FAQ - Self Managed Super Funds

1. What is a self managed super fund (SMSF)?

A self managed super fund is when you run your own fund subject to regulation by the Australian Tax Office (ATO). An SMSF is commonly referred to as a DIY fund, a mum and dad fund or family fund and has fewer than five members.

2. What are the benefits in running your own super fund?

There are a number of benefits in running your own super fund. Examples include asset protection, an opportunity to obtain a tax deduction, and an entity for investment with a low tax rate. An even more important benefit is the possible opportunity to roll over a superannuation benefit in an SMSF. The current taxation legislation does not allow for roll-over of a superannuation death benefit which means that on the death of a member the benefits held in the superannuation fund must be paid out, usually in a lump sum rather than by being transferred to another fund.

3. How is a SMSF established?

The formal procedures include:
- incorporation of a company to act as trustee;
- drafting an appropriate trust deed which is generally done by a solicitor;
- completing an election form to the ATO to elect to become an SMSF;
- developing an investment strategy (independent financial advice).

4. Why is a trust deed important?

The trust deed is the document governing the superannuation fund. It sets out the rights and obligations of the members involved and defines the terms and conditions of the fund. These may include contribution details, forms and levels of benefits and the circumstances in which benefits are paid.

5. What happens if the trust deed is breached?

The trustee must act in accordance with the clauses of the trust deed and is responsible for the legal compliance of the fund. Ignorance of the trust deed or the law is no excuse for breach.
The penalties for breaching threshold levels, as outlined in the trust document and legislation (which in most instances would attach to the trust deed), are taxed at a penalty rate, which may be up to 93%.

6. Are superannuation trust issues subject to the same legal principles as ordinary trusts?

Courts have grappled with this issue, and the answer is not black and white. Though it appears that superannuation trusts are subject generally to the same legal principles the courts also recognise that superannuation funds are subject to specific rules which do not apply to ordinary trusts. As the law of trusts in becoming more complex, it is recommended that legal advice is obtained and a solicitor engaged in drafting a trust deed.