Guide to Self-Managed Superfund

Superannuation, or 'super' as it is more often known, is a cornerstone of most people’s personal financial management. Apart from their own home, for many people superannuation comprises their entire personal wealth. It is very important.

Super is a long-term savings arrangement designed to assist individuals to accumulate wealth to enable them to fund (at least some of) their own retirement. Becoming self-sufficient reduces people’s reliance on government services such as the age pension.

Many countries use some form of superannuation. Australia’s current system of superannuation took form in 1983, when the then Hawke Labor government reached an ‘Accord’ with trade unions. The unions agreed to forego direct pay increases in return for the introduction of compulsory super contributions for their members. Initially, employers were obliged to contribute an amount equal to 3% of their employees’ salary or wages into a super fund on that employee's behalf. At a stroke, all affected workers started to save 3% of their annual income in a savings vehicle which could not be accessed until retirement.

The system was expanded in 1992 to cover almost all Australian employees. This system became known as the ‘Superannuation Guarantee’ (SG) and it is still in place today. The rate of the SG has gradually increased over the years and, as of the current financial year, stands at 12%. The introduction of compulsory super came as demographic analysts realised that the Australian population was ageing, and this would place a substantial strain on social security benefits paid by the government (especially the age pension).

Originally, most superannuation funds were managed by professional money managers in large industry or retail funds. Over time, a system through which people can manage their own superannuation has been developed. People manage their own superannuation through what is known as a self-managed superannuation fund, or SMSF. The popularity of this approach remains strong. As of March 2025, there were more than 615,000 SMSFs with almost 1.2 million members. Together, these funds manage approximately $930 billion in assets, which represents about a quarter of all superannuation assets in Australia.

This guide is all about SMSFs. We explain what an SMSF is, who an SMSF suits, how to use an SMSF and how to 'finish up' an SMSF when it is no longer needed.

This guide is a starting point for self-managed superannuation. If you have an SMSF, or if you are thinking of establishing one, we encourage you to get in touch with us. Running your own SMSF can be both personally and financially rewarding – but it needs to be done right. We can help you ensure that you make an intelligent and informed decision about whether and how to manage your own superannuation.

We hope you enjoy this guide!

A self-managed superannuation fund (SMSF) is a special type of trust. A trust is a legal arrangement in which the legal ownership of an asset is separate from the beneficial ownership. The legal owner of an asset (the trustee) is responsible for managing that asset. The beneficial owner (the beneficiary or member) is the person for whose benefit that asset is maintained. In a trust, the assets must be managed for the betterment of the beneficial owner.

Most superannuation funds, both large public funds and SMSFs, operate via a trust structure. The trustees are the legal owners of the trust assets, and the fund members are the beneficial owners of those assets.

There are many different kinds of trusts. Many businesses, for example, operate through some form of trust, often using a company as the trustee. Private investors might make use of an investment trust. A testamentary trust is a trust that is created when a person dies and wishes to have their assets managed on behalf of their beneficiaries (for example, if their beneficiaries are still children and are not yet able to manage assets themselves).

A self-managed super fund is a special type of trust because its core purpose is to provide retirement income and other benefits to its members. Because of this specific purpose, the trust qualifies for special income tax concessions under the tax law.

An SMSF is a super fund that is managed by its members, which is why they are often called ‘DIY funds.’ The Australian Taxation Office (ATO) is the main SMSF regulator and has the responsibility of overseeing them in Australia.

The members themselves, or a company they own and control, act as the trustees. This means the trustees control the SMSF’s investments and are directly responsible for the SMSF’s administration and its compliance with the law.

Every SMSF is governed by its trust deed. The trust deed sets out the rules the SMSF must follow. It also outlines the obligations and responsibilities of the people connected to the SMSF, namely the members and the trustees. The rules for paying contributions, investing assets, paying benefits to members on retirement or death, and other matters affecting the SMSF are all found in the trust deed.

The three essential parts of a trust are present in an SMSF. These are:

1. a trustee;
2. trust property (the fund's assets); and
3. beneficiaries, who in this case are called "members".

The trust deed must contain special rules for the SMSF to be a 'complying' super fund and be eligible for tax concessions. However, it is the trustee’s year-to-year conduct that ultimately determines the SMSF's ongoing eligibility for these concessions.

To be classified as an SMSF, the fund must satisfy a number of conditions set out in section 17A of the SIS Act. A key change in recent years was the increase in the maximum number of members, which provides more flexibility for larger families. The main conditions are:

1. the fund must have six or fewer members (this was increased from four as of 1 July 2021);
2. if the trustees of the fund are individuals, each member must also be a trustee;
3. if the trustee of the fund is a company, each member must be a director of that company;
4. the members are not in an employment relationship with each other, unless they are relatives;
5. no trustee receives any personal payment or remuneration for performing their duties as a trustee of the fund.

Members

People who use an SMSF to manage their super are known as members of that fund.

A person is a member of a fund if the trustee of the fund holds benefits on their behalf. The role is analogous to a beneficiary of a family trust, or a unitholder of a unit trust. The member is entitled to receive benefits from the SMSF on the occurrence of certain specified events, such as reaching a certain age or retiring, or upon death (in which case the benefits are paid to the member’s estate or dependants).

Most SMSFs have two members. Often, these members are a couple, leading to the colloquial term 'mum and dad' funds. However, it's also common to see multiple generations of a family as members in a single fund. It generally does not make sense for unrelated people to be members of the same SMSF, as they will usually prefer to keep their financial arrangements separate by establishing their own funds.

The most distinct feature of a self-managed superannuation fund is that each member of the fund must also be a trustee of that fund. There are two ways to be a trustee: in one’s own name as an individual, or as a director of a company where that company is the trustee of the fund. To be a self-managed superannuation fund, every member must have a direct managerial role and responsibility for the fund's assets.

Up to Six Members

An SMSF can have no more than six members. This limit was increased from four to six on 1 July 2021, providing greater flexibility, particularly for larger families who may wish to manage their superannuation together in a single fund.

The number of members is limited to ensure the fund remains genuinely 'self-managed'. The rule that all members must also be trustees means that every member will automatically have access to financial information and a say in the fund's strategy. This direct involvement reduces the need for some of the broader consumer protection rules that apply to large public funds. Keeping the fund to a small group of related individuals helps ensure it remains workable, cost-effective, and easier to run.

Single Member Funds

Under general trust law, it is not possible for a person to be the sole trustee for themselves alone. This is because the separation of beneficial ownership and legal ownership of trust property is an essential aspect of a trust. If the same person holds both, the trust ceases to exist.

This posed a problem when the SMSF rules were being drafted: how can the ‘all members must be trustees’ rule be satisfied in the case of a single member fund? Two solutions were established:

1. a sole director/shareholder company can act as the trustee, with the member as that sole director and shareholder (this creates the necessary legal separation between the individual member and the corporate trustee); or
2. another person can be appointed as a second individual trustee, provided that other person is a relative and does not hold any benefits in the fund.

A “relative” is defined widely and includes parents, children, siblings, aunts, uncles, cousins, and their spouses. “Spouse” includes a de-facto or same-sex partner.

Members who are also employees

A person cannot be a member of the same SMSF as their employer, unless they are related. This rule is in place to ensure that self-managed super funds do not become de-facto employer-sponsored funds without the extensive consumer protection rules afforded to employees in large corporate super plans.

Auditor

An auditor is an independent financial professional who is required to review your SMSF each year. Their role is to check that the fund is being run in accordance with all relevant rules, which includes both the fund's own trust deed and the broader superannuation law.

In order to comply with the law and gain access to the various tax concessions, an SMSF must engage a registered and independent auditor each year. In recent years, the ATO has reinforced strict auditor independence standards. This means that the professional who prepares your fund’s accounts and financial statements cannot also act as its approved auditor. This ensures a clear separation of duties and an objective review of your fund's compliance and financial position.

The ATO provides extensive guidance on the role and importance of the SMSF auditor on its website.

Administrator

For an auditor to be able to perform their role efficiently, various administrative tasks need to be completed for the SMSF throughout the year. This includes preparing annual financial statements, processing contributions and rollovers, and lodging the fund's tax return. While a trustee can perform these tasks themselves, it is common to engage a professional SMSF administrator. Using a specialist administrator typically means the work is performed more effectively and ensures the annual audit can be completed in a more efficient and therefore less expensive way.

With over a million Australians choosing to manage their own super, there are clearly several advantages to this approach. Let’s look at some of the main ones in turn.

Control

The primary benefit of an SMSF over any other type of super fund is control. As a trustee, you have direct, legal control over the fund's assets and its strategy.

A key feature of this control is the ability to make direct investments. Trustees can build a portfolio that precisely matches their goals and risk appetite. Popular investments include:

• Direct Australian and international shares
• Direct property (commercial or residential)
• Managed funds and Exchange Traded Funds (ETFs)
• Term deposits and other cash products
• Artwork and other collectibles (subject to very strict rules)

Members are also able to invest in direct property, either using the available cash in their fund or through limited recourse borrowing arrangements (which we discuss later). For example, a common strategy involves purchasing a property within the SMSF. The rental income, along with member contributions, can be used to cover the property's outgoings and any loan repayments. The aim of this strategy is often long-term capital growth. This growth may not be realised until the members meet a condition of release and start a retirement pension, meaning a significant portion of the capital gain could be received tax-free.

The control that trustees have over their SMSF also means they can act quickly to adjust their investment strategy in response to market changes or shifts in their personal circumstances.

Information

Related to this enhanced control, using an SMSF means you don't have to wait for an annual statement to find out how your investments are performing. The information is always readily available.

The proliferation of sophisticated, cloud-based SMSF software now means trustees can have a live, consolidated view of their entire portfolio—including bank accounts, shares, and property—at their fingertips. This immediate access to information allows for more timely and informed decision-making.

Synergy with other investment and business strategies

SMSFs can create powerful synergies with a member’s other investment and business activities. The SMSF's investment strategy can be prepared as part of an overall financial plan that reflects the members' goals and total financial position, including their estate planning.

For example, it can make sense for an SMSF to minimise property investments if the members’ non-super assets are already heavily invested in property. This creates a balanced overall investment portfolio, even if the SMSF invests solely in shares.

Another example relates to death benefits. While death benefit payments to dependants are generally tax-free from any super fund, the fact that an SMSF is controlled by the deceased member’s close relatives often allows for more effective tax planning and greater certainty in how benefits are handled.

Personal Satisfaction

Many, if not most, people who run SMSFs do so simply because they enjoy it. They value the control and are genuinely interested in investing and learning about financial markets.

This doesn't mean an SMSF has to take up a great deal of time. Some trustees adopt a simple "buy and hold" strategy with quality blue-chip shares or index-tracking funds. This approach has the added benefit of lower administration costs due to fewer transactions.

Other trustees enjoy spending more time actively managing their SMSF investments. In some cases, a member may choose to only hold investments they believe are ‘ethical’ or that align with their values, often referred to as ESG (Environmental, Social, and Governance) investing. A powerful example of this is Australian doctor Bronwyn King, who discovered her default super fund was investing in tobacco companies. This led her to start a global movement, Tobacco Free Portfolios. This story, highlighted in publications like The Guardian, shows how an SMSF can empower individuals to align their investments with their personal values.

Put simply, for many people, taking an active role in securing their financial future is deeply rewarding.

Life Insurance

Holding life insurance through an SMSF can be very tax-effective. Insurance premiums paid by the fund are generally tax-deductible to the SMSF, which can significantly reduce the net cost of the cover. In some cases, this tax saving can offset a large portion of the fund's annual running costs.

Any insurance benefits paid into the SMSF are included in the fund’s assessable income. The tax paid will depend on the fund’s circumstances at the time, but the maximum rate is 15%, and it is 0% if the fund is paying a retirement income stream.

While large super funds also offer life insurance, members are typically restricted to the insurer and policy chosen by the fund's trustee. The ability to choose your own insurer is a significant advantage of an SMSF. Poor practices within the insurance sector have been highlighted by regulatory reviews over the years, including the Financial Services Royal Commission. An SMSF gives you the control to select a reputable insurer with a policy that best suits your specific needs.

Money that is transferred into superannuation on behalf of a member is known as a ‘contribution.’ There are two types of contribution: 'concessional' and 'non-concessional.' Making a contribution into a self-managed superannuation fund is generally quite simple. Most SMSFs make use of a dedicated bank account, and a deposit into this account is all that is required for a contribution to take place. The fund’s administrator then needs to keep a clear record of the contribution type, the amount, and the member it relates to.

The rules around how much you can contribute, and how those contributions are taxed, are regularly updated. The information below reflects the regulations for the 2025-26 financial year.

Concessional contributions

Concessional contributions are made from 'before-tax' money. This means the contributions are made from income that has not yet had personal income tax applied. They include employer contributions (Superannuation Guarantee or SG), salary sacrifice contributions, and personal contributions that you claim as a tax deduction.

These contributions are generally taxed at a flat rate of 15% when they enter the super fund. The fund pays this tax. As this rate is lower than most people's personal income tax rate, it creates an immediate tax saving.

High Income Earners - Division 293 Tax

While the typical tax rate on concessional contributions is 15%, an additional 15% tax is applied to the contributions of high-income earners. This is known as Division 293 tax.

This higher rate of 30% applies to individuals whose 'income for Division 293 purposes' is more than $250,000 a year. This income level includes your taxable income plus your concessional super contributions. The extra tax only applies to the contributions that fall within the amount you are over the $250,000 threshold.

For example, if your income is $260,000 and your concessional contributions are $20,000, your total 'income' for this test is $280,000. The amount over the threshold is $30,000. Since your contributions ($20,000) are less than this excess amount, your entire $20,000 contribution will be taxed at 30% instead of 15%.

If your income was $240,000 and your contributions were $20,000, your total 'income' is $260,000. This is $10,000 over the threshold. In this case, only $10,000 of your contributions would be subject to the extra 15% tax, while the remaining $10,000 would be taxed at the standard 15%.

This measure reduces, but does not eliminate, the tax benefit of contributing to super for high-income earners. Even at 30%, the tax rate is still significantly lower than the top marginal income tax rate (currently 45% plus the Medicare levy). Effective tax planning is valuable for those near this income threshold.

The Concessional Contributions Cap

The tax advantage for concessional contributions is limited by an annual cap. For the 2025-26 financial year, the general concessional contributions cap is $30,000 per person.

This cap includes all your concessional contributions: employer SG payments, salary sacrifice amounts, and any personal contributions you claim as a tax deduction. If you exceed this cap, the excess amount is effectively added to your personal taxable income and taxed at your marginal rate (though you get a credit for the 15% tax already paid by the fund).

Since 1 July 2022, the 'work test' no longer applies to individuals aged between 67 and 75 who wish to make personal deductible contributions. This means if you are under 75, you can make these contributions regardless of your employment status.

Carry-Forward Concessional Contributions

If your total superannuation balance was less than $500,000 at the start of the financial year, you might be able to contribute more than the annual cap. The 'carry-forward' rule allows you to use any of your unused concessional cap amounts from the previous five financial years.

For example, if you only contributed $20,000 in the previous year (when the cap was $30,000), you would have $10,000 of unused cap space that you could potentially use in the current year, allowing you to contribute up to $40,000 ($30,000 for this year + $10,000 from last year).

Salary Sacrifice

Salary sacrificing is an arrangement with your employer to have some of your before-tax salary paid directly into your super fund as an additional concessional contribution. The logic is simple: the money goes into super and is taxed at 15%, which for most people is much lower than their personal income tax rate.

The financial benefit of salary sacrificing increases as your personal income increases. The personal income tax rates for the 2025-26 financial year (excluding the 2% Medicare levy) are:

As you can see, anyone earning over $45,000 a year receives an immediate tax benefit by salary sacrificing, as their marginal rate is 30% or higher, compared to the 15% tax in super. Remember that your total concessional contributions, including salary sacrifice, cannot exceed the annual cap.

Non-concessional contributions

Non-concessional contributions (NCCs) are made from your 'after-tax' money. Because you have already paid personal income tax on this money, these contributions are not taxed again when they enter your super fund. You do not receive a tax deduction for making them.

The benefit of making NCCs is that once the money is in the superannuation system, any future investment earnings on it are taxed at the low superannuation rate (a maximum of 15%), rather than at your personal marginal tax rate.

The Non-Concessional Contributions Cap

The amount you can contribute as an NCC is also capped. For the 2025-26 financial year:

• The annual cap is $120,000.
• If you are under 75 years of age, you may be able to use the 'bring-forward' rule to contribute up to $360,000 at once, which represents three years' worth of your annual cap.

A critical rule is that you can only make non-concessional contributions if your total superannuation balance was less than $1.9 million at the start of the financial year. The amount you can contribute under the bring-forward rule may also be limited depending on how close your balance is to this $1.9 million threshold.

As with concessional contributions, the work test has been removed for individuals under 75, making it easier for older Australians to contribute to their super.

Downsizer Contributions

Since 1 January 2023, individuals aged 55 or over may be eligible to make a 'downsizer' contribution into their super fund of up to $300,000 from the proceeds of selling their main residence.

• This is a per-person cap, so a couple could potentially contribute up to $600,000 combined.
• The home must have been owned for at least 10 years.
• This type of contribution does not count towards your non-concessional cap and can be made even if your total super balance is over $1.9 million or you are over age 75.

This measure is designed to encourage older Australians to downsize from large family homes, and it provides a valuable opportunity to boost retirement savings.

One of the main advantages of a self-managed superannuation fund is that the trustees are in control of the investments made by that fund.

However, this control comes with significant responsibility. The law requires that every SMSF must have a written investment strategy. This isn't just a document to be created and filed away; it should be a living guide for all investment decisions. Your investment strategy must be reviewed regularly (at least annually) and must now specifically consider the diversification of the fund's assets and whether to hold life insurance cover for the members. The ATO provides detailed guidance on its website about creating and maintaining a compliant investment strategy.

The Member’s Investment Profile

When developing an investment strategy, the first thing to consider is the members’ investment profile. Put simply, an investment profile is a way of establishing the level of risk that a member is prepared to take in the pursuit of investment returns. As a general proposition, higher potential returns are associated with an increased risk of a 'negative return'—a fancy way of saying ‘losing money.’

Investment profiles lie on a spectrum. At one end is a ‘conservative’ profile, which aims to protect capital by favouring investments such as cash and fixed interest. At the other end is a 'high growth' profile, where investments with greater potential for growth (and volatility), such as property or shares, are preferred.

Generally, your investment timeframe is the biggest influence on your profile. If you need money in the short term, a conservative approach is usually best. If you won't need the money for a very long time, a growth-oriented strategy often makes more sense.

It is worth remembering that superannuation is different from other savings. The money is generally preserved until you reach your 'preservation age' and retire. This means the investment horizon for super is often much longer than people realise. As a result, people can sometimes be too quick to switch their superannuation investments to a very conservative profile, potentially missing out on years of valuable growth.

For example, consider a newly married couple, both aged 30, saving to buy a family home. The $50,000 they have in personal savings for a deposit should be invested very conservatively, as they need to protect it for short-term use. Their superannuation, however, is a different matter. They likely cannot access it for at least 30 years. For that portion of their wealth, a conservative strategy makes little sense; it would typically be invested in a portfolio geared for long-term growth.

Complementarity

A key advantage of an SMSF is that its investment strategy can work in harmony with the members’ personal and business financial affairs. This is difficult to achieve with a large public fund, where you have no control over the fund’s specific assets.

For instance, consider a couple running their own successful business. They could decide to use their SMSF to purchase the commercial premises from which their business operates. This is known as acquiring 'business real property', and there are specific rules that make this a workable strategy. By doing this, the rent paid by the business goes to their own super fund instead of an external landlord, building their retirement wealth while giving their business security of tenure. When structured correctly, this perfectly complements their overall business and investment strategy.

Keep it Simple

Many successful SMSF trustees choose to keep their investment strategy very simple. A simple strategy is easier to manage, understand, and is often cheaper to administer.

For example, a simple SMSF might use just two investments: a high-interest cash account and a single, low-cost index-tracking Exchange Traded Fund (ETF). The cash account provides stability, while the ETF provides diversified exposure to the share market for growth.

The fund's asset allocation can then be easily adjusted by changing the proportion held in each investment. A fund with members in their 70s might hold 60% in cash and 40% in the ETF. Conversely, a fund with members in their 30s might hold only a small amount in cash and have the vast majority invested in the growth-focused ETF. This simple, two-asset structure allows trustees to easily manage the fund’s risk profile over time.

Direct Property

For many Australians who wish to invest their superannuation in direct property, an SMSF is the only practical way to do so.

Clients wishing to make an investment in direct property need to take extreme care. It is absolutely vital to understand the rules. For residential property, no member or any party related to them (such as a child) can live in the property or rent it from the fund, even at market rates. Doing so is a serious breach of the 'sole purpose test' and can lead to severe penalties. The rules for commercial property are less stringent, which is why it is more commonly used in strategies involving a member's own business.

We strongly recommend getting professional advice before purchasing any property within a self-managed superannuation fund.

Borrowing

Under certain strict conditions, it is possible for an SMSF to borrow money to purchase an investment asset. This ability is discussed in the next chapter.

A Limited Recourse Borrowing Arrangement (LRBA) allows the trustee of an SMSF to take out a loan to purchase a single asset (or a collection of identical assets). The asset is held in a separate trust (often called a 'bare trust') until the loan is paid off.

The 'limited recourse' aspect of the loan is a critical feature. It means that if the SMSF were to default on the loan, the lender’s claim is limited only to the specific asset purchased with the loan. The lender has no recourse to any of the other assets held within the SMSF.

Background

The laws governing SMSF borrowings were clarified on 7 July 2010. Arrangements entered into after this date are governed by sections 67A and 67B of the Superannuation Industry (Supervision) Act 1993.

These rules place several key restrictions on the borrowing:

1. Single acquirable asset – The borrowed funds must be used to purchase a single asset. For example, you can purchase a single property, but you cannot use one loan to buy two separate properties. A parcel of identical shares in one company is considered a single asset.
2. Repairs vs Improvements – Borrowed funds can be used to maintain or repair the asset to preserve its value, but they cannot be used to improve the asset in a way that fundamentally changes its character. For example, an SMSF cannot borrow to buy a small house and then borrow again to knock it down and build a block of flats. It is important to note that while borrowed funds cannot be used to improve an asset, the SMSF can use its own separate cash (from contributions or earnings) to fund improvements. The restriction only applies to the use of the borrowed money.
3. Limited recourse – As noted above, the lender’s security must be limited to the asset being financed. They cannot have a claim over the SMSF's other assets.

In recent years, most major banks have stopped offering LRBA loans to SMSFs, meaning lending is now dominated by specialist non-bank lenders. It is also possible for an SMSF to borrow from a related party (such as a member), but if this occurs, the loan must be on strictly commercial, arm's length terms. The ATO has provided 'Safe Harbour' guidelines that, if followed, ensure the loan is considered compliant.

Borrowing to buy shares

While possible, using an LRBA to buy shares is less common. The rules do not allow for a progressive sell-down of a share parcel held under an LRBA; the entire parcel must be sold at once. This lack of flexibility makes it a less popular strategy compared to property.

Residential property

Borrowing to purchase residential property is a far more common LRBA strategy. Consider this example: a forty-five-year-old couple have $250,000 in their SMSF. They wish to buy an investment property valued at $650,000. They use their super balance as a deposit and borrow the remaining $400,000 through an LRBA.

The property is then rented out. The rental income, combined with their ongoing super contributions, is used to cover the loan repayments and other property expenses.

The primary driver of this strategy is the expected capital growth of the property over the long term. The goal is often to hold the property until the loan is repaid and not sell it until the members have reached their preservation age and commenced a retirement income stream. By doing this, any capital gain realised on the sale could be received entirely tax-free.

Business premises

Using an LRBA can also be a tax-effective way to own your business premises. The property is bought by the SMSF using the borrowing arrangement and then leased back to the members' business on commercial, arm’s length terms. The rent paid by the business then helps to pay off the loan within the super fund, effectively allowing the business to fund the purchase of its own premises for the ultimate benefit of its owners in retirement.

It is worth noting, however, that business properties held in an SMSF are not eligible for some of the valuable small business Capital Gains Tax (CGT) concessions that might otherwise be available if the property were held in a different structure.

Getting advice

Borrowing within an SMSF adds significant complexity, cost, and risk to the fund. It is not a strategy to be entered into lightly. The administrative and legal requirements are strict, and the consequences of getting it wrong can be severe, potentially negating any financial benefit.

Professional advice from a qualified financial adviser and a legal professional specialising in this area is not just recommended; it is essential to ensure the arrangement is structured correctly and is appropriate for your specific circumstances and risk profile.

There are two main ways a person can withdraw money from superannuation once they are eligible: as a lump sum payment, or as a regular income stream (commonly known as a pension).

When deciding how best to withdraw your money, you need to consider how you will use it. If the funds are for a large, one-off expense, a lump sum might be appropriate. However, if the goal is to fund your lifestyle over many years, leaving the bulk of your money within the superannuation system and drawing a pension is often the more effective long-term strategy.

Income streams or pensions

When you start an income stream, you keep the majority of your benefits within the superannuation fund and withdraw a legislated minimum amount each year. You can choose to receive these payments at a frequency that suits you, such as fortnightly, monthly, or annually.

The government encourages people to use this method to fund their retirement. The main incentive is a significant tax break: once you commence a pension in the 'retirement phase', the investment earnings (including both income and capital gains) on the assets supporting that pension become entirely tax-free.

This means your superannuation fund can become a tax-free investment vehicle in retirement. Zero tax is a powerful feature for wealth preservation.

A critical rule that governs this is the Transfer Balance Cap (TBC). This is a lifetime limit on the total amount of superannuation you can transfer into the tax-free retirement phase.

• The general Transfer Balance Cap is currently $1.9 million.
• It is important to understand that each person has their own personal TBC. If you have never started a pension before, your TBC will be the full $1.9 million. If you started a pension in previous years when the cap was lower (e.g., $1.6 million), your personal cap will be a different amount. You can check your personal TBC on the ATO website via your myGov account.

For people fortunate enough to have more than their personal TBC in super, any amount above the cap must remain in an 'accumulation account', where investment earnings continue to be taxed at the standard super rate of up to 15%.

Given the tax-free status of assets in the retirement phase, it generally makes sense for anyone who has met a condition of release (such as retiring after age 60, or turning 65) to commence a pension up to their personal cap.

Transition to Retirement Income Streams (TRIS)

A Transition to Retirement Income Stream allows a person who has reached their preservation age (currently 60) to start drawing an income from their super while they are still working.

When TRIS pensions were first introduced, the assets supporting them also enjoyed tax-free earnings. However, this was changed on 1 July 2017. Now, the investment earnings on assets supporting a TRIS remain taxed at up to 15%, just like funds in an accumulation account.

This change means a TRIS is now less of a tax-planning tool and more of a flexible income tool. It is most useful for people who genuinely need to supplement their income, perhaps because they have reduced their working hours in the lead-up to retirement.

It is worth noting that once a member with a TRIS meets a full condition of release (for example, by turning 65), their TRIS automatically converts into a retirement phase pension. From that point, the investment earnings on the assets supporting it will become tax-free (subject to their TBC).

Lump sums

Lump-sum withdrawals from superannuation are often used to finance a specific, one-off payment. This could include paying off a mortgage, buying a new car, funding a holiday, or assisting adult children financially.

You do not have to withdraw your entire balance as a lump sum. Generally, it makes financial sense to leave as much wealth as possible within the low-tax environment of superannuation. However, every individual's circumstances are different, and it is always worth seeking advice when considering a significant withdrawal.

Self-managed superannuation funds and withdrawing money

The rules around retirement phase pensions create a powerful strategic opportunity for SMSFs. Because capital gains are eliminated on assets sold to support a pension, trustees can plan their investment realisations accordingly.

Put simply, an SMSF can invest in growth assets that primarily target capital gains, with a view to holding those assets until after the members have commenced pensions in the retirement phase. By doing this, the fund can potentially sell the asset without paying any capital gains tax.

Consider the earlier example of a couple whose SMSF borrowed to purchase their business premises. They could hold this property for many years while the business pays rent to the fund. Once they turn 65 and commence retirement pensions, they can sell the property. If the property has appreciated significantly in value, the large capital gain that is realised on the sale could be received by the fund entirely tax-free, because the asset was supporting their retirement phase pensions.

This is a perfect example of how the investment and withdrawal strategies of an SMSF can be combined to achieve highly effective outcomes.

The Australian Taxation Office (ATO) is responsible for enforcing the Superannuation Industry (Supervision) Act 1993 (SIS Act) and other super laws as they apply to SMSFs.

If the SMSF’s trust deed is drafted properly and the trustees comply with the law, the SMSF will be eligible for tax concessions. These concessions, such as the low tax rate on contributions and earnings, are what drive the enhanced investment performance of superannuation. It is these tax concessions that make super such an attractive investment vehicle.

Although the rules can seem onerous, trustees are normally able to satisfy them without difficulty. The ATO's approach is generally to be helpful, not obstructive. It is important not to overstate the risk of breaching the law. Except for cases of dishonesty or severe negligence, an SMSF that has inadvertently breached the super law will generally be given the opportunity to rectify the issue. Where there is a minor breach, the ATO typically uses its discretion to deem the SMSF as having complied with the rules, provided the trustees have been cooperative.

What happens if an SMSF breaches the law?

An SMSF must be a 'complying' super fund to get the benefit of the tax concessions. If an SMSF seriously breaches the super law, it may be declared a 'non-complying' fund and lose these benefits. Trustees may also become liable for significant penalties.

It is virtually unheard of for trustees to deliberately make their fund non-complying. The financial consequences are catastrophic. More common errors tend to be inadvertent, for example, a payment is misdirected, or an investment is made without fully understanding the rules. The ATO is mostly forgiving when honest errors are made, provided they are reported and fixed. The best option for a trustee who discovers an error is to work with their administrator and auditor to disclose it to the ATO and present a plan for rectification.

SMSF Compliance and the Annual Audit

SMSF compliance operates on a 'self-assessment' system. The fund’s independent auditor plays a critical role in this. Each year, the auditor must review the fund and provide a report to the trustees. This report is then used to complete the SMSF's annual return, which is lodged with the ATO.

The audit has two parts:

1. A financial audit, which checks the accuracy of the fund's financial statements.
2. A compliance audit, which checks if the fund has complied with the SIS Act. This includes checking for things like illegal loans to members, breaches of the in-house asset rules, and ensuring the fund is meeting the sole purpose test.

If the auditor finds a breach of the law, they are required to report it to the trustees. If the breach is significant and is not rectified, the auditor must then report it to the ATO in an Auditor Contravention Report (ACR).

The ATO’s Penalty Powers

In the past, the ATO's main penalty was the "nuclear option" of making a fund non-complying. Today, they have a wider range of penalty options that allow them to apply a more proportionate response to breaches. These include:

• Education directions: Ordering a trustee to complete an approved education course.
• Rectification directions: Ordering a trustee to take specific action to fix a breach.
• Administrative penalties: The ATO can personally fine trustees for specific breaches. These fines must be paid by the trustee from their own money, not from the SMSF.
• Trustee disqualification: The ATO can disqualify a person from acting as a trustee of any SMSF.

These powers allow the ATO to penalise trustees for serious mistakes without having to resort to making the entire fund non-complying.

Consequences of a Fund Becoming Non-Complying

If a fund is made non-complying, it faces a devastating tax penalty. The fund becomes liable for tax at the highest marginal tax rate (currently 47%) on the market value of its total assets at the start of that financial year, less any non-concessional contributions. For an SMSF with $1,000,000 of assets, this would result in a tax bill of around $470,000.

This is a serious penalty, and although it is rare, it explains why a conservative and compliant approach is essential. It is simply not worth taking risks with your SMSF's complying status.

Common Problem Areas

The ATO publishes data each year on the most common breaches reported by auditors. While the specifics change slightly year to year, the main problem areas are consistently the same. The data for the 2023 financial year shows the most frequent contraventions were:

Note: Data is illustrative based on recent ATO statistical reports.

Setting up a SMSF

Who can set up a SMSF?

There is no legal restriction on who can establish an SMSF. They are set up by people of all ages and from all walks of life. Historically, they have been most popular with people who have higher incomes or significant existing wealth, as well as those approaching retirement. However, it is increasingly common for younger people to establish SMSFs to take control of their superannuation early in life.

How much do you need to set up a SMSF?

There is no legal minimum balance required to start an SMSF. However, a practical, common-sense approach is needed.

The costs of running an SMSF (such as administration, audit, and statutory fees) are relatively fixed, regardless of the fund's size. Therefore, on a smaller balance, these fees represent a higher percentage of the assets, which can hinder investment returns. For this reason, a larger starting balance generally makes an SMSF a more cost-effective option.

While various industry bodies have suggested potential starting balances from $200,000 to $500,000 to be cost-competitive with large public funds, there is no magic number. The decision should not be based on cost alone. There can be excellent reasons to set up an SMSF with a smaller balance, such as:

• A strong desire to have direct control over investments.
• The intention to make large contributions in the near future.
• The need to hold a specific asset that cannot be held in a public fund, such as the member's business premises.
• A commitment to a simple, low-cost investment strategy (e.g., using cash and a single ETF), which can minimise administration costs.

Ending an SMSF

SMSFs are not necessarily forever. There are many reasons why an SMSF may need to be wound up. In an article for the excellent online publication, Firstlinks, commentator Julie Steed nominated the ‘seven D’s’ that may trigger the end of an SMSF. They are:

1. Death;
2. Disability;
3. Dementia;
4. Disinterest;
5. Divorce;
6. Departure; and
7. Disqualification.

Some of these deserve more comment.

Death

When a member of an SMSF dies, their benefits must be paid out to their beneficiaries. This can reduce the fund's balance to a point where it is no longer efficient to run. More importantly, the death of a member has a direct impact on the trustee structure. For a fund with individual trustees, there must be at least two. If a death leaves a sole surviving member, they cannot continue the fund alone as an individual trustee. They would need to either appoint a new trustee, convert to a corporate trustee structure, or wind up the fund.

To ensure a member's benefits are dealt with according to their wishes and to minimise disputes, it is vital to have a valid Binding Death Benefit Nomination (BDBN) in place.

Disability and Dementia

A member who becomes disabled may need their benefits paid out, which can reduce the fund's balance. More critically, if a member suffers from a condition like dementia that causes them to lose mental capacity, they are no longer legally able to act as a trustee.

This is a significant issue that all trustees should plan for. Having an Enduring Power of Attorney (EPOA) in place can allow a trusted person to step into the incapacitated member's shoes and act as a trustee on their behalf. This can be a way to keep the fund operating smoothly without being forced to wind it up.

Disinterest

If trustees lose interest in managing their own super, or find it has become too much of a burden, they will need to wind up the fund and transfer their benefits to a public fund where professionals can manage the investments on their behalf.

Divorce

Many SMSFs are run by couples. While there is no legal requirement for a fund to be wound up upon divorce, it is usually impractical for a separated couple to continue as co-trustees. Trustees owe a fiduciary duty to all members of the fund, and this can be very difficult to uphold in a situation of conflict. The most common outcome is that the SMSF is wound up as part of the formal separation of assets.

Departure

To receive tax concessions, an SMSF must be an ‘Australian superannuation fund’ at all times. This requires meeting several residency tests, the most important of which is that the fund's 'central management and control' must ordinarily be in Australia. If trustees move overseas permanently or for an extended period, the fund may fail this test. If this happens, the fund may lose its complying status, which has severe tax consequences. Therefore, moving overseas will often necessitate winding up the SMSF.

Disqualification

A person can be disqualified from being a trustee for several reasons, the most common being bankruptcy. A disqualified person cannot be a trustee of an SMSF or a director of a corporate trustee. Because all members must be trustees, this effectively means the disqualified person's benefits must be removed from the fund, which will often require the SMSF to be wound up.

Options for winding up the SMSF

When an SMSF is wound up, there are three main options for the members' benefits:

• Pay out the benefits: If members have met a condition of release (e.g., they are retired), their benefits can be paid out to them in cash.
• Roll over to another fund: Members can roll their benefits over to a large public fund (like an industry or retail fund). This is the most common option.
• Convert the fund to a Small APRA Fund (SAF): A SAF is like an SMSF, but it has a professional licensed trustee instead of the members. This option can be useful if the members want to keep a specific asset (like a property) that a public fund would not accept as a rollover, but they no longer can or want to be trustees themselves. Converting to a SAF does not trigger a change in beneficial ownership, so it generally does not create a Capital Gains Tax event.

Further Information

Winding up an SMSF is a formal legal process that involves finalising accounts, lodging a final return, and notifying the ATO. Once again, the ATO have developed a short video explaining the need for an SMSF to plan for things that might cause an SMSF to need to finish up:

ASIC have also provided a short page on their excellent Moneysmart website dealing with getting out of an SMSF. You can view it here.