What is a Self-Managed Super Fund? (Answering Some of the Most Common Questions)

How much money do you need to create an SMSF? How do you know if you qualify? DG Institute founder and CEO Dominique Grubisa answers these questions and more.

You may already have a superannuation fund. Most Australians contribute part of their earnings to such a fund. Typically, they’re managed by a third party with the goal of ensuring you have enough money to enjoy a comfortable retirement.

You have a measure of control with this type of fund. For example, you can may be able to choose which industry you wish to invest your contributions into. A wrap platform and even industry funds allow you to invest in direct shares.

An SMSF, however, provides more control because you are ultimately the trustee of your fund and may invest directly in commercial or residential property. Read our article on buying a property through a self-managed super fund to find out more.

That means you have more options as an investor or business owner.

This article will answer some of the most common questions that people have about SMSFs.

→ Book a free assessment today to find out if setting up an SMSF is right for you.

What is an SMSF?

As mentioned, an SMSF is a type of superannuation fund that offers you more control over your investing.

The key difference between this and a traditional super is that you act as a trustee of your SMSF.

This is what allows you to make decisions relating to the use of the fund. However, it also means that you have to deal with the administrative burden attached to it. As a trustee, you’re responsible for ensuring the fund complies with all tax and super regulations.

How Many Members can an SMSF Have?

According to the ATO:

“You can choose one of the following structures for your fund:

• up to four individual trustees
• a corporate trustee (essentially, a company acting as trustee for the fund).”

In both cases, the maximum number of members is four. And individual trustee structure must also have a minimum of two members.

Decision-making may become more complicated with a SMSF that has multiple members. Each must agree on the direction that the fund will take.

Who Qualifies to Create an SMSF?

Anybody aged 18 or over qualifies to create an SMSF, barring some exceptions.

You’re disqualified from being an SMSF member in the following circumstances:

• You have a legal disability.
• A business that you operate is currently under administration or insolvent.
• You are or have been the subject of a civil penalty order.
• You have a conviction for any offense that involves dishonesty.
• You have an undischarged bankruptcy on your record.
• You have no overdue tax obligations.
• You’re a non-resident who has a membership balance of 50% or more.
• The regulator has decided to disqualify you for other reasons.

As long as you don’t meet any of those criteria, you should be able to create an SMSF or become a member of one.

How Much Money Do You Need to Start an SMSF?

Technically, you’re able to start an SMSF with as little or as much money as you like. However, there are expenses involved with operating an SMSF that make using lower sums unfeasible.

According to figures from ASIC, funds that have less than $50,000 in them have an operating expense ratio of about 13%. This ratio falls as the amount in the fund increases.

The generally accepted wisdom among financial advisors is that it may not be cost-effective to create an SMSF with less than $200,000. That’s not to say that it’s impossible. Your personal circumstances may make creating an SMSF with less money feasible.

Seek advice before you make any decisions.

What Happens to Money in an Existing Super?

You’re usually able to transfer the money from any existing super account into your SMSF.

However, if you ARE in a position to shift over to an SMSF, you need to request and complete a “roll-over form”. This form provides information about the new SMSF structure and the fund that you wish to complete the transfer from.

After approval of that form, the funds enter your SMSF and you get to control how to use them.

You can access the form and instructions on how to complete it on the Australian Taxation Office (ATO) website.

However, you may not have this option if you’re a member in a defined benefit fund. Furthermore, some government employees don’t have a choice in regards to transferring money. Additionally, some employeedson award salaries can’t move over to an SMSF, or it may not make sense to do so.

Finally, it’s worth noting that you may lose some of your existing super’s insurance coverage if you transfer your money.

Can I Make Extra Contributions?

You’re able to make extra contributions as long as you stick to the caps that the ATO has in place.

The most important of these is the non-concessional contributions cap. The ATO sets this at $100,000 for people between the ages of 65 and 75. Those who are younger than 65 may contribute up to $300,000 over the course of three years. However, the exact figure varies depending on how much money is in the SMSF.

The ATO provides a more detailed breakdown in this article. The important thing to remember is that you’re responsible for sticking to these caps as a trustee of the fund.

Can You Use an SMSF to Invest?

You’re able to use an SMSF for investment purposes, assuming you stick to the regulations.

For example, you could purchase a property using an SMSF, as Cas and Rei did.

In preparing for their retirement, Cas and Rei decided they wanted to buy two investment properties. The first would be a traditional investment that allowed them to generate immediate income.

They’d buy the second property using the funds in their SMSF.

That second property is now appreciating in value. It may also attract a rental income, though these funds will have to go back into the SMSF.

When Cas and Rei reach retirement age, they’ll be able to sell the property and benefit from certain tax advantages.

You’re not able to treat an SMSF investment property in the same way as a traditional investment property. However, that doesn’t mean that you can’t create an investment plan using an SMSF.

Are There Benefits to Investing Using an SMSF?

Most of the benefits related to investing using an SMSF have to do to tax savings and concessions. 

For example, investing using an SMSF means that you face an income tax rate of 15%. Investing personally would leave you facing a tax rate of between 30% and 45%.

There are also some benefits related to Capital Gains Tax (CGT). According to SuperHelp:

“SMSF capital gains rules state that if you make a net capital gain, it will be included in your SMSF’s assessable income. SMSFs have flat tax rate of 15%. Complying SMSFs are entitled to a CGT discount of 1/3 if the relevant asset had been owned for at least a year.”

Not only is your SMSF fund a concessionally taxed environment, but you can claim tax deductions to make additional contributions.

This with the flexibility of a SMSF to invest in commercial and/or residential property makes it an attractive investment vehicle for property investors.

Additionally, an SMSF can borrow to invest in superannuation using a limited recourse borrowing arrangement. This can magnify the returns of your investment, however, be aware it could also magnify losses.

There are several other ways to control your tax outgoings using an SMSF. However, these can become quite complex. It’s a good idea to talk to an expert before going forward.

Is it Worth it?

Creating an SMSF isn’t for everybody. You have to consider your personal circumstances and understand that there’s work involved in maintaining the fund. 

However, an SMSF can provide you with more control over what happens to your super contributions. With the right strategy, could prove more profitable than a traditional super, though there are no guarantees.

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For information on Self-Managed Super fund, visit DGI Wealth Management.