Is a Self-Managed Superannuation Fund the right option for me?
Self-Managed Superannuation Funds (SMSF) account for approximately 25% of the multi trillion dollar superannuation pool in Australia.
Most of us have become used to the idea that we have only limited control over our superannuation. SMSFs, however, provide much more control over where, when, and how you invest, what you pay for and when you pay for it. SMSFs also provide increased flexibility and the ability to instruct the trustees what to invest in.
After becoming a trustee of a SMSF, initially, many people struggle with the concept that superannuation is really your own money, but it is set aside for retirement.
Yes, there are limitations on when you can get your hands on the money, and how the money can be invested by the superannuation fund, but it is still your money.
The real goal is making your superannuation money grow so you can achieve your needs and objectives in retirement.
There is no denying that superannuation can be complicated but the skills to run your own superannuation are no different to running a business, managing an office, or investing outside of superannuation. It can be helpful to have an SMSF advisor to help you structure your superannuation and achieve the best possible outcomes.
Advantages of an SMSF
You have complete control over the investments of the fund. You can invest in a wide range of assets, including bank deposits, direct mortgages, direct property, shares, managed funds, and pooled investment trusts. The fund can even purchase commercial property used by the member’s business and lease it back to the business at commercial rates. This also provides Asset protection.
A member of an SMSF has the flexibility to commence a pension (subject to the preservation rules) and access as much of the capital of the fund as they wish, tax free, at any time following retirement after age 60.
All the investments are held in your name as trustee or in the name of a trustee company that you control. This means that only you can sign the fund’s cheques and authorise the making or selling of investments.
The cost of managing an SMSF may be less than comparable institutional funds if the capital is large enough.
A self-managed superannuation fund gives you control and flexibility to take positions in new floats and potentially enhance the funds performance as a result.
Under limited circumstances, an SMSF can also borrow to purchase an asset. This can be beneficial to purchase an asset that would otherwise be out of the reach of the trustees thereby creating an opportunity to generate higher returns.
An SMSF allows you to take a tax deduction on contributions if you are eligible, which the fund pays tax on at 15%. The effective tax rate can be reduced by targeting franked dividend income. As trustee you will also have control over the timing of the realisation of capital gains on your investments. For assets held for more than 12 months, a discounting of the capital gain applies, meaning tax of 10% is paid on the gain.
Should the fund be in pension phase, there is the opportunity to reduce the effective tax rate on income and capital gains to 0%.
The tax rate on investment income within the SMSF, used to support your pension income, reduces to nil once your fund account begins to pay a pension to you. The SMSF allows you to change the characteristics of your fund from an accumulation to a pension fund without the need to sell investments and realise capital gains.
Contributions in specie
You can contribute listed shares, units held in managed funds, fixed-term deposits and “business real property” directly to the fund, instead of cash if you wish. Personal shareholdings can be transferred into the fund without the need to liquidate them.
Estate planning opportunities
Because the fund can continue indefinitely, surviving family members may enjoy tax and social security advantaged income and growth after your death.
In most instances, fund assets are protected upon bankruptcy or litigious attack.
A member of an SMSF can take out any number of differing insurance options via an SMSF, with maximum flexibility of cover.
The fund continues unless you wish to wind it up.
Disadvantages of an SMSF
All decisions and responsibilities associated with managing the fund rest with you as trustee.
The costs and administrative requirements of establishing and maintaining an SMSF include:
- Establishing the superannuation fund, including formulating a trust deed and corporate trustee (if appropriate)
- Preparing and keeping accurate accounting and administrative records, lodging the tax and regulatory return
- Appointing an auditor and ensuring you have an annual audit completed for the fund every year
- Fees to the regulator (ATO) on an annual basis for the privilege of having an SMSF
- Costs of brokerage if you invest your money in listed shares
- Costs of dealing with a real estate agent and solicitors if you purchase property
- Potential costs associated with a financial planner or investment adviser to assist with your investments
- Costs of education if you are an inexperienced investor and you want to make your own investment decisions
These costs also exist when you are a member of an ARPA regulated fund, however due to their size and member base the costs are distributed more widely.
Putting in place additional structures, such as an SMSF, will be more complex to administer and will involve additional ongoing costs, such as tax returns, audits, and possibility actuary reports.
However, this is where experienced SMSF administrators such as Vincents can assist and take most of that burden from you.
Penalties for non-compliance
There are serious taxation consequences for non-complying superannuation funds. Generally, the fund’s total assets – less any member’s contributions for which no tax deduction has been claimed – will be subject to tax at the highest marginal rate. In addition, any income in a year in which a fund is noncomplying will be taxed at the highest marginal rate.
To run an SMSF effectively, you should consider whether you have enough time and the appropriate skills and financial experience, or the willingness to learn, to make the best investment decisions for the fund and to meet all the obligations as an SMSF trustee. Of course, you can outsource some or all these tasks, but ultimately, as trustee, you will be responsible for the running of the fund.
No access to compensation
Unlike the large superannuation funds regulated by the Australian Prudential Regulation Authority (APRA), SMSF members do not have access to the compensation arrangements under the Superannuation Industry (Supervision) Act 1993 in the event of theft or fraud.
There may be risks, for example:
- a lack of access to the Superannuation Complaints Tribunal to resolve SMSF complaints
- between the trustees/members; using individual trustees as opposed to a corporate trustee
- a breakdown in the relationship of fund members, especially in circumstances where the membership structure of the SMSF is unusual
Download our PDF Brochure for more information.