An overview of self-managed super funds

Money Management Tips

SMSFs, or self-managed super funds (also known as DIY super funds) are private super funds that are managed by the member.

The main reason people give for choosing to fly solo is control, so it’s no surprise that it’s the number one reason.

SMSFs allow their members to choose how their retirement savings will be invested and control their investments.

An SMSF is also advantageous if an existing public fund performed poorly, or if you receive financial planning or accounting advice.

Approximately 600,000 SMSFs exist in Australia according to the latest statistics released by the Australian Taxation Office (ATO). This means that there are over 1.1 million SMSF members in Australia.

Describe how the Self Manager super fund works and compare them to public superannuation funds?

A look at SMSF rules

SMSFs must be set up solely to provide pension benefits to their members (or to their dependents if any of the members are unable to retire).

In order to set up an SMSF, you must establish a trust (a legal tax structure) with individuals or corporations as trustees.

In addition to managing the fund’s assets, trustees ensure its ongoing compliance with taxation and superannuation laws. In addition to auditing, reporting and taxing annually, the ATO must comply with those obligations.

A SMSF is open to anyone who is eligible to be a member.

In an SMSF, all members must also serve as trustees. An SMSF that chooses to have a corporate trustee must have at least one director on the board of the corporation.

Every director of the company must also be a member of the SMSF that corresponds to that company, and all of them must be registered with ASIC.

The maximum number of trustees/members of an SMSF will increase from four to six beginning 1 July 2021.

As a trustee, a person must agree to become a trustee and accept their responsibilities by signing a trustee declaration before being eligible to become a member (and therefore a trustee) of an SMSF. The following are prohibited for SMSF members/trustees:

  • Having a bankruptcy filing
  • Disqualified from serving as a trustee of an SMSF by a court, the ATO or ASIC previously
  • You cannot be the employer of another fund member (unless you are related to them).

Trustees can act on behalf of young members under 18 years old who are represented by one or more trustees. These are usually parents or guardians.

Why do SMSFs exist?

Investment decisions are made by SMSF trustees. SMSFs are legally required to have an investment strategy in place.

Trustees should use this investment strategy to guide their decision-making under the sole purpose test.

How do SMSFs benefit investors?

SMSFs have a number of benefits, including:

A greater degree of tax flexibility

Tax-effective investments can be made through superannuation. The members’ contributions and fund earnings of SMSFs that comply with super legislation in Australia are generally taxed at a concessional rate of 15% (up to certain limits).

Furthermore, benefits received after 60 years of age are tax-free. An SMSF’s fund earnings are tax-free when it is a pension fund.

SMSFs are not the only super accounts that can benefit from these tax benefits. SMSFs, however, are able to employ tax strategies related to capital gains, taxable income or franking credits more easily.

A greater degree of investment control

The trustees of SMFs have greater control over the investments of their funds. The funds have access to many of the same products as public funds and some that don’t.

By contrast, SMSFs aren’t restricted to investing in property trusts like public funds, but can invest directly in residential real estate.

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SMSFs can be used by business owners to buy business premises or other commercial properties, which can then be leased to related parties.