“We recently engaged the services of Allan Hall for the set up and ongoing auditing of our Self-Managed Superannuation Fund. Sally Rorke and her team assisted us throughout the very complex process and provided expert assistance and referral to other services provided by Allan Hall. We have been very pleased with the efficiency and professionalism of all the staff we have dealt with at Allan Hall.”
Elizabeth Plati, Trustee
With around 600,000 self-managed funds operating in Australia, SMSFs hold nearly one third of the total superannuation funds, and are becoming the preferred option for those who like to be actively involved with their superannuation and retirement planning.
If managed well, an SMSF can provide significant benefits.
Managing your own SMSF however is a big responsibility. To maximise security around the funds that you will have available for your retirement, the Australian Taxation Office (ATO) has strict rules that govern how you use an SMSF and invest the fund’s money.
SMSFs are not suitable for everyone. You must have sufficient time and skills to manage your own fund and be able to meet your record keeping and reporting obligations.
What is an SMSF?
In simple terms, an SMSF is best described as a type of trust that is a private superannuation fund for between one and four members. The members are beneficiaries who can be individuals, family members or could even be business partners.
The difference between an SMSF and other types of super funds is that each member of an SMSF is also a trustee (or director if the SMSF has a company as a trustee). This means the members of the SMSF run the SMSF themselves to grow their retirement benefits, with due consideration for the super and tax laws in all decision making.
Money in an SMSF can only be used to provide retirement benefits or to pay a death benefit in the event of a member’s death, therefore, the trustee must develop and implement an investment strategy to meet the retirement objectives of all members.
SMSFs are regulated by the ATO and as such they impose a requirement for the fund to be audited each year which means you must keep comprehensive records of fund transactions.
A self-managed super fund puts you in the driver’s seat
Would you like to be able to decide how you want to spend your retirement savings?
An SMSF puts you in the driver’s seat – you control your own investment decisions and can tailor your super to support your personal retirement goals. They have many advantages over traditional institutional or industry run super funds.
In turn, as trustee of your own SMSF you are responsible for complying with the super and tax laws, so the decisions you make must be considered very carefully.
Consider the following advantages and disadvantages of SMSFs in light of your own personal circumstances and seek professional advice to find out if an SMSF may fit into your financial future.
One of the key motivators for individuals moving to a self-managed super fund is greater control over the investment portfolio including the ability to design an investment strategy to meet each member’s individual retirement objectives. In addition, you have more control over the transition from accumulation to retirement phase whereby both accumulation and pension accounts can be held in the same fund.
As an SMSF Trustee, you have access to a wider range of investment options than what is generally available in other types of super funds. This includes being able to own your business premises directly in the SMSF and being able to borrow to acquire a particular asset in the fund.
An SMSF is nimble as it enables the trustee to react quickly to changes in super or tax laws or personal circumstances to ensure they take advantage of current opportunities or protect against risk. It is also possible to transfer certain types of assets from your personal portfolio to an SMSF to achieve greater tax benefits or improve asset protection.
SMSFs are often referred to as family funds as they can hold up to four family members with either pooled or separate investments so long as the fund’s investment strategy allows for this. This offers flexibility, cost savings and can be very tax effective for the family to have their super in the one fund.
Superannuation funds, in general, have significant tax advantages over other types of investment vehicles, with lower tax rates on income and capital gains. However, in an SMSF you can manage the tax payable with a great deal more control. Tax strategies can be implemented for specific members and franking credits received on dividend income can be used to lower the tax paid on fund income and contributions.
Your ability,as trustee of your SMSF to control your investment decisions, provides you with the clarity to monitor and achieve your retirement planning goals. Further, with transparency and understanding of where your super is invested, it enables you to clearly assess investment performance and any associated costs.
Many people do not understand that their super sits outside of their will. An SMSF can be structured to provide effective estate planning outcomes. Whether it’s the ability to make a non-lapsing binding death benefit nomination (not offered by industry and retail super funds) to ensure your wishes are adhered to, or implementing tax effective strategies such as a pension that continues on for your spouse, an SMSF is a great tool to control your superannuation benefits. The ability to combine this with your other estate planning affairs makes it a very effective and often inter-generational estate planning tool.
This is something that is of particular benefit to business owners, as it protects them in the event of bankruptcy or litigation. As superannuation is intended for retirement planning, your superannuation balance is protected from creditors and cannot be used to settle business debt, so it is a way of securing assets.
The responsibility of being a trustee of an SMSF can be considerable in both the time and skill required in meeting the administrative and compliance requirements.
Even though you may appoint professional advisers to advise and assist in the management of the fund, each trustee is ultimately responsible for the ongoing compliance of the fund. If a trustee does not comply with and meet its obligations, there can be significant consequences.
Lack of diversification
In the early years of an SMSF, there may be limited money in the fund to diversify across a wide range of investments, particularly if the SMSF holds direct property.
An SMSF can be more costly to operate than other super funds depending upon the nature of the investments and how they are structured. Annual administration costs can also increase where the trustee does not keep proper records. However, the costs do not increase as the value of the investments grow so typically, SMSFs are more cost effective for larger balances.
Partnering with professional strategic and investment advisers will help you navigate the complex regulations and legislation and develop strategies appropriate for your circumstances. You should ensure you are supported throughout the life cycle of your SMSF with the high level of expert, professional advice and ongoing mentoring that our Super team can provide.