Self Managed Super Fund (SMSF) Beginner Guide: Things to Know

  • Ashwin RamdasAshwin Ramdas
  • Updated Dec 19, 2022

  • Mate Checked

    This information has been reviewed by our SMSF Mates before it was published as part of our review process.

Much like a regular superannuation fund, an SMSF is an excellent way for you to save for your retirement. The key difference of an SMSF is that the members of the fund have much more flexibility with how they manage the investments in the fund. Running an SMSF includes things like managing the investments, preparation of financial statements, compliance of the fund and completing the annual audit requirements.

The members of the SMSF are also the trustees which mean they can run the fund for their own benefit; however, they are unable to access the funds until a condition of release has been met, most commonly reaching retirement age. 

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How is a Self Managed Super Fund (SMSF) structured?

Setting up an SMSF means you become a member and a trustee of the fund (which is similar to a director of a company that’s a trustee).

Being a trustee means you are either an individual or a company that is responsible for investing the fund’s assets to grow the fund for the member’s retirement. If the trustee of the SMSF is a company, it is commonly referred to as a corporate trustee, which means all members of the SMSF need to be directors of the company and vice versa. This structure allows for greater flexibility if one of the members of the fund passes away as a successor can replace the deceased member relatively quickly. This is in contrast to an individual trustee SMSF when administering a deceased members estate is burdensome, to say the least.

What responsibilities does a Self Managed Super Fund (SMSF) trustee have?

As you would expect, running an SMSF comes with specific responsibilities. A trustee of an SMSF must act according to the SMSF’s trust deed and the superannuation tax laws. 

At the core of the superannuation laws is something called the sole purpose test which means the fund needs to be run for the sole purpose of providing retirement benefits to the members of the fund (or to their dependants if a member passes away before retirement). 

If you are a trustee of an SMSF, you must maintain the fund so that it complies with the sole purpose test. This Includes when managing the investments and paying benefits to members upon retirement. 

Here is a helpful list of bullet points that include other responsibilities of the trustee: 

Contributions and payments made to members (or beneficiaries) must comply with the SMSF trust deed and super and taxation laws

  • Assets in the fund are valued at market value for the preparation of the financial accounts
  • Reporting and administration obligations required by the ATO are complied with at all times.

Outsourcing functions required to run the SMSF is standard; however, the trustee is ultimately responsible for the operation of the SMSF with regards to superannuation and taxation laws.

If you are the trustee of a self-managed super fund, you must do the following:

Run the SMSF with the best interests of the fund member in mind

  • Act honestly with all matters relating to the SMSF
  • Manage the SMSF with skill, diligence and care
  • Review and update the SMSF trust deed when required 
  • Comply with the SMSF’s documented investment strategy
  • Manage the SMSF separately from your personal affairs
  • Keep an accurate record of all contributions to the SMSF following superannuation law
  • Ensure precise record-keeping for all SMSF matters and only allow access to funds where the trust deed and law allows it
  • Understand and meet your SMSF obligations and responsibilities
  • Ensure the SMSF is audited each year independently
  • Submit your SMSF annual return and reporting requirements to the ATO each financial year
  • Pay the SMSF supervisory levy each year

All trustees and directors are equally responsible for managing an SMSF and making decisions. People over the age of 18 can be a trustee of an SMSF as long as they are not legally disabled (such as mental incapacity) or a disqualified person by ASIC.

What is a Self Managed Super Fund (SMSF) Trust Deed?

The trust deed is a legal document that outlines the rules for establishing and operating your super fund – things like the fund’s objectives, which can be a member and how benefits are paid. The trust deed and superannuation laws together form the fund’s ‘governing rules’.

The trust deed must be:

  • Prepared by someone qualified to do so;
  • Signed by all trustees;
  • Executed according to local state or territory laws; and
  • Regularly reviewed, and updated as necessary.

Investment Strategies for Self Managed Super Fund (SMSF)

An investment strategy will also need to be included as part of your trust documents. It is a formal plan identifying the SMSF’s financial goals (investment objectives) and the tolerance for risk and investment time horizon. As a trustee of the fund, you should regularly review the fund’s investment strategy to ensure it remains current.

It is essential that you understand:


Diversification allows you to minimise your investment risks by investing in a variety of asset classes. By arranging your portfolio in such a way that it holds various types of assets, if the assets do not move in symphony with each other, a diversified portfolio will be able to minimise losses. This will effectively reduce the risks within your portfolio.

Asset Classes

The most common assets classes are as follows:

  • Cash – generally refers to safer assets such as bank bills and term deposits. These investments have a shorter investment time frame. They are more stable than other asset classes and provide a steady low-risk rate of return.
  • Fixed income – generally refers to government bonds, corporate bonds, mortgages and hybrid securities. These are relatively safer than the asset classes below and provide a moderate rate of return.
  • Property – generally refers to direct investments in residential, industrial and commercial property as well as listed property vehicles listed on the Australian share market. Property usually generates a moderate to high rate of return.
  • Australian Shares – generally includes shares held in publically listed companies and listed on the Australian stock exchange. Returns are through dividend distribution and capital growth (or loss). Australian shares may experience volatility over the short to medium term, but the returns may be potentially higher.
  • International Shares – generally includes companies traded on international stock exchanges and not listed on the ASX. It offers increased diversification in a much more extensive range of companies and countries. 

Types of diversification

There are three main ways of diversifying:

  1. Spreading your portfolio among various asset classes as detailed above;
  2. If you are investing in shares only, you could vary your investments by investing in Australian and International shares;
  3. and by spreading your investments across several fund managers.

Dollar-Cost Averaging

By adopting a dollar-cost averaging strategy, you can spread out your investment entry points and potentially achieve a lower average cost of invested funds over a specific time frame. It is expected that for the same dollar amount, you will purchase more units when the share price is lower and fewer units when the share price is higher.

Restrictions on SMSF investments

Investments within an SMSF must be made on an ‘arm’s length’ basis.

This means that the sale price of the asset should always reflect the actual market value. The income of the assets must show an accurate rate of the market return.

Related parties and relatives

These include transactions with anyone who is related to the fund or the trustees.

A ‘related party’ of your fund includes:

  • All members of the fund;
  • Associates of fund members which includes:
    • Relatives of each member; o Business partners of each member;
    • Any spouse or children of those business partners, any company or trust a member or their associates who control or influence;
  • Employer sponsors who contribute to your superannuation fund, under an arrangement between the employer and the trustee of your superfund;
  • Associates of standard employer sponsors, which includes: Business partners or affiliates and other entities like companies or trusts of which the employer controls;
  • Companies and trusts that have control over the employer.
  • A relative of a member is defined as any of the following:
  • A sibling, a parent, a grandparent and a family member.

As expected, there are many investment restrictions that apply to transactions involving ‘related parties’ of your fund.

Loans and early access

You are unable to lend money or provide direct or indirect financial assistance from your superannuation funds to a member or a member’s relative even if there is interest paid. The fund’s assets must be kept solely for your retirement.

Acquiring assets from related parties

The SMSF is not permitted to purchase an asset from a related party unless it is received at market value and is:

  • A listed security;
  • A business real property;
  • An in-house asset provided the market value of all in-house assets within the SMSF does not exceed 5% of the total assets within the fund.
  • Where an asset is acquired at less than the market value, the difference is recorded as a contribution.

In-house assets

An in-house asset is considered an investment in a related party’s fund. 

It is any of the following:

  • A loan or investment to a related party;
  • An investment in a related trust; and
  • Any asset of the superfund that is leased to a related party.

Exceptions include:

Any ‘business real property’ within the SMSF which is leased to a related party of the fund; 

    • Specific investments in related non-geared trusts or companies; and
    • Most investments and loans began prior to the 11th of August 1999.

Except for the above exemptions, the level of in-house assets that an SMSF can hold is limited to 5% of the SMSF’s overall asset value.

What costs are associated with Self Managed Super Funds (SMSFs)?

Some of the costs associated with SMSFs could include but are not limited to:

  • Initial advice fees;
  • Establishment costs;
  • Ongoing admin fees;
  • Audit fees;
  • Legal fees.

What are the main advantages of setting up a Self Managed Super Fund (SMSF)?

  • SMSFs offer member’s a higher level of flexibility to invest in a wide range of assets and investment choices; 
  • Members can pool their superannuation funds to increase the purchasing power;
  • All members of the SMSF are involved in the investment decision-making process.

What are the main disadvantages of setting up a Self Managed Super Fund (SMSF)?

  • Capital gains tax may be paid on the sale of investments when you move out of your existing fund into the SMSF;
  • An SMSF that is concentrated in a particular asset is not correctly diversified and can suffer outsized losses if the asset price falls.

What are the annual costs? 

    • The annual SMSF supervisory levy (paid to the ATO);
    • Preparing financial accounts and lodging ATO application costs;
    • The accounting costs to produce a yearly tax return and financial statement;
    • Annual auditors fees;
    • Expenses relating to the initial structure setup of the SMSF, including costs for a trust deed & investment strategy;
    • The price for a yearly actuarial certification (when required).

What are the optional costs to consider?

    • ASIC fees to establish a corporate trustee;
    • Professional investment advice fees;
    • Accounting and bookkeeping fees;
    • Investment management fees.

What are the other important considerations?

  • Trustees must understand and comply with all legal obligations of running an SMSF;
  • Trustees must develop, implement and review the investment strategy for the SMSF;
  • Trustees are responsible for the management of the fund including when tasks are outsourced to external providers;
  • Breaches of the fund’s legal obligations may cause the fund to incur a penalty tax rate of 46.5%.

Self Managed Super Fund (SMSF) Risks

Lack of statutory compensation

Self-managed super funds do not receive the same government protections that are given to an APRA regulated superannuation fund. 

When transferring an existing superannuation account balance from a superannuation fund regulated by the Australian Prudential Regulation Authority (APRA) to an SMSF, things to consider include the following:

  • Members will be removing themselves from the compensation framework given to super fund investors in an APRA-regulated fund if theft or fraud occurs;
  • Members will not be eligible for compensation under superannuation laws if the fund incurs a loss as a result of theft or fraud.

Impact on insurance

It is generally more difficult and more expensive to obtain life insurance and TPD insurance within an SMSF when compared to an APRA-regulated super fund, which can often receive default levels of cover for life and TPD insurance without any kind of medical assessment. Unless the trustee of the SMSF specifically seeks out insurance cover for the fund, there may not be any in place. 

Access to complaints mechanisms

Some of the dispute resolution mechanisms like the Superannuation Complaints Tribunal, might not be available to SMSFs.

The appropriateness of different SMSF structures

It is costly to change structures, ownership of assets and trustees after the SMSF has been established.

See the ‘Structures’ section for more detail.

Trustee obligations to operate an SMSF

There are several important obligations that an SMSF trustee must comply with under superannuation and taxation laws. These include:

  • operating the SMSF to provide retirement benefits to members, or to their dependants if a member of the fund dies before they retire;
  • receiving contributions and distributing benefits to members and their beneficiaries whilst following the SMSF trust deed, superannuation and taxation laws;
  • correctly valuing the assets within the fund at the true market value to prepare the financial accounts;
  • completing the annual SMSF audit by an approved auditor; and
  • meet the minimum requirements for reporting and administration required by the Australian Taxation Office (ATO).

Trustee obligations to develop an investment strategy

The trustees of an SMSF must develop, implement and regularly review the fund’s investment strategy. Trustees must understand the following:

  • how to improve the risk and return profile of the fund by adequately diversifying the fund’s assets over various asset classes;
  • that there are restrictions on investments within the SMSF; and
  • certain transactions are prohibited, such as lending the fund’s money to a member.

Consider an exit strategy when the time comes

Trustees may want to wind up their SMSF for a wide range of reasons. To make any exit as straightforward as possible, it is important that trustees consider and develop an exit strategy for their SMSF. Specific wind-up requirements should be included in the fund’s trust deed.

Self Managed Super Fund (SMSF) Insurance Options

It is a legislative requirement that SMSF trustees consider the insurance needs of the SMSF members when drafting the fund’s investment strategy. The three main types of insurance which can be held within an SMSF include Term Life, Total and Permanent Disability and Income Protection (salary continuance).

Term Life Insurance

Life insurance pays out in the event of the insured person’s death to a beneficiary. This payout is commonly used to cover living expenses of which the insured person would have contributed to such as education fees for children, debt repayments and other expenses. 

You may also like to read our article covering the 7 biggest myths about life insurance.

Total and Permanent Disability (TPD) Insurance

Total and Permanent Disability (TPD) provides a payout in the event of total disability incurred by the insured person. Policyholders can only choose an ‘any occupation’ definition which means you must be unable to work in your regular occupation or other occupation for which you are reasonably suited as a result of your education, experience or training.

Income Protection Insurance

Income protection insurance will typically cover up to 75% of the insured person’s income and in most cases and provides a monthly benefit if the insured is unable to work as a result of an illness or accident (up to age 70). 

The SMSF sits between the SMSF trustees and the insurance provider and pays for the premiums. Before receiving any insurance proceeds, you will need to meet a ‘condition of release’. A general condition is for the member to permanently retire or reach age 65. Conditions of release allowing insurance proceeds to be accessed are as follows:

  • Death;
  • Permanent incapacity;
  • Temporary incapacity; and
  • Terminal medical condition.

Under these limited conditions, funds may not be payable unless the beneficiary/recipient has also met a requirement of release. For income protection claims, payments can be made as a non-commutable income stream.

Advantages of holding insurance within an SMSF

• Premiums for Term life and TPD insurance held within an SMSF are tax-deductible to the fund; and

• Funds can be paid from superannuation savings rather than after-tax monies.

Disadvantages of holding insurance within an SMSF

• Retirement savings will decrease to fund insurance premiums and may affect overall balance upon retirement unless additional contributions are made to offset the premium payments; and

• Life insurance proceeds paid as part of a lump sum death benefit to a spouse will be tax-free, while profits paid to a non-dependent adult child will generally be taxed.

Closing a Self Managed Super Fund (SMSF)

You may consider winding up your SMSF for various reasons. These may include:

  • Your knowledge of trustee responsibilities and obligations;
  • The time involved in running the SMSF;
  • The ongoing associated running costs;
  • Your management of investments within the SMSF;
  • High burden of managing the fund and paying any fines; and
  • Any deterioration in the relationship between the trustees and the members.

To close an SMSF, you will need to:

  • Refer to and complete the instructions and requirements as specified in the trust deed regarding the winding up of the fund. All trustees should agree on the decision and method involved;
  • Payout or rollover the superannuation balance to another fund;
  • Engage an approved SMSF auditor to complete the final audit and indicate that the fund is being wound up;
  • Complete and lodge the final annual return;
  • Pay any outstanding tax; and
  • Once all liabilities are settled, and any refunds received, you must close the fund’s bank account.

Limited Recourse Borrowing Arrangement (LRBA)

Borrowing or gearing your super into the property must be done under strict borrowing conditions called a ‘limited recourse borrowing arrangement’ (LRBA).

An LRBA arrangement provides you with the right but not the obligation to buy an asset through the payment of instalments. The fund will receive any interest generated by the asset; however, it will not have legal ownership over the asset until the loan is repaid.

The following steps need to be completed in order to establish the limited borrowing arrangement:

1) Ensure your trust deed allows for the arrangement;

2) Identify the assets to be purchased;

3) Meet with a specialist SMSF advisers;

4) Establish a holding trust; and

5) Meet with a lending specialist and apply for a loan and purchase the asset.

Limited recourse borrowing agreement

A limited recourse borrowing agreement (LRBA) requires the trustee of an SMSF to borrow from a third party lender. The trustee would then use the borrowed funds to purchase an asset that is held in a separate trust. If for some reason, the loan defaults, then the lender’s rights are limited to the asset which is held in the trust and does not have recourse on any assets within the SMSF.

Loan Conditions

From September 2007, superannuation funds, including SMSF’s can borrow using an LRBA provide the following conditions and features are adhered to:

• The borrowed funds are used to acquire an asset;

• The asset is held on trust. The SMSF trustee has a beneficial interest and a right to acquire the legal ownership of the asset through the payment of instalments;

• The lenders recourse against the SMSF trustee in the event of default is limited to rights relating to the asset;

• The asset being acquired is one which the SMSF is permitted to acquire or hold directly. The investment subject to the loan cannot be an investment the fund already owns. Additionally, the superannuation law places restrictions on investments that can be acquired from related parties such as relatives of members or trustees, members or fund trustees; and

• Depending on the lender an interest cover ratio may be imposed, meaning in the event of default, the asset may need to be sold and debt repaid.

Eligible Lenders

Any loan arrangement must be on a full arm’s length commercial basis and in keeping with the sole purpose test (investments must be for the provision of retirement benefits for the members of the fund). There is no legislated limitation on the total amount a fund can borrow. However, the lender’s security must be limited to the underlying asset subject to the borrowing. Similarly, there are no legislative restrictions on where the loan can be sourced.

LRBA costs

With an LRBA, a trustee of an SMSF may incur expenses associated with borrowing to invest in property. Some of these costs may include:

• Loan establishment fees;

• Valuation fees;

• Stamp duty fees;

• Legal expenses; and/or

• Title search fees.

Advantages of setting up an LRBA

• It allows an SMSF to purchase an asset in situations where it does not have enough available capital to purchase the asset outright;

• It may help in diversifying the SMSF’s investments by providing funds to acquire other assets; and

• There may be tax benefits.

Disadvantages of setting up an LRBA

• It may not be a cost-effective option for small amounts of money;

• Trustee must understand responsibilities and investment restrictions; and

• Managing the paperwork and maintain records may be a time-consuming process.

Arm’s length income

An SMSF must always transact on an arm’s length basis, which means the purchase and sale of any assets within the fund must reflect the true market value of the asset. Any income generated from assets within the fund should also reflect the actual market rate of return. If the trustee of an SMSF were to sell an asset for a below-market rate intentionally, then they would be in breach of this rule.

Confused about any of the terms in this content? Check out our glossary page for explanations of many different superannuation and SMSF terms.

Related reading: How to set up / start a self managed super fund (SMSF)

General Advice Warning

Ashwin Ramdas

Eventum Consulting

Ashwin is an accountant and educator based in Perth, Western Australia. He is passionate about helping family owned businesses and startups. He is one of the founders of SMSF Mate and you’ll regularly see him on our podcast!

Ashwin is a managing owner and director of Eventum Consulting, a multidisciplinary firm helping clients with finance, succession planning and their tax needs. He also served as a lecturer in taxation and small business at the Central Institute of Technology, and has worked as an accountant at a number of well-known tax specialists.

Ashwin studied a Diploma of Business Education and a Bachelor of Commerce in Financial Accounting, Managerial Accounting and Corporate Finance, both at Curtin University, WA.

Ashwin is passionate about technology, and sees it as an enabler for his clients to grow truly sustainable and profitable businesses.

You can find out more about Ashwin or connect with him on Linkedin here:

Or visit his website here:

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  • SMSF Mate is a unique website because it has ideas about how to approach SMSFs, insurance and other financial topics that come straight from first hand experience. It's much more useful than what you find on all the other financial websites that just offer generic info that you could easily get on the ATO's website. It's also nice to know there's no financial incentive behind the information, it's legitimately there to help people understand self-managed super funds and how to get the most out of them, not to get an affiliate commission from a broker or other financial services provider. The investment product information is also incredibly useful, I've never seen this kind of functionality on any other website that let's you look at such a wide range of products, sort by what info is most interesting or important to you, and subscribe to updates for different funds and financial products all in one place. Definitely worth checking out if you own or are considering an SMSF!

    David G, Self-Employed, SMSF Owner
  • SMSF Mate provides a unique insight into superannuation and financial topics in a way that is easier to understand than conventional websites. The colloquial nature of the site makes it easy to understand and they often speak about complicated topics in lamens terms so I can wrap my head around them. The investment product information is a great way to research funds that I am interested in investing in with my SMSF and there is a lot of helpful information on the site for better structuring my investment portfolio. In comparison to other websites which offer similar information, SMSF Mate excels as the information is free to access whereas many other sites charge a subscription fee for the same thing. Overall, I think SMSF Mate is a great resource for SMSF trustees and is worth looking at for a variety of super-related topics. Thanks.

    Tim B, Business Owner, SMSF Trustee