What is a Self-Managed Superannuation Fund?

Self-Managed Superannuation Funds

A Self-Managed Superannuation Fund (SMSF) is a superannuation fund with up to six members. SMSFs are generally established by family members wishing to consolidate their family’s superannuation savings.

The members cannot be employees of other members, unless they are relatives. Each member of the fund must take on the trustee role.

An SMSF is still governed by superannuation laws in the Superannuation Supervision Industry (SIS) Act and taxation legislation that relates to superannuation. These funds are regulated by the Australian Taxation Office (ATO).

The Role of Trustee

An SMSF can either have individuals who act as the trustee or a corporate trustee. Strict rules apply as to who can be a trustee or director of a corporate trustee and each person must not be a disqualified person.
If members choose to have individual trustees, each member must act as trustee. No-one can be a trustee without also being a member unless the fund only has one member. In this case, a second person needs to be nominated as trustee.
Where an SMSF has a corporate trustee, each member must be a director of that company, and each director must be a member. If the fund only has one member, that person can be the sole director, or a second director may be appointed. If using a corporate trustee, it is generally best to use a company that has no other purpose.

A person cannot act as trustee (or director of a corporate trustee) if they are a disqualified person. This means they also cannot be a member of an SMSF. A disqualified person is someone who:

  • Has ever been convicted of an offence involving dishonesty;
  • Has ever had a civil penalty order under the Superannuation Industry (Supervision) Act 1993 made against them;
  • Is an insolvent under administration (i.e. they are an undischarged bankrupt);
  • Has been disqualified from acting as a trustee.

A company cannot act as trustee if a responsible officer is a disqualified person or the company is in liquidation.

In certain situations, a person can be a member of an SMSF but may be unable to fulfil the role of trustee. In these cases, it may be possible for another person to act in their place as either the member’s legal personal representative or under an Enduring Power of Attorney (EPoA). These situations include:

  • Death of the member
  • The member is under age 18
  • The member has lost mental capacity
  • The member wishes to hand over power to their EPoA

Legal advice should be sought in these situations to ensure the SIS rules are not breached and to ensure the correct process to appoint the replacement trustee is followed.

Trustee Declaration

Trustees must accept the role in writing and verify that they are not a disqualified person.

All new trustees and directors of trustee companies are also required to complete a ‘trustee declaration’ within 21 days of being appointed a trustee. This form is available from the ATO. It does not have to be sent back to the ATO but must be retained for at least 10 years and be made available to the regulator if requested.

Investment Strategy

The trustees are required to formulate, regularly review and give effect to an investment strategy. The investment strategy is a document that outlines the key investment guidelines to be adopted by trustees when investing the SMSFs funds.

When preparing an investment strategy, consideration must be given to the following:

  • The risks in making, holding, and realising investments and the likely return to be derived, having regard to the fund’s objectives and expected cash flow requirements;
  • The composition of the SMSF’s investments to ensure sufficient diversification (as appropriate);
  • The ability to liquidate investments to meet cash flow requirements as they arise;
  • The ability of the fund to discharge its liabilities as they arise (including the ability to pay benefits to members as required);
  • Whether the trustees of the SMSF should hold insurance cover for the members of the SMSF.

This strategy should be documented in writing and be reviewed regularly (at least annually). Investments that do not fit within the strategy cannot be held.

The ATO has produced a range of publications, videos and other information to help trustees of SMSFs.

Trustees are encouraged to access this information and review it. Information can be accessed from the ATO’s website (www.ato.gov.au).

Superannuation Borrowings LRBA

Superannuation funds may take out long-term loans to buy assets under the Limited Recourse Borrowing Arrangement (LRBA) rules in superannuation legislation.

The rules are very specific on how the loan arrangement must be structured. This includes:

  1. The borrowed money must be used to purchase a single acquirable asset, or collection of identical assets. The loan can be used to pay expenses for the loan or asset purchase, or to repair or maintain the acquired asset. Borrowed money cannot be used to improve the asset.
  2. The asset must be held in a custodial trust with the SMSF having a beneficial interest in the asset. The trustee of the custodial trust cannot be the same as the trustee of the SMSF.
  3. The SMSF trustee must have the right to legal ownership of the asset once the loan has been repaid.
  4. If the SMSF defaults on the loan, the lender will only have recourse to the asset purchased with the borrowed money.

However, the lender may seek to obtain a personal guarantee from SMSF members. 

The timing of transactions is important as the borrowed money must be directly applied to purchase the asset and the title held in the name of the custodial trustee.

Before entering an LRBA, the SMSF trust deed should be reviewed to ensure you are permitted to borrow. This may require amending the trust deed before proceeding with the acquisition. The acquisition should also fit into the SMSF’s investment strategy.

The information below provides answers to some of the typical questions that arise in relation to LRBAs.

Single Acquirable Asset or Collection of Identical Assets

Whether the fund borrows or not, trustees of an SMSF can buy any asset that is appropriate to the fund but it can only be acquired from a member or related party if it is business real property, listed shares, units in a widely held unit trust or an in-house asset.

Each loan can only be used to buy a single asset. This means for example, that a property spread across more than one title deed is usually not a single asset. The acquisition of each title would need to be financed from a separate loan arrangement. An exception to the rule is where a property covers more than one title, but it is legally impossible to sell them separately or there is a permanent and substantial fixture that is built across the titles.

A collection of assets will meet the rules for a single asset if the assets are identical, have the same market value and are purchased in one transaction. For example, a parcel of shares in a single company can be purchased provided they are all at the same price.

‘Off the Plan’ Purchases

It is possible to purchase a property ‘off the plan’ using an LRBA but only if the SMSF pays the deposit using accumulated savings and the loan is used to finance the balance of the purchase price at settlement.

Maintenance, Repairs, and Improvements

Borrowed money can only be used to:

  • Buy an applicable asset;
  • Pay the costs associated with borrowing (e.g. loan establishment fees) and acquiring the asset (e.g. valuation fees, transfer duty, conveyancing and legal fees);
  • Maintenance and repairs to the asset – maintenance is defined as work to prevent defects, damage or deterioration to the asset while repairs include remedying or making good defects in, damage to, or deterioration of an asset.

Improvements cannot be funded from borrowed money but may be paid with money from the SMSF provided the nature of the asset does not change.

Advice should be sought before money is spent on an asset that is subject to an LRBA. 

Limited Recourse

The loan must be limited recourse. If the SMSF trustee defaults on the loan the lender can only recover what is owed from the asset that was purchased with the loan. This protects the other assets in the fund. But members may have needed to provide personal guarantees which puts assets held outside superannuation at risk.

Members who have been requested to provide a personal guarantee should seek appropriate legal advice to ensure they are fully aware of their rights and obligations.

Custodial Trust

The asset must be held on trust for the SMSF. The title should be registered in the custodial trustee’s name. The custodial trustee cannot be the same as the trustee of the SMSF. Many commercial lenders will require a custodial trustee to be a corporate trustee.

The trust and the trustee will need to be established before the asset is purchased or before any purchase contract is entered into. Once the loan has been repaid, the title of the asset will need to be transferred to the SMSF trustee to avoid being treated as an in-house asset (that is subject to a 5% limit). Stamp duty may apply, with rules varying across the states.

Related Party Lenders

SMSF trustees can seek finance from a commercial lender. Alternatively, a member, relative or other related party could be the lender. In this case, appropriate legal advice should be obtained to ensure the borrowing arrangements are correctly structured from a taxation, superannuation, and legal perspective.

The Australian Taxation Office has issued several Interpretive Decisions that indicate that where a trustee of a SMSF seeks to borrow from a related party, such loan arrangements should be arranged on commercial terms. If trustees borrow on non-commercial terms, the ATO may treat the income derived from the underlying asset as non-arm’s length income. Non-arm’s length income is taxed at a current rate of 47%. When entering a loan with a related party, the trustees should exercise care to ensure that other aspects of superannuation law are not breached and that the loan arrangement is properly documented.

In April 2016 the Australian Taxation Office released Practical Compliance Guidance 2016/5. This publication establishes ‘safe harbour’ terms for SMSFs seeking to borrow from a non-bank lender for the purposes of acquiring real property and listed securities. 

LRBAs and the Transfer Balance Cap (TBC)

The TBC is the maximum amount a member of a superannuation fund may invest in superannuation income streams (pensions) (other than an income stream being paid under transition to retirement rules). The limit, which applies to people first commencing a retirement income stream from 1 July 2023 is $1,900,000[1]. This figure is subject to indexing in future years.

Where a SMSF has a LRBA in place and has one or more members of the fund receiving income streams, repayments made under the LRBA may be counted against the member’s TBC in certain circumstances. However, this only applies to LRBAs entered on or after 1 July 2017.

An amount will be counted against a member’s TBC (that is, counted as a credit against the TBC) where repayments made under an LRBA increase the value of interests that are supporting a retirement phase income stream. Generally, this will occur where a LRBA is held over assets that are in the pension phase of superannuation and repayments are being made from assets held in the accumulation phase of the same superannuation fund. Value is being shifted from the accumulation phase to the pension phase.

Where a LRBA is in place over an asset that is in either the accumulation or the pension phase, and the repayments are made from the same phase, then TBC reporting is not required.

By way of example, if a single member SMSF has both an accumulation account and a pension account and an asset of the pension account has a LRBA in place, and repayments of the loan are made from cash held in the accumulation account, the amount of each repayment will be reportable as a credit against the member’s TBC as each repayment effectively transfer value from the accumulation account to the pension account (by reducing the debt held in the pension account).

[1] People that commenced a retirement income stream before 1 July 2023 may have a  lower cap.

How and When to Wind Up an SMSF

Winding up an SMSF involves a series of legal, administrative, and financial steps that must be completed to ensure compliance with Australian superannuation laws and regulations. The process can be initiated when it is no longer cost-effective, practical, or necessary to manage your own fund.

When to Wind Up an SMSF

An SMSF should be wound up when:

  • You no longer have the capacity, time, or desire to manage the fund yourself, especially in retirement or due to changes in health or lifestyle.
  • If the costs of running the SMSF (such as auditing, accounting, and administration fees) outweigh the benefits, winding up the fund and moving to a more cost-effective option may be ideal.
  • Changes in SMSF membership (e.g., death of a member) or compliance breaches that are difficult to rectify may also necessitate winding up the fund.
  • If a trustee is no longer able to fulfill their obligations, or if trustees wish to reduce complexity in managing their retirement savings.

How to Wind Up an SMSF

The process of winding up an SMSF involves several key steps:

  • The fund’s Trust Deed must be reviewed to ensure that the rules for winding up the SMSF are understood and followed.
  • A formal decision is made by the trustees to wind up the SMSF. This resolution must be documented in writing and kept for record-keeping purposes.
  • All investments within the SMSF, such as shares, property, or cash, need to be sold or transferred to another superannuation fund. Ensure that all capital gains tax (CGT) and other taxes are accounted for on the sale of these assets.
  • Settle any outstanding tax liabilities, administration fees, and other obligations of the SMSF. This includes making any necessary superannuation contributions or pension payments that are due.
  • Once the assets are liquidated, transfer the member balances to another complying superannuation fund (e.g., an industry or retail super fund). The transfer must be done according to each member’s balance in the fund and within the requirements of superannuation law.
  • Prepare and lodge the final financial statements and audit report of the SMSF and submit the final SMSF annual return to the Australian Tax Office (ATO), ensuring all tax obligations are satisfied.
  • After the final return is lodged and liabilities are settled, notify the ATO that the SMSF is being wound up and cancel the SMSF’s Australian Business Number (ABN). Keep records for at least five years after winding up the fund, as required by law.
  • Once all assets are sold, liabilities settled, and member balances transferred, close any SMSF bank accounts and investment platforms associated with the fund.

Risks and Other Considerations

It is important to bear in mind the following in relation to our advice:

  • The winding-up process can take several weeks to months, depending on the complexity of the SMSF’s assets, any outstanding liabilities, and the timing of asset liquidation.
  • Be mindful of the financial year-end when selling assets to manage potential tax liabilities, such as capital gains tax.
  • The fund will remain operational until all required tasks are completed, and the ATO is satisfied that all obligations have been met.

General Advice Warning: The information in this Education Guide is provided for information purposes and is of a general nature only. It is not intended to be and does not constitute personal financial advice. Further, the information is not based on your personal objectives, financial situation or needs. You are encouraged to consult us before making any decision as to how appropriate this information is to your objectives, financial situation and needs. Also, before making a decision, you should consider the relevant Product Disclosure Statements available from your financial consultant.