Self-Managed Super Funds

By John Grocke


Family Super Funds, referred to as Self-Managed Super Funds (SMSF's), have become the popular choice for those people seeking more control, flexibility and access to direct investments that otherwise are not available through most Institutional or Industry super funds.

They may be called “self-managed” super funds but the concept of self-managed is often misunderstood.  In reality there are a few people who meet the definition of 'self-managed' (probably less than 10% of those operating a Family Super Fund) and the majority of families operating a self-managed super fund do so in conjunction with professional advisers including their accountant and a financial planner.

The media often refer to super as an investment. We would argue this does not correctly represent the nature and structure of superannuation; rather, it is a facility (a Trust structure) where long term savings can accrue with special taxation concessions both on some types of contributions and the investment earnings along the way.

The investment part relates to the type of assets your fund holds. For example where a member held mostly cash during the Global Financial Crisis they did not suffer a negative return. So the investment part is all about where you have your money within the fund invested; as is the case outside of super as well.

The industry does a poor job of defining the difference between income and the growth on the assets you hold in your super account. Generally super funds simply report an annual return which comprises both income and growth (or negative growth). To illustrate this better say your super account has delivered an income from interest, share dividends and other distributions of 5% for the financial year. In addition to the income there is the movement in the share or unit price of the growth assets in your portfolio. Let's compare the combined result with a positive and negative return of 6%. With a positive growth return your combined return for the year is 11% whereas with a negative growth return of 6%, your combined return is -1%. A very significant variation.

If you are drawing a pension from the fund it becomes important to understand if you are drawing income or an income and capital from your account. If you are drawing within the income the fund generates then you know that your capital is intact.

Some of the parameters required to operate a SMSF include;

  • No more than 4 members
  • The fund must be audited each financial year once the financials have been prepared
  • The fund must have certain key documents including an Investment Policy statement
  • There must be a minimum balance to make a SMSF viable, we would use a figure of $300,000 as a starting point. This amount is aggregated between the members.

Costs are generally fixed and as the fund balance increases, unlike Institutional and Industry super funds, it does not increase relative to the asset base. The members of the fund are required to also be the Trustees and take the responsibility for the management of the assets on behalf of the members.

There are investment rules that need to be adhered to but broadly the types of investments Family Super Funds prefer to hold include:

  • Direct Property
  •  Direct Shares
  •  Term Deposits
  • A simple bank account as the operating account for the fund.

A Family Super Fund is transparent and once the members become familiar with the rules and requirements, together with professional help, operating an SMSF can be an interesting and an alternate way to manage long term savings.

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Anthony Klatt, John Grocke and Mathew Wilkshire are authorised representatives of Paragem Pty Ltd. Paragem Pty Ltd ABN 16 108 571 875, is the holder of Australian Financial Services License number 297276 and these authorised representatives trade as Johnston Grocke.

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