Superannuation
Self-managed super fund (SMSF)
A self-managed super fund is a private super fund with a small number of members who are also its trustees, giving them control of investments and responsibility for compliance.
A self-managed super fund, or SMSF, is a super fund that members run themselves. Unlike a retail or industry fund, where a professional trustee makes the decisions, in an SMSF the members are the trustees, or directors of a corporate trustee. An SMSF can have a small number of members, currently up to six, and every member must be a trustee. This gives members control over how the money is invested, but also puts the legal responsibility for the fund squarely on their shoulders.
The ATO is the main regulator of SMSFs. Trustees must have an investment strategy, keep the fund's assets separate from their personal assets, and invest for the sole purpose of providing retirement benefits to members. Generally the fund cannot lend money to members or buy assets from them, with limited exceptions such as listed securities and business real property at market value. Breaches of these rules can lead to penalties, and in serious cases the fund can lose its complying status and face heavy tax.
Every SMSF must be audited each year by an approved SMSF auditor and must lodge an annual return with the ATO. The fund must keep records, hold a bank account in the fund's name, and prepare financial statements. Fees for an accountant, auditor and the ATO supervisory levy mean running an SMSF costs money, and it is not always cost effective for smaller balances. The costs are one of the reasons people should seek independent advice before setting one up.
From a tax perspective, a complying SMSF pays tax on its income at a concessional rate, and the rate is lower during the pension phase. The details depend on whether members are in the accumulation or retirement phase, and on current law, so check ato.gov.au. Contributions made to the fund by employers and members are treated in the same way as contributions to other funds, and are subject to the same contribution caps.
GST can matter to an SMSF in a few ways. The fund usually has no GST turnover, because investment income such as interest and dividends is not generally a taxable supply, but if the fund owns commercial property that it leases, the fund may be required to register for GST where its GST turnover reaches the threshold. Residential rent is input-taxed. If the fund is registered, it can claim credits for GST on business-related costs in the usual way, subject to apportionment for any input-taxed activity.
A common misunderstanding is that an SMSF can invest in anything the members like. In truth, the sole purpose test, the in-house asset rules and the requirement for arm's length dealings limit what is allowed. Another is that trustees can use the fund's money before retirement. Early access is heavily restricted.
This is general information, and you should seek advice from the ATO or a licensed adviser and registered tax professional before making decisions about an SMSF.
Worked example
Dave and Karen set up an SMSF with a combined balance of $600,000 and buy a commercial shop for the fund at market value. The fund leases it to their own business at a market rent of $3,000 per month plus GST, so annual rent is $36,000 plus $3,600 GST. Because the fund's GST turnover is below $75,000, it is not required to register and charges no GST, though registration remains optional.
Practical tips
- Get independent advice before setting up an SMSF, because the trustee obligations are significant and fees can outweigh benefits on smaller balances.
- Keep SMSF money completely separate from your personal and business money, and never use fund assets for private purposes.
- Arrange the annual audit early, as late lodgment or non-compliance can lead to penalties.