SMSFs for beginners: What is an SMSF, and how does it work?

In the past, SMSFs were more commonly known as DIY super funds. Historically, self-managed super funds have been popular with business owners and other self-employed individuals

With the introduction of compulsory super, and a growing awareness of the importance of saving for a long life in retirement, SMSFs have become increasingly popular with other Australians, typically those with higher superannuation account balances.

SMSFs are not just for business owners, or the self-employed. If you’re an employee, and assuming you have fund choice, setting up a SMSF is one of your super options (for information on other types of super funds, see SuperGuide article Comparing super funds: Who’s who in the super zoo?).

Apart from a strong desire to control your superannuation savings, the cost of running an SMSF means that you generally need substantial super savings to justify the costs of setting up and running an SMSF.

What is an SMSF?

A superannuation fund must meet basic conditions to be considered a self-managed super fund (SMSF). The basic requirements of a SMSF (also known as a DIY super fund) include the following:

• Maximum number of members is 4.
• Each member of a SMSF must also be a trustee of the fund, and all trustees must be members (except when operating as a non-member trustee for a single member fund).
• A SMSF trustee cannot receive payment for performing the role of trustees.
• No member of a SMSF can be an employee of another member, unless they’re relatives (‘relative’ has a specific definition).

An SMSF must be established using a trust deed, and the SMSF trustees must be appointed, and then must elect to be regulated. The SMSF must operate a fund bank account. SMSF trustees must also sign a trustee declaration, and report certain information to the ATO.

How does an SMSF work?

In a large super fund, someone else looks after your superannuation benefits. As a SMSF trustee, you make all of the C-A-R-T decisions. CART is a term that I have coined to help trustees understand their fund responsibilities and it stands for Compliance, Administration, Reporting and Tax obligations (for more information on super C-A-R-T obligations associated with SMSFs, see SuperGuide article [insert new article link] – SMSFs: Driving your super C-A-R-T obligations).

Note: You can also choose another type of DIY super fund, known as a small APRA fund although it’s a less popular option. A professional trustee runs a small APRA fund, and the Australian Prudential Regulation Authority regulates the professional trustee and fund. A small APRA fund costs more than an SMSF, because you have to pay trustee fees, although the trustee fee usually includes any administration and compliance costs.

Why are some Australians attracted to SMSFs?

For most SMSF trustees, the desire for greater control over super savings is the main reason for starting a SMSF. Some typical reasons why individuals set up SMSFs are

• Control over your fund’s investment strategy and a greater choice in what you can invest in, including direct property and collectibles such as works of art. See our special section, SMSF investment.
• A belief you can do a better job investing your super money than your existing fund’s trustees, and at a lower cost. We explain how much a SMSF costs in the SuperGuide article SMSFs: How much does a DIY super fund cost?
• The ability to take advantage of tax benefits linked with super (see SuperGuide article Four must-knows about super’s tax rules).
• Flexibility in when and how you fund your retirement, including starting a superannuation pension (see SuperGuide article SMSF pension: How do I start one?).
• Opportunities to purchase business property, such as an office, within the SMSF, and to use the property in your business (see our special sections Property and superannuation and SMSF borrowing (gearing)).
• For the purposes of greater control over your estate planning. Any death benefits paid from your fund to your dependants (under the tax laws) are tax-free, and a benefit payments tax is payable on super benefits paid to your adult children (see our special section Superannuation death benefits).

For more information…

If you are considering starting an SMSF, then the following SuperGuide articles may be of interest:

• SMSFs: Is DIY super right for you?
• SMSFs: How much does a DIY super fund cost?
• SMSFs: Enough super to justify SMSF running costs?
• SMSF expertise: 3 ways to run your DIY super fund
• SMSF providers: What should I look for when setting up my DIY super fund?
• SMSF trustee declaration: a quick guide
• SMSF basics: Trish’s 10 commandments of DIY super