A Self-Managed Superannuation Fund (SMSF) is a superannuation fund option ever-growing in popularity in Australia. It allows fund members to take direct control of the management of their retirement assets, while still being regulated by the Australian Taxation Office (ATO).

Not only are there certain challenges and extra tasks involved, but there are some restrictions on who can become a trustee. In this article, Part 1, we look at whether an SMSF is even possible for you based on the current legislation and certain circumstances that can make a switch to self-managing problematic. In Part 2, we look at the ins and outs of running a SMSF to help you determine whether a DIY fund would really suit you and your superannuation needs.

In a SMSF, the fund trustees double as fund members - and trustees are the person(s) charged with fund management and decision-making. So before going down the SMSF rabbit hole, check you are legally allowed to be a trustee. There are several restrictions in place on who can and cannot become a trustee to help regulate the industry and make sure SMSFs are run well. Listed below are the main restrictions on trustees:

• Adults only. A trustee must be 18 years of age or over.
• You cannot be a SMSF trustee if you are a disqualified person. A person is disqualified if they:
  • have been convicted of an offence involving dishonesty
  • have been subject to a civil penalty order under the super laws
  • are insolvent under administration (i.e. an undischarged bankrupt)
  • have been disqualified by a court or regulator (by ATO or APRA)
• Planning to live overseas temporarily? Here's where it gets tricky. If you live internationally or plan to jet-set overseas for an extended period, check and stay up-to-date with superannuation residency rules. Funds must always meet the 'Australian Superannuation Fund' definition at all times to meet tax concessions.
• No employer/employee relationships. In a SMSF you cannot have a fund member who is employed by another fund member - unless the two members are relatives (spouse, parent, sibling etc.)
• A trustee can also be a company. Known as a 'corporate trustee', a company incorporated under law can act as trustee for a SMSF. If you choose to have a corporate trustee for your fund then you're appointed as a director of that company.

Many have heard of the significant annual savings made possible through self-managing and this is one of the biggest SMSF drawcards. While this is generally true, this doesn't work out to be the case for everyone.

Trustees of a SMSF cannot pay themselves any fee for performing trustees' duties since they double as the fund members. So when properly managed, this is one of the areas where an SMSF can save members money, as you are saving on professional trustee's service fees.

Having said that, many SMSF trustees in Australia choose to rely on accountants or specialist companies to set up or provide ongoing administrative services to SMSFs. In this instance, trustees perform less of the work themselves, but pay for the privilege. Relying on accounting firms or other related service providers may be a necessity for some SMSFs, but keep in mind using outside services does add up. Additional fees can be as little as $1000 annually (so long as there are only a few transactions) but can be much higher if trustees aren't careful. Therefore, if you aren't willing to take on the administrative responsibilities and/or suspect you would need outside help (when it comes to making investments, lodging tax returns etc), make your calculations prior to switching to a SMSF to see if a DIY fund is economical for you.

The second catch is whether or not you have a starting balance to make a SMSF worth it. Recent ASIC research into SMSFs found that a starting balance of $200,000 and under was not very cost-effective. A SMSF should contain between $200,000 and $250,000, otherwise the set-up costs and annual expenses eat into the smaller profits. On the flip side, when funds do meet the minimum amount, ASIC unsurprisingly found SMSFs were comparable if not cheaper than large super funds.

Therefore, if you are interested in a SMSF and believe you are capable, but do not have the funds, you may want to consider waiting. Otherwise, it is possible to start a SMSF with less than $200,000, but be sure to make substantial contributions within the first few years to make it worthwhile.

In a brand new SMSF, the first contribution is usually a non-concessional contribution from the members themselves or an amount rolled over from the member's previous super fund. But where will ongoing contributions come from?

If you're an employee, check if you have the ability to choose where your employer pays your super fund contributions (referred to as fund choice). If you do, then you would simply inform your employer you want your contributions paid into your own super fund. However, if you do not have fund choice, this is where it gets a bit tricky. Despite every Australian supposedly being able to choose their superannuation fund, there are industrial agreements that force many companies to contribute to a specific collective fund. In this scenario you would need to make your own direct SMSF contributions.

Storing your retirement nest egg in a SMSF has its potential benefits, but as you can see, you first need to meet certain legal and economic criteria. If you've come this far and tick the boxes, check out Part 2 as we delve into whether a SMSF would suit your needs and lifestyle.