What is a Self-Managed Super Fund (SMSF)?

A Self-Managed Super Fund (SMSF) is essentially a private super fund that you manage yourself or with the assistance of a financial advisor. Instead of putting money into a retail or industry super fund, you can make contributions into your own fund and invest in the assets that are most appropriate to your plan.

The team at Endorphin Wealth have been advising their clients for many years on their SMSFs. We can assist you to:

  • Consider if establishing an SMSF is appropriate in your circumstances,
  • Provide advice and ongoing management for the investments and insurance policies within your SMSF, and
  • Assist with winding up or considering alternative options if your existing SMSF is no longer appropriate.

The Australian Prudential Regulation Authority’s (APRA) recent statistics on SMSF funds showed there were 595,840 SMSFs operating in Australia, holding $712 billion in assets. More people are setting up SMSFs due to recent findings that have shown that retail super funds lack clarity with their investments and have a tendency to focus on profit rather than the interests of members.

Should I invest in an SMSF?

In recent years, the Australian Securities and Investments Commission (ASIC) conducted an online survey of 457 SMSF members who had set up their own fund in the preceding five years. The results showed that they were unaware of a large number of risks and responsibilities that comes with running their own SMSF.

The main reason for setting up an SMSF is greater control over investment decisions. However, according to ASIC, around one-third of SMSF trustees are unsure about what is required to run their own fund and the benefits of diversification.

In one case, an SMSF member, believing the property market was “over-inflated” and the stock market was too “risky”, held 100 per cent of their SMSF balance in cash, hoping to invest in property “in maybe three or four years”.

Survey respondents reported mis-judgement of their expectations and actual experiences as SMSF members in a number of key areas, including:

  • the risk and responsibilities of running an SMSF, and
  • costs to set up and run an SMSF,
  • time spent on administering an SMSF,
  • individual understanding of SMSFs and their legal responsibilities as SMSF trustees.

Risks and responsibilities of running an SMSF

All members of an SMSF are responsible for the fund’s decisions and for complying with the law.

These responsibilities come with risks:

  • You are personally liable for all the fund’s decisions — even if you get help from a professional, or if another member made the decision.
  • Your investments may not bring the returns you expect.
  • You are responsible for managing the fund even if your circumstances change — for example if you lose your job.
  • There may be a negative impact on your SMSF if there is a relationship breakdown between members, or if a member dies or becomes ill.
  • If you lose money through theft or fraud, you won’t have access to any special compensation schemes or to the Australian Financial Complaints Authority (AFCA).
  • You could lose insurance if you’re moving from an industry or retail super fund to an SMSF. See consolidating super funds.

The ATO can conduct a random audit of an SMSF at any time. The penalties for non-compliance are high and receiving a notice of non-compliance from the ATO usually has devastating tax consequences.

Costs of setting up and running an SMSF

Individuals looking to set up an SMSF need to factor in all costs to start and run their SMSF including amounts to cover any initial and/or ongoing advice, as well as start-up costs, including the appointment of the trustee and registration of the fund.

The annual cost of running the fund, including accounting, auditing and reporting costs. This ensures the fund is compliant, and members are able to extract relevant information during any period of the financial year.

Time spent on SMSF administration

The time required to manage and administer an SMSF can be significant. This will often depend on the type of investor your activity when managing your SMSF investment portfolio. Having said that, 38% of respondents in the ASIC survey said running an SMSF was more time consuming than they expected. On average, SMSF trustees spend eight hours a month managing an SMSF.

All SMSF trustees will need to undertake some level of regular investment research on their investment options. This includes ongoing monitoring of the investment strategy and the performance of current and future investments. They may also need to organise annual valuations of assets such as direct property investments.

Trustees also need to be mindful that they meet their regular reporting obligations. This ensures the fund is compliant and are updated on changes in regulation or super laws.

Trustees would be responsible and will be held accountable, for their SMSF at all times.

Understanding of SMSF and legal responsibilities as a trustee

SMSF trustees must have sufficient financial knowledge. This is to make choices that are in line with their fund’s investment strategy. Individuals should also be made aware they – not their financial adviser, accountant or lawyer –are legally responsible for their SMSF.

You need the financial and legal knowledge and skills to:

  • understand different investment markets, and build and manage a diversified portfolio
  • set and manage an investment strategy that meets your risk tolerance and retirement needs
  • comply with tax, super and investment regulations and laws
  • organise insurance for fund members

If you want to know more about Self-Managed Super Funds or starting up your own SMSF, please contact Endorphin Wealth via phone at  (03) 9190 8964 or at advice@endorphinwealth.com.au .