Self-managed super funds (SMSFs) explained

In addition to SMSFs, there are four other main types of super funds available in Australia:

1. Retail super funds. Designed to cater for a broad range of people, with a wide range of investment options and styles to choose from.
2. Industry super fund. Run as profit-for-member funds, generally with low fees and a limited selection of investment options to choose from.
3. Public sector fund. May be restricted to people working in the public sector as government employees (although some are open to everyone).
4. Corporate fund. Set up by large companies for their employees.

You can read more about different types of super funds in our Guide to superannuation.

There’s no minimum starting balance for an SMSF.

Until recently, the guidance from the Australian Securities and Investments Commission (ASIC) was that a person should only consider opening an SMSF if the fund will have at least a minimum balance of $500,000. However, ASIC has now recognised that the size of the fund is not the only factor that determines whether an SMSF is right for someone.

One of the main considerations when establishing an SMSF is how much it will cost to set up and run the fund compared to other types of super.

The set-up costs are for registering your SMSF and preparing the necessary documents to make your fund compliant, such as setting up a company to act as trustee and obtaining a trust deed for the fund. Many people engage an SMSF administration service provider to help them with all this.

On top of that, you’ll also have ongoing costs and expenses. This may include:

• annual supervisory levy paid to the ATO
• administration and accounting costs for your financial statements and tax return
• auditing costs 
• investment or financial advice costs
• insurance premiums
• interest expenses
• management and administration expenses
• legal advice costs if you have any specific legal requirements, such as complex estate planning requirements.

Depending on how you set up and manage your fund, and how many members you have, your ongoing costs may add up to thousands of dollars each year. However, unlike other types of super funds, many SMSF costs are generally fixed regardless of fund size. That’s why it’s generally agreed that SMSFs are more cost-effective if you have a higher super balance. 

Generally, anyone can be a member of an SMSF. However to be a trustee (or a director of a corporate trustee) of an SMSF, you must: 

• be at least 18 years old 
• not have a legal disability that makes you incapable of making your own financial decisions
• be a fit and proper person (e.g. not have any outstanding tax or super affairs such as unlodged tax returns or unpaid tax debts)
• not be bankrupt, insolvent, convicted of an offence involving dishonesty, or meet one of the ATO’s other definitions of being a disqualified person

One of the main reasons why people want to open an SMSF is to purchase a property through their fund. While this is possible, investing in property via an SMSF needs to be considered carefully. It can result in lack of diversification and increased investment risk, because most of the fund’s assets may end up tied up in just one asset. You need to ensure the fund will have sufficient cash flow and liquidity to pay any expenses and the property’s expected rental yield and capital growth will line up with your retirement objectives.

There are also a range of strict investment rules that you will need to keep in mind when owning something like a residential property via an SMSF. 

For example:

• none of the SMSF members nor any of their related parties (such as their relatives) can live in or use the property for their private or domestic purposes, even if it’s just for a short period, such as a holiday 

• you can’t add a property you already own to your SMSF

• you can’t purchase a property from any of the SMSF members nor any of their related parties.

While there are some concessions that can allow a member or other related party to lease a business premises from their fund, these rules are complex and we recommend you speak to a financial adviser about them.   

There are also strict conditions about borrowing money to purchase a property through your SMSF. You can read about these conditions and other SMSF rules on the ATO website.