Written byA self-managed super fund (SMSF) is a private superannuation fund of up to six members who run it themselves as trustees, taking on the fund's investment and compliance duties.
Also known as: SMSF, DIY super fund, self managed super
Key points
- Every member is a trustee, or a director of the fund's corporate trustee, so the legal responsibility sits with the members.
- The ATO regulates SMSFs, and each fund lodges an annual return and is audited by an approved SMSF auditor.
- The sole purpose test applies: the fund must be run to provide retirement benefits, not to give members a benefit today.
- Trustees must set an investment strategy and consider whether members need insurance held through the fund.
- Running costs are largely fixed, so a smaller balance carries a higher percentage cost than it would in a large public fund.
How an SMSF works
An SMSF is a trust set up under a deed, with its own bank account and tax file number. Members roll in existing super and make contributions, and the trustees decide where the money goes, from listed shares and term deposits to commercial property. The fund pays tax on its earnings at the concessional super rate.
Trustees keep fund assets separate from personal ones, value the portfolio each year, hold the records and lodge the annual return. Most funds pay an accountant or administrator to handle the paperwork, but the legal responsibility cannot be handed over, and penalties for breaches fall on the trustees personally.
What trustees take on
The appeal is control: choosing exactly what the fund owns, including direct property and specific shares a public offer fund would not hold. The trade-off is time and accountability, because you sign off on the strategy, the records and the annual audit.
Related party rules are strict. Members and their relatives generally cannot live in or rent a residential property the fund owns, and assets usually cannot be bought from members. Business real property is treated differently and can be leased to a member's business at market rates. The ATO publishes the current tests.
Borrowing inside an SMSF
An SMSF cannot borrow in the ordinary way. Where a fund does borrow, it uses a limited recourse borrowing arrangement, which holds the purchased asset in a separate holding trust and limits the lender's security to that asset alone.
Not every Australian lender writes these loans, the terms are tighter than ordinary borrowing, and the fund needs enough cashflow from contributions and rent to cover repayments. Trustees usually take licensed advice before starting one, because a breach can put the fund's complying status at risk.
Example
Dan and Kim set up an SMSF with a corporate trustee and roll in their existing balances. They write an investment strategy covering shares, a term deposit and a small commercial unit the fund buys and leases to Dan's business at market rent. Each year an accountant prepares the return, an approved auditor signs off and the fund lodges with the ATO. The pair track contributions carefully, because contribution caps apply and the audit checks them.
Not to be confused with
- Trust
- an SMSF is a type of trust, but an ordinary family trust is not a super fund and gets no super tax treatment
Frequently asked questions
How does a self-managed super fund work?
You set up a trust with a deed, become a trustee alongside the other members, and roll existing super into the fund's own bank account. Trustees choose the investments, keep the records, and lodge an annual return that an approved SMSF auditor has signed off.
How much do you need to start an SMSF?
There is no legal minimum, but audit, accounting and administration costs are largely fixed, so they weigh more heavily on a small balance. ASIC and the ATO both publish guidance on the likely costs and the time involved. Licensed advice is worth getting first.
Can an SMSF buy property?
Yes, subject to the rules. A fund can hold residential or commercial property as an investment, but members and their relatives cannot live in or rent a residential property it owns. Business real property is different and can be leased to a member's business at market rates.
Can an SMSF borrow money?
Only through a limited recourse borrowing arrangement, where the asset sits in a separate holding trust and the lender's recourse is limited to that asset. Fewer lenders offer these loans, and the fund must be able to meet repayments from contributions and rent.
Who regulates SMSFs?
The ATO regulates self-managed funds, while APRA oversees larger public offer funds. SMSF trustees deal with the ATO for registration, annual returns and compliance action, and they do not have access to every protection that applies to APRA-regulated funds. Check the current position with the ATO.
Related terms
Trust
A trust is an arrangement in which a trustee holds legal title to assets and manages them for the benefit of beneficiaries under a trust deed.
Read definitionATO
The ATO is the Australian Taxation Office, the national tax authority that collects income tax, GST and PAYG, administers superannuation rules, issues rulings and enforces compliance.
Read definitionAPRA
APRA is the Australian Prudential Regulation Authority, the statutory regulator responsible for prudential regulation of banks, credit unions, insurers and superannuation funds, protecting depositors, policyholders and fund members.
Read definitionInsurance
Insurance is a contract where you pay a premium and an insurer covers specified losses, such as damage to a financed asset or a lender's loss on default.
Read definitionPortfolio
A portfolio is a grouped set of loans, leases and the assets behind them, held by one lender or lessor and managed together for reporting, risk and performance.
Read definitionSecurity (collateral)
Security (collateral) is an asset or legal interest a borrower grants a lender, which the lender can take and sell to recover the debt if the borrower defaults.
Read definitionGo deeper
Sources
This article is general information only and is not financial advice.