Key takeaways
- Money enters the fund as contributions or rollovers, is invested, and is later paid out as a pension or lump sum.
- The fund has its own bank account and assets, kept strictly separate from members' personal money.
- Each year the fund prepares financial statements, is independently audited, and lodges its annual return.
- The fund moves through three broad phases: accumulation, transition to retirement, and retirement (pension) phase.
An SMSF works like a small financial engine for your retirement. Money flows in, gets invested, grows in a concessionally taxed environment, and eventually flows out to you as income in retirement. The difference from a large fund is that you direct the engine.
Money coming in
Two streams feed the fund. Contributions are new money, from your employer, salary sacrifice, or personal payments. Rollovers are existing super you transfer in from another fund. Both land in the fund's own bank account. There are annual limits on how much you can contribute, which we cover in contributions to your SMSF.
Investing the money
The trustees decide how the fund's money is invested, guided by a written investment strategy that the fund must keep and review. An SMSF can hold shares, managed funds, term deposits, property and other allowable assets. Every asset must be held in the fund's name and kept separate from members' personal assets. See what an SMSF can invest in for the boundaries.
The yearly cycle
Each financial year the fund follows a steady rhythm:
- transactions are recorded and the books reconciled;
- financial statements and member balances are prepared;
- an approved SMSF auditor independently audits the fund;
- the SMSF annual return is lodged with the ATO and any tax is paid.
Our annual compliance calendar maps these out across the year.
The three phases of a fund
A member's super generally moves through three phases:
- Accumulation: you are building the balance, and fund earnings are taxed at the concessional super rate.
- Transition to retirement: once you reach preservation age, you can draw a limited income stream while still working. See TTR pensions.
- Retirement (pension) phase: you start a pension and draw a regular income, with earnings on the assets supporting that pension potentially taxed at nil.
Money going out
Benefits can only be paid once a member meets a condition of release, most commonly reaching preservation age and retiring. Payments are made as a pension, a lump sum, or a mix of both, directly from the fund's bank account. Paying a benefit before a condition is met is a serious breach, so trustees need to be clear on the rules before releasing any money.
Frequently asked questions
- Does an SMSF need its own bank account?
- Yes. An SMSF holds its money in a dedicated bank account in the fund's name. Mixing fund money with personal or business accounts is a compliance breach and one of the most common mistakes new trustees make.
- When can I take money out of my SMSF?
- Generally once you meet a condition of release, such as reaching your preservation age and retiring, or turning 65. Accessing super early without meeting a condition is illegal and carries significant penalties.
- How often does an SMSF report to the ATO?
- An SMSF lodges an annual return after its independent audit each year. Funds paying pensions also report certain events, such as starting a pension, through transfer balance account reporting.
