How Does an SMSF Actually Work?
An SMSF is run by its members, who are also its trustees, or directors of its corporate trustee, responsible for every investment and compliance decision. Generally, the fund pools its assets and generally apportions income, expenses and growth across members based on their account balance, rather than tracking which member's money bought which asset. Fund income is taxed concessionally, generally 15%, with different treatment applying to pension phase, capital gains and non-arm's length income.
What's the difference between a trustee and a member?
Every SMSF member is generally also a trustee, or a director of the fund's corporate trustee, these are two different roles the same person holds at once. As a member, you have your own account balance in the fund, built up through contributions, rollovers and investment earnings. As a trustee, you're legally responsible for running the entire fund, making investment decisions, meeting compliance obligations and acting in the interests of all members, not just yourself. This dual role is what makes an SMSF different from an industry or retail fund, where those two functions are held by entirely separate parties.
How are income and expenses apportioned between members?
Most SMSFs don't track which specific asset belongs to which member. Instead, the fund's overall income, expenses and investment growth for the year are generally apportioned across members in proportion to their account balance, so a member with a larger balance receives a correspondingly larger share of the fund's earnings. Some SMSFs use segregated assets, where specific investments are set aside to support a particular member's benefits, most commonly once a member has started a pension, which changes how apportionment works for that portion of the fund.
How is an SMSF's income taxed?
Superannuation income in an SMSF is generally taxed at a concessional rate of 15%. Capital gains on assets held for at least 12 months receive a one-third discount, reducing the effective tax rate to 10%. Income supporting a member's pension in retirement phase is generally tax-exempt, up to that member's Transfer Balance Cap. Income from a non-arm's length arrangement is taxed very differently, at the top marginal rate of 45%, which is one of the more serious tax risks in SMSF compliance. Our full guide to SMSF Tax and PAYG Instalments covers this in more detail.
Who makes decisions in an SMSF?
Trustees make the fund's decisions collectively, most SMSF Trust Deeds require unanimous or majority agreement between trustees for significant matters, including investment decisions, admitting new members, and changing the fund's structure. This is different to an industry fund, where members have no direct say in the investment choices available.
Frequently asked questions
Can an SMSF have members who aren't trustees?
In limited circumstances, for example, a minor member who can't legally act as trustee, but generally every member is also expected to be a trustee or director of the corporate trustee.
Does each member own specific assets in the fund?
No, in most SMSFs the fund's assets are pooled and income is apportioned by account balance, rather than members owning specific individual assets, unless the fund has chosen to segregate assets for a particular member.
Why is fund income taxed differently to my personal income?
Superannuation is taxed under a separate, generally concessional regime designed to encourage retirement savings, which is different to the marginal tax rates that apply to personal income.
Want a clearer picture of how your SMSF actually operates? Contact Lifetime SMSF on 1300 031 943 or visit lifetimesmsf.com.au.
This information is general and factual in nature. It is not financial product advice, legal advice or tax advice. Lifetime SMSF Pty Ltd is not licensed to provide financial product advice under the Corporations Act 2001. If you require personal advice, consult an appropriately licensed or authorised financial adviser.