishing a self-managed superannuation fund (SMSF) is in the client's best interests
    • What are the most likely expenses associated with establishing, running, and eventually closing down the fund?
    • The continuous condition of the fund, as documented in subsequent statements or records of advice

    Therefore, the first thing that a customer should think about is selecting an adviser who has a large amount of experience working with SMSFs.

    The second factor to take into account is the cost. According to the SMSF Association Review, smaller funds have a chance to compete well in the market if service provider fees are kept low.

    One rule of thumb that has circulated in SMSF circles for years is that the bare minimum required to be able to cost-effectively run a fund is around $200,000.

    Qualifying as an SMSF

    Be a superannuation fund; Have fewer than five members; and. Have each member as either an individual trustee of the fund or the director of a corporate trustee (and vice versa). Somewhat surprisingly, only about 30 per cent of SMSFs have corporate trustees.

    A self-managed super fund (SMSF) is a private super fund that you manage yourself. SMSFs are different to industry and retail super funds. When you manage your own super, you put the money you would normally put in a retail or industry super fund into your own SMSF. You choose the investments and the insurance.

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