There’s been a lot of talk about the upcoming super changes, whether you can make non-concessional contributions, moving super between pension and retirement phases, and resetting the CGT cost base of the fund’s investments.
While there is a lot happening, things haven’t changed to any great degree for anyone thinking of starting a self-managed superannuation fund (SMSF).
The basic considerations for having an SMSF remain the same as they have for many years. In other words, ‘the more things change, the more things stay the same’.
Reasons for having an SMSF
The main reason for having an SMSF is the greater control the trustees/members have over their retirement destiny. Other reasons include:
- Investment choice: Trustees decide the fund’s investment strategy to suit the investment and superannuation needs of the fund’s members. The investment choice can include direct shares, managed funds, real estate, cash and term deposits. There are some investments which are unique to SMSFs;
- Cost: The cost of setting up and running an SMSF may vary depending on the circumstances. It is possible for the costs of running the fund to be lower than fees you may pay on other funds;
- Transparency: Monitoring and controlling the fund’s transactions is directly done by the trustees/members, which provides greater visibility of the fund’s investments and their performance at any time;
- Tax control: It is possible for an SMSF to provide greater control over the tax payable by the fund. This mainly relates to the timing of the purchase and sale of investments which may optimise the tax position of the fund;
- Estate planning: Having an SMSF provides the flexibility to plan who receives the member’s death benefits, when they receive it and how they receive it, such as a pension or lump sum; and
- Pooling of investments: Family members may be able to pool their superannuation in the one SMSF, which may invest in certain assets for the benefit of the family business. This may include business property and some direct and indirect investments in family business entities.
The statistics about SMSFs are impressive by any standard. SMSFs make up the biggest segment of the $2.3 trillion superannuation investments. Over the last decade, SMSF assets have trebled in size to $674.7 billion, which represents nearly 30% of total superannuation assets in Australia. It is expected that SMSFs will continue to grow by 5% each year.
SMSFs are continuing to attract a younger demographic. Of the funds established in the December 2016 quarter, 43% of new trustees were under the age of 45. This proportion has increased steadily year by year. This demographic is after greater control of the member’s retirement savings and innovative admin solutions with real time access, as they are more tech savvy than older generations.
Here are some advantages of using an SMSF:
- Holding business premises in the SMSF: Many small business owners have their business premises owned by the SMSF. This provides tax effective strategies as the premises can be leased to the member’s business and may receive a tax deduction for the rent paid on the property. The fund would be taxed at 15% on the net rent received. In some cases, the SMSF may wish to enter into a limited recourse borrowing arrangement, where the fund borrowing to have a property purchase is held in trust on behalf of the fund. You may need to obtain advice on how this could advantage the fund. Assets held by the SMSF are protected from bankruptcy, as creditors are unable to access a member’s superannuation benefit if they are facing bankruptcy;
- Ability to buy or sell the fund’s investments quickly: Trustees/members of an SMSF can quickly change their investments, or the asset allocation of the fund, within the limitations of the fund’s investment strategy. This allows the fund to gain optimum access to tax benefits, as well as investment opportunities as soon as they arise;
- Ways of investing differently: SMSFs can hold direct property, unlisted shares, artworks and other exotic or boutique investments;
- Manage or eliminate CGT: Capital gains on investments held to support pensions are generally tax free because there is no CGT payable;
- Buy assets that members could not otherwise afford: An SMSF allows up to four people, usually family members, to pool superannuation assets to purchase assets which may be unaffordable if purchased by members individually; and
- Flexible payment of death benefits: Benefits from superannuation are not subject to the same payment restrictions as if they are paid from a person’s estate. There is no requirement to wait until probate has been granted.
There are some things that trustees/members of SMSFs may need to pay attention to.
- Time involved: Some trustees may like to spend a lot of time reviewing their SMSF. This needs to be taken into account in working out the total effort required in operating the fund;
- Knowledge of trustees: SMSF trustees need to make sure they know the superannuation rules and they update themselves of any changes to determine the impact on the operation of the SMSF;
- Investment Risk: Taking greater risk or lacking investment diversity may impact on the returns of the SMSF, or may not provide enough cash flow to allow benefits to be paid to members when required; and
- Costs: Before establishing an SMSF, a comparison of costs should be made. If the SMSF is small, it may turn out to be more expensive than other types of funds.
The decision to have an SMSF requires a number of considerations, some of which may seem to be in conflict. However, there are many benefits of having an SMSF, which include control and flexibility over investment decisions, including timing investments to take advantage of taxation and estate planning.
Important: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. Consider the appropriateness of the information in regards to your circumstances.
Published in Switzer Daily by Graeme Colley: 8th June, 2017