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When investment markets fall dramatically, Australian investors often take a greater interest in the DIY super structure. Some individuals believe they can achieve better investment returns on their super money than the professionals, or can do it more cheaply, or perhaps they believe: ‘If someone is going to be losing my money I’d rather it be me!’

Your history may close the door to SMSF

Have you ever been convicted of an offence involving dishonesty? I’m not playing truth or dare: This question is important if you’re considering running your own super fund.

Your character and your financial acumen are important considerations when deciding if you’re a suitable person to be a self-managed super fund trustee.

An individual can’t be a SMSF trustee if he is a ‘disqualified person’: For example, an individual with a conviction involving dishonesty, or an individual who is an ‘undischarged bankrupt’. If you’ve been declared bankrupt, you’re not permitted to be a super fund trustee until your bankruptcy is discharged.

If you’ve ever been convicted of an offence involving dishonesty, then forget about becoming a trustee of a SMSF.

The types of dishonesty offences that would deem individuals as ‘disqualified persons’ are fraud-related, such as attempting to gain financial benefit by deception from the government, which may include something as simple as giving false information on your tax return, although offences that involve time in prison are most likely to exclude you from running a SMSF.

I explain who can, and can’t, become a trustee of a SMSF in Chapter 8.

Markets may go up, or down, but when you run your own super fund you’re never off duty when keeping your DIY super fund on the right side of the super laws.

A DIY super fund is subject to many of the same rules as other super funds, such as those relating to

✔ Contributions, including salary sacrificing (see Chapter 4).

✔ Taxation (see Chapters 13, 18 and 19).

✔ Investments (see Part IV).

✔ Benefit payments (see Part V).

Take your pick – the ATO or APRA

Very few people realise you can actually choose from two types of DIY super fund:

✔ Self-managed superannuation fund (SMSF): The ATO regulates this type of DIY super fund. A SMSF is run by the fund members in their role as trustees. Your fund must satisfy basic conditions to be considered a SMSF (see ‘Satisfying the SMSF definition’, later in this chapter).

✔ Small APRA fund: The Australian Prudential Regulation Authority (APRA) regulates this type of DIY super fund. APRA oversees the soundness of financial institutions and super funds (with the exception of SMSFs, which are regulated by the ATO). A small APRA fund is run by a trustee that holds an RSE licence – that is, a professional trustee approved by APRA. All super trustees of non-SMSFs must hold such a licence. RSE stands for registrable superannuation entity.

Apart from references to small APRA funds in this chapter, and in Chapter 2, and one reference in Chapter 8, I devote the rest of the book to SMSFs.

One of the main reasons APRA regulates small APRA funds is to protect those members who may find themselves in a small fund due to being an employee of the business owners, but not a relative of the owners of the business. A small APRA fund may also be suitable where an individual is disqualified from being a SMSF trustee (check out the sidebar ‘Your history may close the door to SMSF’ earlier in this chapter, and Chapter 8).

Leading the charge with SMSFs

SMSFs are by far the most popular type of DIY super fund, with 534,000-plus SMSFs in operation compared to just over 2,700 small APRA funds, as at June 2014 (figures released in September 2014).

SMSFs have enjoyed stellar growth in the past decade or so. In 1998, SMSF trustees controlled just over 10 per cent of Australia’s super wealth, according to APRA and ATO statistics. Five years later, in 2003, SMSFs held 20 per cent of Australia’s superannuation money. Fast forward to late 2014, and the SMSF is now the leading category of super fund in Australia, with the 534,000 or so SMSFs in existence controlling around a third of the country’s super wealth.

As at June 2014, SMSFs controlled $557 billion of the $1.85 trillion or so held in super assets in Australia, according to statistics released by the ATO in September 2014. (In contrast, small APRA funds controlled a mere $2 billion of all super money.) Remarkably, this massive amount of money held in SMSFs is controlled by just over 4 per cent of Australia’s population; that is, just over 1 million DIY super trustees.

The one common feature of both types of DIY super fund is that each fund can have no more than four members. The key differences between the two types of DIY super fund, besides having separate regulators, is that the professional trustees of small APRA funds can charge (and do!) for their services, and such funds are subject to more onerous member disclosure obligations. Small APRA funds have similar member reporting requirements to larger funds, and members of small APRA funds have access to a complaints process if they have any issues with the fund.

Satisfying the SMSF definition

A super fund must meet basic conditions to be considered a SMSF. If a DIY super fund doesn’t meet the basic requirements for a SMSF, it may be deemed to be a small APRA fund, which means it needs to have a professional trustee that holds an RSE licence (refer to ‘Take your pick – the ATO or APRA’ earlier in this chapter).

The basic requirements of a SMSF include the following:

✔ Each member of a SMSF must also be a trustee of the fund, and all trustees must be members.

✔ No member of the fund can be an employee of another member unless they’re relatives, and a relative can include immediate family and extended family. A relative of a fund member includes a spouse, parent, grandparent, brother, sister, uncle, aunt, nephew, niece, lineal descendant or adopted child. A relative also includes a spouse, including same-sex spouse, of any of these individuals defined earlier as a ‘relative’. For example, if you run a business and your brother is one of your employees, he can be a member of the fund. For more information on the meaning of relatives, see Chapter 8.

✔ None of the SMSF trustees can receive payment for performing the role of trustee.

If a super fund doesn’t meet these conditions, the ATO usually works with the trustees of the DIY super fund to help them meet the requirements of a SMSF. Alternatively, the ATO gives the trustees time to wind up the fund, or the opportunity to use a licensed trustee and move to APRA regulation. For more info on the rules applying to SMSF trustees, see Chapters 8 and 9.

If trustees fail to notify the ATO of the change in status of the SMSF, they could be penalised personally with a fine of up to $3,400. I explain SMSF administration and compliance penalties in Chapters 9 and 11.