How SMSFs work

You can set up your own private super fund and manage it yourself, but only under strict rules regulated by the Australian Taxation Office (ATO).
An SMSF can have between one to four members. Each member is a trustee (or director if there is a corporate trustee).
When you run your own SMSF you must:

• Carry out the role of trustee or director, which imposes important legal duties on you
• Use the money only to provide retirement benefits
• Set and follow an investment strategy that ensures the fund is likely to meet your retirement needs
• Keep comprehensive records and arrange an annual audit by an approved SMSF auditor

Your accountant can assist you with the compliance side of things – what you need to do is decide how you would like to invest the funds.
Important
If you're running an SMSF you will typically need:

• A large amount of money in the fund to make set up and yearly running costs worthwhile
• To budget for ongoing expenses such as professional accounting, tax, audit, legal and financial advice
• Plenty of time to manage the fund
• Financial experience and skills so you are more likely to make sound investment decisions
• Separate life insurance, including income protection and total and permanent disability cover

Questions to ask yourself -

Before setting up an SMSF, ask yourself these questions:
Have you considered other super funds or investment options?
If you're thinking about setting up an SMSF because you're not happy with your current fund, consider changing to another fund or investment option first.
Will your self-managed fund outperform your current fund?
Super funds use professional managers to invest your super money. Can you do better than the professionals?
Have you considered the costs?
There are running costs that go with having an SMSF. These include the cost of investing, accounting and auditing for your SMSF, which may be much higher than what you are currently paying. These costs will cut into your retirement savings, so be sure to find out from your accountant what the costs will be
Will you lose valued benefits?
Super funds usually offer discounted life and disability insurance. If you set up an SMSF you will have to purchase your insurance separately. Make sure you look into your insurance options before closing your current super account as age and health issues can limit your ability to buy a new policy and increase your premiums.
Do you know enough?
Do you know all your legal responsibilities? Are you on top of the investment market? Can you manage a diversified portfolio of investments? Do you know the tax implications?

SMSFs and investing in property

Some people want to use their SMSF to invest in property.
You can only buy property through your SMSF if you comply with the rules.
The property:

• Must meet the 'sole purpose test' of solely providing retirement benefits to fund members
• Must not be acquired from a related party of a member
• Must not be lived in by a fund member or any fund members' related parties
• Must not be rented by a fund member or any fund members' related parties

However, your SMSF could potentially purchase your business premises, allowing you to pay rent directly to your SMSF at the market rate.
SMSF borrowing
Borrowing or gearing your super into property must be done under very strict borrowing conditions called a 'limited recourse borrowing arrangement'.
A limited recourse borrowing arrangement can only be used to purchase a single asset, for example a residential or commercial property. Before committing to a geared property investment you should assess whether the investment is consistent with the investment strategy and risk profile of the fund.
Geared SMSF property risks include:

• Higher costs - SMSF property loans tend to be more costly than other property loans which must be factored into your investment decision.
• Cash flow - Loan repayments must be made from your SMSF which means your fund must always have sufficient liquidity or cash flow to meet the loan repayments.
• Hard to cancel - If your SMSF property loan documentation and contract is not set up correctly, unwinding the arrangement may not be allowed and you may be required to sell the property, potentially causing substantial losses to the SMSF.
• Possible tax losses - Any tax losses from the property cannot be offset against your taxable income outside the fund.
• Cannot borrow to improve the property - Borrowed funds can be used to maintain a property but cannot be used to improve a property.