By David Henriksen
27 June 2019
I often get asked, “When should I consider having a Self-Managed Super Fund (SMSF)?”. The answer is it depends on your circumstances as well as other factors.
Some of the key reasons why people do have or consider an SMSF include:
- Cost savings – With a consolidated super balance between up to four members if they have a combined value of around $400,000, running an SMSF may be cheaper in fees compared to leaving benefits with current industry or retail super funds. This is because the members/trustees control the costs and have a choice to pay for professional assistance or just pay the fixed cost of the annual accounting, audit and administration of the SMSF. Compared to other industry and retail funds that most often charge a fee based on the value of the super fund.
- Better investment choice and flexibility – With an SMSF members/trustees have access to more investments as they can invest directly in property, all listed shares in Australia and globally, unlisted trusts such as property trusts or investment trusts, bonds, cryptocurrencies, precious metals and any other traded assets (generally speaking). It is very common for a business owner to consider holding business premises that they run out of in their SMSF if it is able to fund the property through either its own funds or through Limited Recourse Borrowing Arrangements (LRBAs).
- Control – Sometimes people just want full control of their super wealth as they do not trust any institutions to manage their retirement wealth. An SMSF gives them the ability to take full control over their retirement wealth for better or for worse.
- Consolidation of multiple super balances into one place – In the case of an individual or couple to have all their super in one portfolio they either manage themselves or with the assistance of a trusted investment adviser. This consolidation allows for better oversight of investments removing the noise of having various super accounts all invested differently and never really having a global view of their total asset position or allocations across various markets and investments.
- Better estate planning strategies – With industry and retail super funds if your adviser is trying to separate various contributions to better manage super benefits that may or may not be taxed on your death (this gets complicated in industry or retail super funds). For each contribution that is to be quarantined a new super account (and portfolio) needs to be set up. In an SMSF however, even though you can only have one accumulation account (the account your contributions first go to and are held until you qualify to start pensions) you can run many pension accounts. This then allows for better estate strategies at the same time as still only having one portfolio supporting many member accounts. Even in events such as the death of one spouse things can continue in the SMSF in most circumstances with no need to move portfolios and investments around as would be needed in other super funds like industry and retail super funds.
An SMSF is a special type of trust that if established properly complies with the Superannuation Industry Supervision Act (SIS Act). By complying with the SIS Act, it is taxed concessionally compared to other types of trusts such as family trusts (both fixed and discretionary) or widely held trusts. An SMSF is taxed at a 15% income tax rate (and 10% tax on capital gains if the asset sold was held for more than 12 months) while it is in accumulation mode and a very generous Nil% income tax rate (and capital gains tax rate) when in full pension mode.
An SMSF can have up to four members and commonly has either one member or a couple who are both members.
The members are the ultimate controllers of the SMSF and are responsible for ensuring the SMSF complies with the SIS Act. If they fail to ensure the SMSF is run properly they can be fined or have criminal charges against them or have their SMSF made non-complying by the ATO who regulates SMSFs. If made non-complying the SMSF is issued a tax bill at 45% of the value of the SMSF assets at the time of becoming non-complying (nearly 50% of the member's retirement wealth is lost to tax in such an event).
Most SMSF members/trustees seek expert advice from their accountant, financial adviser and/or SMSF administrator to ensure they are properly managing their SMSF to avoid breaking the law and having any negative outcomes. There are around 600,000 SMSFs in Australia today with over 1.1 million Australians who are members of their own SMSF.
Before considering an SMSF I encourage all people to talk to an SMSF accountant or financial adviser on this topic to ensure all risks are considered. This article is general in nature an should not be used as the basis to establish an SMSF without further advice that considers your personal circumstances and suitability of such a product.
If you have more questions after reading this article or have an SMSF and want to talk further please contact PKF Sydney & Newcastle on (02) 4962 2688 or email [email protected] and one of the team will contact you to assist further.