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Setting up an SMSF: 10 Things You Need to Know Before Starting

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Superannuation is non-negotiable. We all need to invest in super to fund our retirement years. Australia has had a system of compulsory superannuation since 1991 with total assets in superannuation now totalling nearly $3 trillion.

More and more people are choosing to manage their own super through the use of self-managed superannuation funds (SMSFs).

If you’re thinking about starting your own SMSF, here are 10 things you should know.

  1. SMSFs are becoming increasingly popular

SMSFs are becoming increasingly popular. The latest figures by the ATO show there are around 600,000 SMSFs in Australia, which together control more than $750 billion in assets. This is about a third of all assets in the superannuation system. 

  1. Almost anyone can start an SMSF

According to H&R Block’s Director of Tax Communications, Mark Chapman, to start an SMSF you only really need to meet two criteria.

Firstly, “you need a fairly decent pot of super,” he advises. Generally speaking, if you’ve got less than $250,000 an SMSF is probably not going to be worthwhile because the costs of setting it up and running it will very quickly eat into your balance. 

Secondly, you want to get more control over your super. “Most people who have their funds invested in an industry or retail fund don’t really have any control over what happens to their super, they pass all that responsibility into the fund,” Mark says.

  1. Having an SMSF puts you in control

Having an SMSF allows you to take control of your superannuation, making the decisions about how it is invested in accordance with your personal preferences.

“If you have a SMSF you’re looking after the money yourself, you’re making the investment decisions,” Mark advises.  

Retail and industry super funds don’t allow for this level of control. Sure, your retail or industry super fund will let you make some broad choices around your investments, but you don’t get to make the key investment decisions in the same way you can with an SMSF. 

If taking control appeals to you, and you think you can do a better job than the retail or industry funds, then an SMSF might be worth considering. 

  1. There are significant benefits to having an SMSF

“The big pro about having an SMSF is the element of control,” Mark advises, “you can choose the investments that will work the best for you.”

With an SMSF you set the investment strategy and make the investment decisions. This allows you to choose the investments that work for your current economic situation and that you believe will generate optimal returns for your retirement. 

It is your decisions that will determine the quantum of your retirement funds. “The element of control, of making your own decisions and possibly doing a better job than the people who run the big funds is quite exciting,” Mark says.

But with this privilege comes responsibilities. 

  1. There are also significant responsibilities involved with an SMSF

When you run your own SMSF you will need to ensure tax returns are filed, audits are conducted, and compliance and administration are attended to.

“The administration obligations can be quite a burden if you’re not really up for it,” Mark says. You’ll need to hold trustee meetings, document those meetings, and prepare various forms for the ATO.

“You can’t simply set up the fund and forget about it,” Mark says, “you got to be involved 365 days a year in making sure your fund is working for you and that you’re complying with all the laws, which are quite complex.” 

  1. Professional advice is recommended

The best way to manage the compliance and tax obligations involved in running an SMSF is to get professionals involved.

You should look at engaging an accountant and will likely need a lawyer to draft the initial documentation.

You may also want to look at getting some expert investment advice, depending on what you want to do with the funds in the SMSF.

“Getting all those sorts of professionals involved is the way to reduce stress on yourself,” Mark advises.

  1. Running an SMSF involves costs 

SMSFs are not cheap – there are costs involved in setting up and running an SMSF. These can include legal and accounting fees, as well as fees for other types of professional advice. Any costs incurred means these funds can’t be used to invest or fund your retirement.

“The ongoing costs can be quite substantial,” Mark told us, “so the fund needs to be prepared to pay those costs.” 

  1. There are also deadlines involved

Every year SMSFs have to lodge an annual return with the ATO.

“If you don’t have a tax agent looking after your SMSF the deadline is the 28th of February”, Mark advises, “if you do have a tax agent then generally you are entitled to an extended deadline of the 15th of May.”

But if you have a newly established SMSF the annual return needs to be lodged by 28 February, regardless of whether you have a tax agent. 

  1. SMSFs are popular with SME owners 

“Typically people who run small businesses are not necessarily going to be contributing to retail or industry funds themselves,” Mark says, “it’s usually the employer who makes those contributions.”

It can, therefore, be easy for small to mid-sized enterprise (SME) owners to neglect their superannuation. 

By setting up their own SMSF, SME owners can ensure they are saving for retirement. This is a popular option, with figures showing some 50% of SME owners running their own SMSF.

“Another attraction is that where your small business operates from premises, you can potentially look at using your super fund to purchase the business premises,” Mark says, “that way the rent you pay for using those premises can contribute to your super.” 

  1. SMSFs are not for everyone

If you have sufficient funds in super and think you can achieve better investment returns than your retail or industry fund, you may want to consider an SMSF.

But remember SMSFs are not for everyone – you need to be prepared to put in the work involved in both establishing an SMSF and managing it on an ongoing basis.

“There is a burden on anybody who starts an SMSF,” Mark says, “you’ve got to be prepared to see it through.”

The Motley Fool Australia has no commercial affiliation with H&R Block.