Should I have my own SMSF?
It’s a question over 1.1 million people have said yes to, with there being in excess of 600,000 SMSFs in Australia currently, managing over $900 billion in assets. Superannuation is a large part of an individual’s asset pool, so, taking an active role in its growth and security is important – wherever your super is held.
Is an SMSF something for everyone? Let’s look at what an SMSF is and the Benefits of having an SMSF.
What is an SMSF?
A self-managed super fund (SMSF) is a private super fund that you manage yourself.
All members are trustees and trustees are members and you can have up to 6 members involved.
An SMSF must be run for the sole purpose of providing retirement benefits for the members. Additionally, all decisions you make as trustee of your SMSF must be in the best financial interests of the members.
Control
Super is likely one of your biggest assets. It makes sense that you want to have control over it.
In an SMSF, as trustee of the fund, you have total control. You decide not only how to invest your retirement savings, but also who is involved in the fund with you, the members’ needs for insurance and ultimately how death benefits are dealt with. We are of course there with you to assist with all of your questions and record keeping requirements.
Investment Choice
You have all the choices in the world!
You can invest in a variety of assets, including some types of investment that are not available to you in an APRA regulated fund.
These include the more usual investments of
- Listed and unlisted Australian and International Shares
- Term Deposits
And you can also consider
- Investment Properties – Residential and Commercial
- Some Collectibles
- First Mortgages
- Unlisted Investment Trusts
to name but just a few.
You may even choose to purchase a business property and lease it back to your business.
Borrowing
To make some of the larger investment choices is possible because of the borrowing rules introduced in 2007. SMSFs can borrow for certain assets with a Limited Recourse Borrowing Facility.
Minimum amount required
There is a lot of controversy around what should be a reasonable amount before considering setting up an SMSF.
There’s no minimum amount required to set up an SMSF but, depending on the fund’s complexity and structure, set up costs, administration, reporting and legal fees, it can become expensive. It’s generally more cost-effective if your SMSF has a higher balance.
Generally, at least $300,000 should be considered a minimum, or the ability to get to this balance in a short period of time.
Costs
SMSFs generally incur fixed administration fees regardless of the value of members’ benefits. This means as your super balance grows, the fees as a percentage of your super balance fall. Since SMSFs can have up to six members, the fixed administration fees can be shared across members to further reduce individual member’s administration costs.
Contrast this with the APRA funds which charge fees based upon a percentage of member balances, resulting in fee growth as your benefits grow.
Tax benefits
You’re entitled to the same reduced tax rates that are available through super so your investment return is taxed at a maximum of 15% (assuming your SMSF is a complying fund) rather than your personal income tax rate which could be as high as 45%. In addition, once in retirement phase, your earnings are tax free.
These tax benefits are common to all super funds, not just SMSFs. However, SMSFs have more flexibility to use tax strategies around capital gains, taxable income or franking credits. We’re happy to speak to you about strategies applicable to your circumstances.
Portability
Your SMSF is your lifetime retirement savings fund. You can switch service providers while retaining the same fund and investments.
With APRA super funds, changing service providers usually involves switching from one super fund to another. Not only is this time consuming, it can also mean taxes like a capital gains tax are paid on your balance, reducing your retirement savings
Estate Planning
An SMSF gives you greater flexibility and control in how you pass your wealth on to your family or other beneficiaries when you die. You can create a strategy to accomplish exactly what you are after, taking advantage of all available tax benefits.
The deed may also allow for cascading death benefit nominations or the exclusion of certain beneficiaries.
Enjoyment
On top of these benefits, many SMSF investors enjoy the sense of involvement and purpose that running their own fund brings. It does however, require a certain amount of commitment.
Is there a downside?
If you set up an SMSF, you’re in charge – you make the investment decisions for the fund and you’re held responsible for complying with the super and tax laws. It’s a major financial decision and you need to have the time and skills to do it. Of course you can engage professionals to assist you.
Some of the SMSF compliance requirements which we can help you fulfil include:
- Making sure the SMSF has no more than 6 members and that all members are trustees.
- Meeting all administrative and reporting requirements, including lodging returns by the due dates, and appointing an approved auditor.
- Making sure the SMSF meets the sole purpose test – that the fund exists to give retirement benefits to its members.
- Meeting the super contributions rules and not going over the contribution caps.
- Having an investment strategy, carrying it out, and regularly reviewing it.
- Complying with benefit payment rules when paying funds out of the SMSF to its members.
SMSFs are not suitable for everyone. It depends on the person’s circumstances, financial goals and investment knowledge. If you are considering an SMSF, speak to a trusted adviser to determine if this is the best course of action for you.
Please note the above is general advice only that does not consider your personal objectives and financial situation.
To talk to someone about your personal circumstances please contact Ibbotson & Moscatelli accountants on 03 9824 5533 to arrange an appointment or email office@imaccountants.com.au with your enquiry.
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