Thinking about an SMSF?

What you need to know and watch out for

Choosing to manage your own superannuation through a self-managed super fund (SMSF) can offer greater control over your retirement savings. But before you decide, it’s important to pause and reflect on the responsibilities, costs, and regulatory requirements that come with this choice. An SMSF is not just another investment option – it’s a regulated trust structure that requires careful management and compliance.

What is an SMSF?

As the name suggests, a self-managed super fund (SMSF) is a retirement savings fund that you set up and manage yourself. You are also the trustee.   

This means you take on the responsibility for managing the fund’s investments, administration and compliance with all the rules and regulations set by the Australian Taxation Office (ATO). 

These responsibilities can be a substantial undertaking, with potential consequences for non-compliance, including disqualification, penalties and tax consequences.

Given the significant obligations in operating an SMSF, it’s important to have a clear understanding of your responsibilities, ongoing commitments, and the careful management required to comply with legal requirements before jumping in.

”Trustees spend on average more than eight hours a month managing an SMSF. That's more than 100 hours a year.” – SMSF Investor Report, April 2021, Investment Trends.

Covered on this page:

• What’s the difference between an SMSF and a retail or industry super fund?

• What you can and can’t do with an SMSF

• The sole purpose test

• Common mistakes and misuse

• Costs of setting up and managing an SMSF

• Choice and control with Mercer Direct

What’s the difference between an SMSF and a retail or industry super fund?

Retail and industry super funds pool their members’ super contributions to invest them collectively across a diversified range of investment options and asset classes. Each member may choose which investment option(s) they want their super to be invested in from the super fund’s investment menu. Members are generally charged administration and investment management fees.

As members’ funds are pooled, tax liabilities and operating costs are shared among all members within the plan. Within SMSFs, tax and costs are incurred by the selected members of the SMSF – and this may have significant consequences on underlying outcomes depending on the magnitude and frequency of activity by members within the SMSF.

An SMSF can have up to six members, and all members must be SMSF trustees. The trustees are personally liable for all the SMSF's decisions, must ensure that it complies with tax and super laws, and are financially responsible for all set-up and ongoing costs associated with running the SMSF. Collectively, the trustees are responsible for:

• developing, implementing and regularly reviewing the fund’s investment strategy

• keeping records of trustee decisions

• completing financial statements

• lodging tax returns or reports.

Another key difference between these funds is that retail and industry super funds are heavily regulated by the Australian Prudential Regulation Authority (APRA), which provides protection against theft or fraud of member assets. SMSFs are regulated by the ATO, which focuses on compliance and enforcement rather than prudential supervision.

An SMSF also needs to have the accounts audited by a registered SMSF auditor. This cost is paid by the SMSF’s members.
 

What you can and can’t do with an SMSF

The sole purpose test
 

Like any other Australian super fund, an SMSF must adhere to the fundamental principle that governs the operation of a regulated super fund in Australia, the sole purpose test. The test imposes a high standard of compliance to ensure that super funds are used strictly for retirement benefits and not for other purposes. While an SMSF can invest into a range of asset classes, the trustees must not benefit from the assets within the SMSF. This can restrict into which assets the SMSF invests, and there are significant penalties for inappropriate investments, including where trustee may benefit or get access to the asset before retirement. Therefore while SMSFs can provide additional control, they require the right supervision and advice from professionals, such as auditors and tax accountants, on the appropriateness of assets. The cost of engaging these professionals would be incurred by the SMSF and underlying SMSF members.

Common mistakes and misuse
 

SMSFs are supervised by the ATO and must follow strict rules. These rules are not always well understood, which can lead to steep fines, disqualification as a trustee, or loss of concessional tax status. Serious breaches can even result in criminal charges.

Here are some of the areas where SMSF trustees sometimes break the rules:

• Accessing funds illegally by withdrawing money from the SMSF before meeting a condition of release (for example, attaining age 65).

• Not lodging the SMSF annual return on time.

• Providing prohibited loans to SMSF trustees or related parties.

• Using SMSF assets such as residential property for personal reasons.

• Acquiring assets from related parties, such as buying a property or business from a friend or family member.

• Failing to pay trust distributions that are owed to the SMSF.

• Valuation errors where financial statements don’t reflect the true value of assets.

• Missing an annual audit or not using an approved SMSF auditor.

• Not preparing or updating the SMSF trust deed that outlines how the SMSF will operate.

Costs of setting up and managing an SMSF

Set-up and ongoing costs can be much higher for an SMSF compared to a retail or industry super fund. Every year that you have an SMSF, you're required to pay for an independent audit and an annual supervisory levy to the ATO.

You also need to consider costs for:

• tax agents to help prepare your SMSF annual return

• valuations of your SMSF's assets

• legal fees

• insurance

• interest expenses

• investment or financial advice.
   

What you could be missing out on

Control over your reinvestments is a big factor for many people choosing SMSFs, however it’s also important to consider what you may already have access to within a large super fund.

Large funds can typically provide:

• Diversified global investment portfolios

• Access to asset classes not easily available to individual investors, such as infrastructure and private markets

• Professional investment management and portfolio construction 

• Ongoing market monitoring and governance

• Administration, compliance and reporting.

For many people, this structure allows them to focus on their retirement goals without needing to manage the operational responsibilities of running their own fund.