A self-managed super fund (SMSF) is an investment vehicle that Australian citizens can use to hold assets intended to provide financial security in the future. SMSFs work in a similar way to many other investment vehicles and funds, but it’s important to understand the details.
There are many good reasons to invest using a self-managed super fund (SMSF), but some thought does have to be given to how to set one up. The onus will be on you to get things right, but this guide will outline what is needed, and how to use an SMSF to achieve your long-term investment goals.
What are self-managed super funds?
A self-managed super fund is an investment vehicle that Australian residents can use to hold assets intended to provide a more secure financial future. You can think of an SMSF as a basket in which you put securities such as stocks, REITs, commodities and cryptoassets.
Unlike a retail or industry super fund, a self-managed super fund puts you in the driver’s seat. As both trustee and beneficiary, investing using an SMSF means that you have complete oversight of the investment process and control over the types of assets it holds.
Finally, be aware that you’ll be held responsible for complying with the relevant SMSF regulations. It therefore pays to do your due diligence and work with a financial professional on all of the compliance obligations and legal requirements.
Tip: Check your SMSF regularly to ensure that it is set up for current market conditions and your investment objectives.
How do self-managed super funds work?
SMSFs work in a similar way to many other investment vehicles and funds, but it’s important to get familiar with the details. You will ultimately be responsible for your SMSF being compliant with regulatory reporting requirements.
An SMSF must have at least one member, and no more than six. This allows family and friends to share the management and benefits of the fund. As a member of your SMSF, you are also its trustee. Alternatively, you may wish to get a corporate trustee to assist with certain responsibilities.
Tip: Consider engaging the services of a financial professional to help with the start-up and ongoing compliance and legal obligations.
Remember that both setting up and managing a self-managed super fund takes time, effort and money. You will want to ensure that you have the capacity to:
- Regularly research potential investment opportunities.
- Set up and review your investment strategy.
- Take care of all financial obligations such as accounting, recordkeeping, insurance and organising your annual fund audit, which must be conducted by an approved SMSF auditor.
What SMSF investment options are available?
One of the big advantages of using an SMSF is the variety of investment opportunities. There are a wide range of different types of assets that can be held in an SMSF such as REITs, commodities, and cryptoassets.
These investment options also include:
- Australian and international shares
- Exchange-traded funds (ETFs)
- Antiques and collectables
- Businesses
- Cash
Those assets can then be bought and sold using a large number of different strategy approaches, such as trend and momentum trading. Whether you want to run a high-risk, high-return strategy, or adopt a more conservative approach, SMSFs offer a way to invest in a way that suits you.
Tip: The wide range of assets that can be held in an SMSF allows you to build a well-diversified portfolio.
SMSF investing with eToro
SMSF investing with eToro starts by completing the onboarding process. This involves downloading and completing eToro’s Self-Managed Superfund Application form. You then send it to the eToro Customer Service Centre in the form of a ticket.
You’ll need to collect and attach a range of documents for your SMSF application, including proof of identity, proof of address, a certified trust deed and more. You can find a full list of what you will need here.
After you’ve been verified, you can use your SMSF as you would your money on eToro to invest in Australian markets and beyond.
Are there any SMSF investment rules and restrictions?
As the trustee of your self-managed super fund, you are responsible for all of the financial and legal obligations associated with running it. This also means that you are liable for any breaches of regulation.
All Australian residents can apply to set up their own SMSF. To be an SMSF member, you generally must:
- Be at least 18 years old.
- Be financially solvent.
- Consent to being a member or trustee of the fund.
- Accept the fund’s responsibilities by signing a Trustee Declaration.
- Have no criminal convictions relating to dishonest behaviour.
- Have never breached the Superannuation Industry (Supervision) Act 1993 or been disqualified by SMSF regulators.
- Not breach the sole purpose test.
Tip: You are required to keep a written record of your SMSF investment strategy and share that as part of your reporting process.
There are also some restrictions in terms of what you can invest in. Self-managed super funds do not allow for in-house assets to a related party to exceed 5% of the fund’s total assets. A “related party” can include a member of the SMSF or a standard employer-sponsor of the fund. You also generally can’t borrow money or acquire assets from a related party.
What are the pros and cons of self-managed super funds?
Self-managed super funds are a great way to put yourself in charge of your financial future, but there are also some potential drawbacks to SMSF investing. Here are some of the pros and cons:
- Flexibility to make decisions according to fluctuations in the market, and seize opportunities triggered by stock market volatility.
- Diversification spreads risk and can smooth out returns, making the whole investment process easier to manage.
- A self-managed super fund lets you exit a position at a time that suits you. This allows you to manage your portfolio to suit your personal aims, or respond to macroeconomic business cycles.
- You may have control over your SMSF and be responsible for its financial and legal obligations, but you can also seek professional advice.
- Because it is a retirement fund, your SMSF will only pay a flat 15% tax rate. Income from shares generally comes with a 30% tax credit, so you can claim back the difference.
- Super funds generally do not come into the scope of Australian capital gains tax (CGT). Once you have held an investment for over one year, only two-thirds of the gain is taxable.
- SMSF managers generally spend at least eight hours working on their fund every month. This amounts to almost 100 hours over a year. Make sure that you have the capacity to manage your fund adequately.
- There are costs associated with having a self-managed super fund. Those costs may outweigh the benefits if, for example, your fund only holds minimal assets.
- You will need to stay up to date with the latest changes to super regulations, and always be on top of your legal and compliance obligations. You will be responsible for any breaches.
- If you’re not familiar with investing, monitoring the market or risk management, there could be downsides to you taking control of your fund’s investment decisions.
Final Thoughts
While not for everyone, there are many benefits to setting up and managing your own self-managed super fund — from total control over what, where and when you invest, to the agility of making fast decisions and growing your wealth according to your personal financial aims.
These useful functionality features could be enough to persuade you to join many other Australians who are committing to setting up their own SMSF.
Learn more about investing on the eToro Academy.
FAQs
- Is there a minimum amount of money I need to have for a self-managed super fund?
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No, there is no minimum amount of money you need to have to start a self-managed super fund on eToro. However, given the expense and time required to manage an SMSF, the cost-benefit is skewed towards those with more capital to invest.
- Do my SMSF beneficiaries have to be related to me?
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No, the fellow beneficiaries in your SMSF do not have to be related to you.
- What is the maximum number of members that can be in an SMSF?
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As of July 2021, the ATO states that an SMSF can have a maximum of six members. Previously, the limit was four members, so choose wisely when involving members in your investments.
This information is for educational purposes only and should not be taken as investment advice, personal recommendation, or an offer of, or solicitation to, buy or sell any financial instruments.
This material has been prepared without regard to any particular investment objectives or financial situation and has not been prepared in accordance with the legal and regulatory requirements to promote independent research. Not all of the financial instruments and services referred to are offered by eToro and any references to past performance of a financial instrument, index, or a packaged investment product are not, and should not be taken as, a reliable indicator of future results.
eToro makes no representation and assumes no liability as to the accuracy or completeness of the content of this guide. Make sure you understand the risks involved in trading before committing any capital. Never risk more than you are prepared to lose.