Video: SMSFs – You can’t do it all yourself
SMSFs are often called ‘do-it-yourself funds’, but that isn’t really the case. Meet the people who you will have to work with or who can help you meet your obligations as an SMSF trustee in this ATO video.
Managing your own super comes with a lot of responsibility and involves significant time and effort. A self-managed super fund (SMSF) might be suitable if you have a lot of super and extensive knowledge of financial and legal matters.
You must understand your legal responsibilities and the investments you make because, even if you employ professionals to help you, you are still the one ultimately responsible.
What is a self-managed super fund (SMSF)?
An SMSF is a private superannuation fund, regulated by the Australian Taxation Office (ATO) that you manage yourself. SMSFs can have up to four members. All members must be trustees (or directors, if there is a corporate trustee) and are responsible for decisions made about the fund and compliance with relevant laws. Set up costs and annual running expenses can be high, so it’s most cost-effective if you have a large balance.
How do self-managed super funds work?
An SMSF is a legal tax structure whose sole purpose is to provide for your retirement. SMSFs operate under similar rules and restrictions as ordinary super funds.
When you run your own SMSF you must:
- carry out the role of trustee or director, which imposes important legal obligations on you
- set and follow an investment strategy that is appropriate for your risk tolerance and is likely to meet your retirement needs
- have the financial experience and skills to make sound investment decisions
- have enough time to research investments and manage the fund
- budget for ongoing expenses, such as professional accounting, tax, audit, legal and financial advice
- keep comprehensive records and arrange an annual audit by an approved SMSF auditor
- organise insurance, including income protection and total and permanent disability cover for super fund members
- use the money only to provide retirement benefits.
If you decide to set up an SMSF, you are personally liable for all the decisions made by the fund – even if you get help from a professional or another member makes the decision.
A professional who is licensed to provide SMSF advice can help you weigh up the pros and cons of running an SMSF and help you decide whether it’s right for you. They may also be able to help with the administration and investment decisions for your SMSF. But remember, you cannot pass on the responsibility of being a trustee or director, so you must understand what your adviser is doing.
Robo-advice and SMSFs
SMSF advice has traditionally been provided by an actual person but could also be provided by a robo-adviser. Robo-advice is financial advice that’s delivered by a computer instead of a physical financial adviser. It may be cheaper than seeing an adviser; however, there are limitations to what robo-advice software can do, and it may not be subject to the same quality controls and monitoring that advice from a real person would be.
Ongoing SMSF advice
The type of ongoing advice you choose will depend on your needs. For example, you might use a financial adviser or broker for investment advice and an accountant for the financial management of the fund.
SMSF advisers must be licensed to provide this type of advice. You can check by searching for their name on ASIC’s financial advisers register. You can find out more about the licensing of accountants on the ASIC website.
Find out what advice your adviser or accountant is licensed to give.
Don’t forget that your accountant must have an Australian financial services (AFS) licence if they are advising you about your SMSF.
Adviser authority over cash management accounts
Most SMSFs will use some type of deposit account, such as a cash management account, to hold surplus funds and allow for active management of investments. If you are using a financial adviser, you may have given them authority to view and/or make transactions on your account on your behalf. This may be referred to as a ‘third party authority’.
Types of adviser third party authorities
An authority that allows your adviser to operate your account can be classified by the amount of access you give them:
- View access – your adviser can see the account transactions but cannot operate the account
- Withdrawal access – your adviser can make transactions, including withdrawals, on the account
- Complete access – your adviser can do all the things that you can do with the account, including changing contact details, changing or adding authorised signatories or closing the account.
The risks of granting an adviser third party authority
By allowing your adviser to operate your account (which may be referred to as an ‘adviser-operated account’), you are placing a lot of trust in them. Some of the risks to be aware of include:
- your money being invested in products or schemes that may not be in your best interests
- the possibility that your adviser could use their access to commit fraud.
While the risk of fraud may be remote, it could have serious consequences if it does occur.
Limiting the risks of adviser-operated accounts
These accounts may be convenient for your adviser, particularly if they are actively managing your investments, but there are steps you can take to limit the risk they pose to you. You can:
- make sure you understand the extent of the authority you have given your adviser and the risks involved
- get all the details of the account, including any authorities you have provided, in writing
- ask to be notified each time your adviser makes a transaction on the account
- make sure all correspondence relating to the account comes to you, even if your adviser also receives the information
- check the account transactions regularly and speak to your bank if something doesn’t look right.
Questions to ask before you set up an SMSF
In June 2018, ASIC released its findings from a review of the SMSF sector. The review found that around 90% of financial advice about setting up an SMSF did not comply with relevant laws. Other findings included that, among SMSF trustees:
- 38% said running their SMSF was more time-consuming than expected
- 32% said the set-up and running costs were more than they expected
- 29% incorrectly thought they were entitled to compensation for theft and fraud involving their SMSF.
Running your own super fund is a major commitment. Before setting up an SMSF, ask yourself:
Have you considered other do-it-yourself (DIY) super options?
Many professionally managed super funds have DIY investment options which let you choose specific assets, such as shares, exchange traded funds and term deposits. This gives you some control over your investments without the legal and administrative responsibilities of running an SMSF.
Have you considered other super funds or investment options?
If you’re thinking about setting up an SMSF because you’re not happy with your current fund or the way your money is invested, consider changing to another fund or investment option first. See choosing a super fund.
Will your self-managed fund outperform your current fund?
Super funds use highly skilled professionals to invest your money. Will the investments you choose perform better than your professionally managed super fund? Are you confident you can accurately measure returns?
Figure 1 compares the average returns for SMSFs with APRA-regulated super funds over a 5-year period. On average, APRA-regulated super funds achieved higher returns than SMSFs.
Figure 1: Average returns for SMSFs and APRA-regulated super funds 2012 to 2016
Source: ATO, Self-managed super funds: A statistical overview 2015-16.
Have you considered the costs?
Like all super funds, SMSFs have costs associated with running the fund, including investing, accounting and auditing. If these costs are high they could have a significant impact on your retirement lifestyle.
Figure 2 shows the average total cost of running an SMSF as a percentage of the fund’s balance, known as the expense ratio. Most SMSFs are paying a lot more in fees than the average APRA-regulated fund.
The average expense ratio for APRA-regulated funds was 0.8% as at June 2017.
Figure 2: Average cost of running SMSFs in 2016
Source: ATO, Self-managed super funds: A statistical overview 2015-16.
Will you lose valued benefits?
Super funds usually offer discounted life and disability insurance. If you set up an SMSF you will have to purchase your insurance separately. Make sure you look into your insurance options before closing your current super account as age and health issues can limit your ability to buy a new policy and may increase your premiums.
Do you know enough?
Are you aware of all your legal responsibilities? Do you understand the different investment markets? Can you construct and manage a diversified portfolio of investments? Do you know the tax implications?
What if your relationship with others in the fund changes?
If there is more than one member in your SMSF, do you have a written plan outlining what will happen in the event of ill health, death, relationship breakdown or waning interest of a member?
If an SMSF member loses money due to theft or fraud, they do not have access to any special compensation schemes or the Superannuation Complaints Tribunal to resolve disputes.
What can you invest your SMSF in?
Having access to a broader range of investments is a common reason for starting an SMSF. Through a self-managed super fund, you can not only invest in shares, term deposits, managed funds and property, you can also hold alternative assets, such as antiques and artwork.
You may want to set up an SMSF so you can choose your own shares. But, unless you have a lot of money to invest, you are unlikely to be as diversified as a fund manager, who has the advantage of using pooled funds to buy a broad range of shares.
Some APRA-regulated funds now allow you to choose your own shares.
Some people use their SMSF to invest in property. For information on the rules of property investment within super and the costs involved, go to our SMSFs and property webpage.
SMSFs can hold collectibles such as artwork, jewellery, antiques, coins, stamps, vintage cars and wine; however, there are very strict rules around holding these assets in your SMSF.
The assets must be insured and they cannot provide a present‑day benefit. This means that artwork cannot be displayed in your home or business, you cannot drive the vintage car, you cannot wear the jewellery or drink the wine.
For more information, see the ATOs webpage on collectibles and personal use assets.
Some SMSF trustees have taken an interest in investing in cryptocurrencies such as Bitcoin, Ethereum, Litecoin and Ripple. While SMSFs are not prohibited from investing in cryptocurrencies, as a trustee, you need to consider:
- the nature of cryptocurrencies – For a detailed explanation on what they are and how they work, see our webpage on cryptocurrencies
- cryptocurrency risks – Cryptocurrencies carry additional risks, including fewer safeguards, values that can fluctuate significantly over a short period of time and the risk that your money could be stolen with little or no recourse
- SMSF regulatory requirements – There are superannuation regulatory requirements that apply to investments made by your SMSF. For more information about SMSFs investing in cryptocurrencies, visit the ATO website.
Be wary of services offering to establish an SMSF for you in order to gain exposure to cryptocurrencies. Not only does operating an SMSF involve significant time, skills and responsibility, you may also be putting your retirement savings at risk.
You should seek independent advice from a licensed financial adviser before undertaking any new type of investment in your fund.
How SMSF trustees invest
SMSF trustees prefer different assets from those of APRA-regulated super funds, which may impact returns. SMSFs tend to invest more in cash, property and alternative assets while APRA-regulated funds are usually better diversified.
Memory loss, dementia and SMSFs
Many of us will experience some form of memory loss as we age; however, when you run your own super fund, the financial consequences of significant memory loss, from illnesses such as dementia, can be very serious.
As trustee of your SMSF, you should plan for the possibility that some form of impairment could stop you from being able to properly manage your fund. It’s better to make a contingency plan while you’re capable of making good decisions than waiting until your health deteriorates.
If you’re not able to run your fund, you could:
- transfer your SMSF assets to a managed super fund, or
- appoint a person you trust to take over your trustee responsibilities as your legal personal representative.
If you decide to nominate another person to act as trustee on your behalf, you will need to give them all the information required to perform this role. This includes:
- your SMSF documents (such as trust deeds, bank account details, tax returns)
- passwords to access your SMSF accounts
- contact details of any professionals you deal with, such as your SMSF auditor or adviser.
Visit our page on Memory loss, dementia and your money for more information on what you can do now to protect your finances in the future. Consider getting advice from an appropriately qualified professional before making these decisions.
By law, if you or another trustee of your self-managed super fund becomes bankrupt, that person can no longer remain a trustee, director or member of the super fund. SMSFs have a 6-month grace period to remove the bankrupt trustee and make arrangements to deal with their super assets.
If you are the only member of your SMSF, a new director will need to be appointed to manage the fund on your behalf while you are disqualified.
Seek legal advice about the actions you need to take to deal with bankruptcy and your SMSF.
Scams targeting people with SMSFs
Be wary of people who approach you to set up a self-managed super fund with the aim of withdrawing some or all of your super to pay off debts. These arrangements are illegal.
See superannuation scams for more information.
SMSF courses and further education
If you’re thinking of running an SMSF, consider completing a free Self-Managed Superannuation Fund Trustee Education Program designed to assist trustees in understanding their role and responsibilities.
The ATO has a section about self-managed super funds and a range of useful resources you can download from their website or order a hard copy.
Seek information from industry bodies such as the Self Managed Super Fund Association.
If you’re thinking about setting up an SMSF, you need to be 100% committed. Before you make that decision, do some research and ask yourself what the real benefit is.