The Pros and Cons of SMSF: Everything You Need to Know

Self-managed super funds (SMSFs) are becoming a popular option among Australians who are seeking more control over their retirement savings. However, with that control comes a greater level of responsibility, and it is a decision that should be carefully considered.

If you’re considering starting your own SMSF or simply want to understand how it works, this guide explains what an SMSF is, how it operates in Australia, and the key pros and cons to consider. With insights from Trusted Finance Solutions, you’ll gain a clearer understanding of whether an SMSF could be the right choice for your retirement strategy.

What is a Self-Managed Super Fund?

A self-managed super fund (SMSF) is a type of superannuation fund that you manage yourself, rather than relying on an industry or retail fund. It can have up to six members, with each member required to act as a trustee or serve as a director of a corporate trustee.

Unlike larger super funds, where decisions are made by professional fund managers, SMSF members take on responsibility for investment decisions and for ensuring the fund complies with Australian superannuation and tax laws.

According to the Australian Taxation Office (ATO), over 600,000 SMSFs are registered across Australia, collectively managing more than $880 billion in assets as of 2024. This reflects growing interest in personalised control over super investments, but it also highlights the scale of responsibility involved.

How Does an SMSF Work in Australia?

Running an SMSF means you’ll take on the role of trustee, which includes managing the fund’s investments, keeping accurate records, and meeting annual tax and audit requirements.

Here’s a snapshot of how SMSFs operate:

• Trustee responsibilities – Making all investment decisions, ensuring compliance with super laws, preparing annual financial statements, lodging tax returns, and arranging independent audits.
• Setup process – Establish a trust deed, register with the ATO for an ABN and TFN, open a dedicated SMSF bank account, and roll over existing super.
• Ongoing obligations – Maintain an investment strategy, value assets annually, stay within contribution limits, and monitor fund performance.

Even if you outsource certain tasks to accountants or administrators, ultimate legal responsibility still sits with you as the trustee.

Potential Advantages of an SMSF

When structured and managed correctly, SMSFs may offer several potential benefits for Australian investors:

1. More Control Over Investments

One of the most attractive features of an SMSF is the level of control it offers. As a trustee, you have full authority to decide how your super is invested, giving you the flexibility to shape your investment strategy around your financial goals and risk tolerance.

Your SMSF can invest in a wide variety of asset classes, including:

• Australian and international shares
• Residential or commercial property
• Term deposits and cash accounts
• Managed funds
• Alternative assets such as precious metals (within ATO guidelines)

This flexibility may suit investors who want a hands-on approach to building their superannuation portfolio, particularly those who prefer to move beyond the default options offered by retail or industry super funds.

2. Property Investment Opportunities

SMSFs may offer the option to invest directly in property, which is not typically available through most traditional super funds. For example:

• Business owners may use their SMSF to purchase commercial premises and lease them back to their own business, provided the lease arrangement is at market value and meets superannuation law requirements.
• An SMSF may use a Limited Recourse Borrowing Arrangement (LRBA) to help fund the purchase of residential or commercial property, where the lender’s access is restricted and does not extend to other assets within the fund.

This strategy may appeal to people who are interested in investing in property. However, it’s important to understand that SMSF property purchases come with strict conditions, require long-term planning, and may involve significant upfront and ongoing costs.

3. Tax Management Flexibility

Like other types of superannuation, SMSFs benefit from concessional tax treatment. Investment income generated by the fund is usually subject to a 15% tax rate, which could be reduced to zero when members retire and start receiving pension payments from the fund.

In addition to low tax rates, trustees may have more flexibility to manage:

• The timing of capital gains or losses
• The use of franking credits from Australian shares
• How and when contributions or pension payments are made

With careful planning, SMSF trustees may have the opportunity to structure their super in a way that helps improve after-tax outcomes. However, tax advantages depend on remaining compliant with superannuation and tax rules, and seeking professional guidance is often necessary.

4. Potential Cost Efficiency for Larger Balances

For individuals or families with a combined super balance of $250,000 or more, an SMSF may become cost-effective when compared to traditional funds. While SMSFs have fixed costs for administration, auditing, and compliance, these costs can be spread across all members, potentially reducing per-person expenses as the fund grows.

If the fund is managed efficiently and professional services are used wisely, trustees may find they have more control over both investment decisions and overall fees. This can be particularly beneficial for financially engaged investors who prefer to take ownership of their retirement strategy.

Potential Disadvantages and Risks of an SMSF

While SMSFs can offer more control, they’re not the right fit for everyone. Managing your own super comes with risks and responsibilities worth considering:

1. Legal Responsibility and Compliance Risk

As a trustee of an SMSF, you are personally responsible for ensuring the fund complies with Australian superannuation and tax laws. This includes:

• Lodging accurate and timely annual returns with the ATO
• Ensuring all investments meet the sole purpose test (i.e. the fund exists solely to provide retirement benefits)
• Keeping fund assets and transactions separate from personal or business finances

Even minor breaches, such as making a prohibited loan to a member, can lead to serious consequences. These may include administrative penalties, trustee disqualification, or the fund being declared non-compliant, which could result in significant tax liabilities.

This level of responsibility may not suit everyone, especially those unfamiliar with regulatory obligations or financial compliance.

2. Time Commitment and Complexity

Running an SMSF can require a significant investment of time and effort. Trustees must stay across:

• Ongoing investment decisions and performance reviews
• Appointments and coordination with professionals like accountants, auditors, and financial advisers
• Changes to superannuation legislation, contribution limits, and tax rules

Even if you delegate some tasks, the ultimate accountability still rests with you as the trustee. For individuals with limited time or who prefer a hands-off approach, the complexity of managing an SMSF may make it a less suitable option.

3. Costs Can Outweigh Benefits for Smaller Balances

While SMSFs may offer cost advantages for balances above $250,000, they often prove expensive for smaller funds. Typical SMSF costs may include:

• Setup and administration fees
• Annual independent audits
• Ongoing accounting, tax, and legal support

SMSFs with lower balances (under $200,000–$250,000) may struggle to achieve cost efficiency compared to retail or industry funds, especially if professional services are required regularly. For those with smaller balances, fees can reduce overall returns and make it harder to grow the fund over time.

4. No Access to Superannuation Compensation Schemes

Unlike members of APRA-regulated super funds, SMSF members are not covered by statutory compensation schemes. This means:

• There is no access to the Superannuation Complaints Tribunal
• There is no government safety net if a service provider mismanages funds or commits fraud

If something goes wrong, such as a failed investment or administrative error, the financial loss is fully carried by the fund’s members. This can introduce additional risk, especially if trustees are dependent on external service providers for fund administration and investment decisions.

5. Potential for Poor Diversification

SMSFs often concentrate their investments in a few key assets, commonly direct property, due to trustee preferences or limited available capital. While property can be a valuable long-term asset, a lack of diversification can expose the fund to unnecessary risk.

For example:

• A single residential property may tie up a large portion of the fund’s assets.
• Assets that are hard to sell can make it difficult to pay pensions or meet required withdrawals in retirement.
• Concentration risk may impact fund performance during downturns in a specific market.

Diversification is an important principle in investment, and SMSFs with limited diversification may face challenges in balancing returns and managing risk, especially as members transition into retirement and require more stable income.

Who Should and Shouldn’t Consider an SMSF?

Setting up an SMSF may be worth considering if you:

• Have a super balance of at least $200,000 (ASIC recommends this as a potential cost-effective threshold).
• Are confident managing financial matters or have access to quality financial advice.
• Want more control over how your super is invested.
• Are willing to spend time staying informed about regulations and investments.

On the other hand, an SMSF might not suit you if:

• You prefer to have your super managed by professionals.
• Your balance is too small to justify the costs.
• You lack the time, interest, or capacity to manage compliance and paperwork.
• You’re approaching retirement and would rather not take on new complexity.

For some Australians, an SMSF can be an effective tool for growing wealth and planning for retirement. For others, a traditional super fund may be a more suitable option that offers simplicity, support, and lower risk.

Thinking about taking control of your super? Contact us today and speak with a mortgage broker who can help you explore whether an SMSF aligns with your long-term retirement plans.

Let’s Make Your Super Work Smarter, Together

An SMSF may offer greater flexibility and control over your retirement savings, but it also involves active management and a solid understanding of both financial and legal responsibilities. While the potential benefits can be appealing, it is just as important to carefully consider the associated risks.

There’s no single answer to whether an SMSF is “right.” It depends on your goals, experience, balance, and whether you’re prepared to seek the right support.

If you’re thinking about investing in property through your SMSF, working with a knowledgeable professional who understands the rules and responsibilities can make a real difference. Trusted Finance Solutions, your mortgage broker in Moonee Ponds, offers personalised support to help you structure your SMSF property purchase in the right way, working with your advisers to ensure the process remains compliant and aligned with your long-term investment goals.

Make the most of your super with the right support. Our mortgage brokers in Melbourne can help you secure the best SMSF loan for your needs. Get in touch to get started.

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