Employers are obligated in Australia by law to make super contributions as part of an employee's salary. If you are with a conventional super provider, this amount goes into a large fund, but it can also be deposited instead into your self managed super fund.
Managing your own superannuation fund can be a tempting proposition, particularly for people who consider themselves financially savvy. Conventional superannuation funds tend to focus on shares and fixed income assets, but since you’re making the decisions yourself, you might choose instead to invest in more diverse things like residential or commercial property, commodities like gold or even artwork.
There are a few different ways SMSFs can be set up. The fund can either have individuals as trustees, or a company. With individual trustees, all members of the fund need to be trustees and vice versa, while for corporate trustees, all members need to be directors of the company.
Once you’ve got your ducks in a row and know the typical fees and costs of SMSFs, here are a few benefits of managing your own super.
You choose where your money goes
The ability to choose exactly where you are investing is one of the biggest reasons SMSF is so attractive. With normal superannuation funds, you’re effectively trusting other people with your retirement savings.
While you can choose different portfolio options (defensive, diversified or aggressive for example), you likely can’t get too granular or modular. This isn’t necessarily a bad thing, especially if you aren’t interested in investing, but if you are, SMSF puts the responsibility entirely back in your hands.
Further, many super funds - especially industry funds - invest in things like bridges and roads. These assets can be difficult to quantify the performance of.
With an SMSF you could technically have all your retirement money tied up in one singular asset, if you really wanted. This might not be the best option but the freedom is there. You can also invest in more exotic things like gold or artwork. Some popular asset classes of the SMSF population in Australia are:
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Listed shares: $259.98 billion
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Real property residential: $44.84 billion
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Real property commercial: $81.2 billion
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Collectable and personal use assets: $566 million
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‘Other’ assets: $25.44 billion
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Cryptocurrency: $943 million
Source: ATO data, June quarter 2023
Being the master of your own domain means you can be sure your money isn’t invested in a sector or company you have ethical concerns about. Take a 2021 report from the Australian Institute, which suggested most Aussie super funds had investments in companies involved with the production of nuclear weapons. If you’re a pacifist, it would be a rude shock to discover this was how your retirement savings were being used.
SMSF lending (Limited recourse borrowing)
One of the most attractive things about SMSF is the option to borrow money to make larger investments through limited recourse borrowing arrangements (LRBA). SMSF loans are becoming increasingly popular; as of June 2023, the ATO reported that funds in Australia collectively held more than $55 billion worth of LRBAs.
Most commonly, these arrangements are used to buy commercial or residential property, but some products, like NAB’s super level, allow margin lending as well, which lets the fund borrow to buy securities like shares or bonds.
If you’re a property enthusiast, SMSF borrowing can allow you to invest your superannuation in the asset class you know best. However, there are strict rules that govern limited recourse borrowing arrangements. If you’re interested in using loans like this, our below guides give an overview of exactly how SMSF lending works, and the rules you’ll need to follow.
Read more: Guide to SMSF lending
Read more: Buying property through an SMSF
Table here:
| Lender | Home Loan | Interest Rate | Comparison Rate* | Monthly Repayment | Repayment type | Rate Type | Offset | Redraw | Ongoing Fees | Upfront Fees | LVR | Lump Sum Repayment | Additional Repayments | Split Loan Option | Tags | Features | Link | Compare |
|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
6.99% p.a. | 7.00% p.a. | $2,659 | Principal & Interest | Variable | $0 | $230 | 70% | Featured |
| |||||||||
7.24% p.a. | 7.25% p.a. | $2,726 | Principal & Interest | Variable | $0 | $0 | 70% | |||||||||||
7.25% p.a. | 7.65% p.a. | $2,729 | Principal & Interest | Variable | $30 | $1,190 | 80% | |||||||||||
7.39% p.a. | 7.47% p.a. | $2,767 | Principal & Interest | Variable | $0 | $995 | 80% | |||||||||||
7.49% p.a. | 7.50% p.a. | $2,794 | Principal & Interest | Variable | $0 | $230 | 80% | |||||||||||
7.74% p.a. | 7.75% p.a. | $2,863 | Principal & Interest | Variable | $0 | $0 | 80% |
Rent to your own business
If you’re a business owner, you are allowed to buy commercial property through your SMSF and rent that property to your business. Instead of paying rent to a landlord, you could instead divert that money into your superannuation fund.
The rent is taxed at the 15% concession rate for the SMSF, rather than your marginal tax rate, which you would pay purchasing the property personally or through the business. This is only allowed for commercial property: residential homes owned by an SMSF cannot be rented out to fund members or their family.
These transactions need to be done on an ‘arm's length’ basis, which means both the purchase and the income from the property should reflect the true market rate of return. This is to prevent people from doing something like buying property through their SMSF, then renting to their own business at a heavily discounted rate.
Such a move would contradict the overarching principle that SMSsF must be run with the sole purpose of providing retirement benefits to members. When an SMSF receives non arm's length income (NALI), it is taxed at the highest marginal income tax rate, which is 45%.
Tax management
Like all superannuation funds in Australia, SMSFs are taxed at the concessional 15% rate. Within that though, you can use the flexibility of self managed funds to make strategic tax decisions to suit the members of your SMSF.
For example, let's say your fund holds shares and a commercial property that has appreciated in value since you bought it. In one year, the fund receives franking credits from share dividends, which can be offset against tax liabilities that year. If you chose that year to sell the property, you could use the franking credits to reduce the amount you would be due to pay in capital gains tax.
This is another area where the services of a tax professional, who can help you make your fund as tax efficient as possible, could be invaluable.
Asset protection
Even if you are declared bankrupt, creditors cannot typically get at superannuation assets. Transferring an asset you own into your super makes it secure than just owning it in your name. However, there are laws that mean if you are deemed to have moved assets to your fund specifically to avoid repossession, creditors still could have a claim.
Further, setting your fund up to have a corporate trustee can provide even more protection. An individual trustee if subject to litigation could put their personal assets at risk. A corporate trustee on the other hand limits the liability to company assets and not members within the fund.
Disadvantages of SMSF
Management costs
For the 2020-21 financial year, ATO data indicates the average annual admin and operating expenses was $6,545 per fund. Various research indicates the break-even point with regular funds is a balance of $200,000, which not everyone has.
ASIC provides the following guide to the expenses associated with SMSFs.
|
Stage |
Unavoidable costs |
Optional costs |
|---|---|---|
|
Setting up an SMSF |
Legal costs for setting up trust deed |
Hiring professionals (accountants, lawyers etc), legal costs for corporate trust |
|
Management costs |
Opportunity cost of the time you spend managing your SMSF |
Hiring professionals for advice |
|
Administering and reporting |
ATO supervisory levy, annual independent audit fee, cost of producing fund’s annual financial statements and tax return, and (when required) the fee for annual actuarial certification |
Legal cost of amending trust deed, insurance costs, investment and management fees |
When you put money into a normal superannuation fund, you don’t need to spend any money transferring the balance over, so the legal costs for setting up your SMSF is an extra expense.
As your fund grows, the annual costs shrink relative to your balance, so you can eventually end up paying a smaller percentage than you would having a fund deduct a fixed proportion. The flip side of this is when the assets held by the SMSF are low.
Let's say it costs you $10,000 to run your SMSF each year, enlisting tax and legal professionals to make sure everything is done accurately and legally. If you have a balance in a given year of $50,000, you are spending 10% of your balance on administration costs. Compare this to the cost breakdown at UniSuper for a $50,000 balance:
|
Cost on a $50,000 balance |
||
|---|---|---|
|
Administration fees |
The lesser of 2% or $96 for every $50,000 in your balance each year. |
$96 |
|
Investment fees |
Investment fees and costs of 0.42% p.a |
$210 |
|
Transaction fees |
Transaction fees of 0.09% p.a |
$45 |
|
Total |
$351 |
Read more: SMSF Ongoing Fees and Setup Costs
Risk and responsibility
If you are managing an SMSF with a few different people, you are responsible for their retirement savings. That’s an important duty and shouldn’t be something you take on lightly. If you make poor investment decisions, you risk jepordising their financial future, while breaching SMSF rules can mean huge tax penalties, fines and even prison.
SMSF rules
If you’re considering an SMSF, it’s very important to make sure you’ve got your head around the rules. Once you set up an SMSF, you are completely in charge of it, which means you make the investment decisions for the fund and are responsible for ensuring the fund complies with the following superannuation and tax laws. Income from self managed funds is generally taxed at a concessional rate of 15%, but non complying funds that don’t follow the rules are charged at the highest marginal tax rate.
These are some of the most important things you’ll need to keep in mind:
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SMSF must be run for the sole purpose of providing retirement benefits for the members
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The fund needs to be managed in the best interest of fund members, and in accordance with the relevant law
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The investments of the SMSF also need to be separated from the business and personal interests of the members, at an ‘arm’s length' basis
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SMSF must be set up correctly so its eligible for tax concessions and can receive contributions
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The SMSF needs to be set up as a trust, with a trust deed establishing the rules the fund will operate under, as well as the beneficiaries of the trust
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Any investment decisions need to be outlined and justified in an annually-updated investment strategy document
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