Understanding self-managed superannuation funds (SMSF’s)

Self-managed superannuation funds in Australia are a way of saving for your retirement with full control.

Australian Taxation Office figures indicate there were nearly 600,000 of these privately run super funds in Australia in March 2019. Less than 5 per cent of the population are members of SMSFs and yet they account for about 27 per cent of the $2.7 trillion invested in superannuation! I think SMSFs are a misnomer in some ways. Let me explain.

You must comply with the laws

Granted, you do get to make all the investment decisions, but you still cannot do what you like with your money: you must comply with all the superannuation and taxation laws, just like the trustees of big superannuation funds. SMSFs are often used for alternative investments including wine, art, residential or commercial investment property and physical gold and silver.

These are not the kind of investments you’ll find in everyday superannuation funds that typically offer investments in company shares or managed funds. While your SMSF may involve property, it’s not a savings account to tap into for a home reno. Using funds inappropriately (such as for the home reno or a holiday) is illegal and attracts harsh penalties.

You need the correct documentation

SMSFs require a trust deed, a legal document that sets out the rules for establishing and operating your fund. Together, the trust deed and superannuation law form the fund’s governing rules. One big mistake is to make investments contrary to the trust deed. For example, the trust deed may set out that investments are to be balanced – 50/50 – in terms of risk and yours are 100 per cent defensive (or 100 per cent aggressive). This is a classic ATO check that gets people into trouble.

There are ongoing costs

Establishing a SMSF can be expensive; ditto running costs which include at the very least qualified licensed professional advice from an accountant and an annual independent audit, if not legal and other financial advice as well. Sadly, there are some unscrupulous ‘professionals’ who use a cookie-cutter approach to SMSFs when these really must be designed to fit. The average individual SMSF member balance is around $652,000.

I met a woman who was ‘sold’ the need for an SMSF with a balance of just $7,000: the set-up cost was $3000, her investments were no different to those available in a normal superannuation fund and she had no idea of her legal responsibilities!

You need an investment strategy

Statistics show that a huge proportion of people with a SMSF have never actually implemented an investment strategy: their money is sitting in cash or term deposits. That is often because they don’t know what to invest in, they get caught up in life and don’t stay on top of it, or they may be too scared to enter into investments because they are acting emotionally rather than rationally.

Remember, those ruled by emotional behaviour such as greed and fear are not investors. I have clients who have SMSFs because they make sense for their personal situation. This is where professional advice and support prove invaluable.

You are responsible

Then there is also the matter of law-abiding decision-making. Normal superannuation funds have trustees who are accountable for abiding by rules and regulations. When you have a SMSF, you are both member and trustee. You alone are responsible and liable. You can’t shirk responsibility if you have a SMSF because your partner set it up and said it was a good thing to do, either. Given that 70 per cent of Australian SMSFs have two members, you’re not alone!

Ignorance is not bliss as a woman I’ll call Erin discovered. When her husband Cal died suddenly, Erin found out he’d not lodged tax returns for their SMSF for eleven years and that she, as a trustee of the two-member SMSF, was responsible. The ATO could have taken half the value of the fund as a penalty for this kind of breach!

Financial advice and regular reviews are critical to a healthy super balance. Your needs and risks will change with ages and life stages, as we discuss in coming chapters. Just imagine if you got advice and that filtered through for the next ten, twenty, thirty or forty years, how many times it would have repaid itself?

A superannuation fund also links in with estate planning, the final element of our financial foundations.

This is an edited extract from “On Your Own Two Feet” by financial adviser Helen Baker and was originally published online in Nest Egg