Article supplied by The SMSF Club
As 9% of your annual salary is already being paid into superannuation, soon to become 12%, you should ensure that your superannuation funds are invested in the most appropriate superannuation vehicle.
If you are serious about maximising your wealth, then you should monitor and control the investment decisions for your superannuation as carefully as you would your money outside of super. After all, superannuation is your money!
By having a self-managed superannuation fund (SMSF), you can choose specifically what you want to invest in. You have 100% control over the investment decisions. You have 100% control over your money. You have 100% control over what should become your biggest asset.
What is a Self-Managed Superannuation Fund?
An SMSF, like all superannuation funds, is designed to provide for retirement. An SMSF is often referred to as a Do It Yourself (DIY) super fund, because you control the underlying investment decisions as to where and how your super is invested.
According to the Australian Tax Office (ATO), as at September 2011, SMSFs held the largest proportion of Australian superannuation, accounting for over 32% of assets. There are around 450,000 SMSFs, representing 850,000 Australians managing their own superannuation funds, and approximately $300 billion dollars invested within these vehicles. Currently about 2,000 new SMSFs are established every month. So why are so many Australians establishing their own SMSF?
Why an SMSF?
As the thousands of Australians who have already established a SMSF know, there are lots of benefits in running your own SMSF. The main advantages of having an SMSF over traditional superannuation funds are:
- You have complete control over where your super is invested
- You can maximise tax efficiency
- There is a large amount of flexibility
- You can control costs
Control over making investment decisions
The number one reason that so many Australians are now establishing their own SMSF is because you can control the underlying investment decisions. This allows you to select specific investments and potentially tailor your own investment strategies.
Your investment portfolio may include:
- Direct investments (such as shares or direct property)
- Managed fund (retail or wholesale)
- A business (non-related party) and business property
- Non-traditional assets such as antiques or art
The types of investments the SMSF can hold are subject to the fund’s investment strategy. The investment strategy is formulated to accurately reflect your objectives, risk profile and the investments you intend to utilize. Your investment strategy can also be changed from time to time to suit your changing circumstances, and to take advantage of any investment opportunities. Therefore you control where your superannuation funds are invested. You control what should become your biggest asset. You control the decisions that will eventually dictate the quality of your lifestyle in retirement.
During retirement you are not confined to investing in any particular asset class, which means you may elect to continue investing in a range of growth assets if you so chose, provided it is part of a properly considered investment strategy, and provides you with sufficient income. In contrast, many retail providers elect to switch to very conservative income producing assets, such as cash and fixed interest, which provides very limited opportunity for capital growth, increasing a major risk of outliving your super.
Ability to transfer your assets held outside of super to within the superannuation paradise
With an SMSF you are able to transfer listed shares, managed funds, widely held unit trusts and business property held in individual names into superannuation as personal contributions.
Transfer of these assets may incur capital gains tax, stamp duty, and fringe benefits tax, which would need to be considered in detail. However, in some cases we may be able to claim a deduction for the superannuation contribution which would potentially offset any capital gains that may be payable.
Ability to control the costs and maximise tax efficiency within super
With an SMSF you have the ability to maximise the tax efficiency aspects of your superannuation. As an example, contributions tax is taken out up front by the traditional super funds on contributions. An SMSF will incur this tax when it lodges its tax return. In some cases the tax may not be payable at all after taking into account deductions or imputation credits.
Another strategy is deferring capital gains tax until pension phase. This involves holding investment assets that you believe will have high capital growth during accumulation phase, and then selling them upon commencement of retirement where no capital gains tax applies.
SMSFs are flexible in that they can be tailored to suit the specific needs of all of their members. That is, you may have one member in pension phase, while another member is still in accumulation phase. Your investment strategy may also be formulated in a way that allows for segregation of assets, so that you have growth assets attached to the pension, which pays zero tax.
SMSFs also provide small business owners the ability to link the tax concessions of superannuation with their business and family objectives. They can be very beneficial for small business owners who already own, or are looking to purchase, their own premises, including offices, factories, warehouses and shops.
Control over costs in running the fund
With an SMSF you make the decisions in terms of running the fund. That is, you decide whether to buy/sell assets, and therefore have control over the costs such as brokerage, stamp duty etc.
Further, investors running their own SMSF often pay substantially fewer fees compared to other retail member funds. For example, an entry fee of up to 5% could be payable on entry to a retail fund, which usually incorporates an upfront fee paid to financial advisers. On-going management fees are usually charged on top of this upfront fee.
The initial establishment and on-going administration costs of an SMSF are tax deductible to the fund, and are usually recouped quickly with the other savings you make by controlling your investment decisions. The compounding effect of the cost savings reinvested over time can significantly increase the value of your superannuation assets over the medium to long term.
Characteristics of SMSFs
- They can have up to four members
- All of the members must be trustees, and there can be no other trustees. For this purpose a trustee includes a director of a company where the trustee is a company
- No member is allowed to be an employee of another member (or of an associated person), unless they are a relative of a member
- Trustees are prohibited from receiving remuneration for their trustee duties
To manage the SMSF you have a few different alternatives. You can act as an individual trustee, establish a corporate trustee, or employ a professional trustee to perform the responsibilities for managing your SMSF. You should consult a specialized investment adviser to determine what is the best structure for your personal circumstances.
Disadvantages of an SMSF
It is important that you understand that there are some disadvantages of establishing an SMSF. The main disadvantages of an SMSF include:
- The risk of non-compliance under the SIS legislation is increased due to a potential lack of specialist superannuation knowledge.
- The cost involved in establishing and managing the SMSF. This disadvantage depends on how complex the investments; who will administer the fund, and the size of the fund.
- Increased time needs to be set aside for the on-going management of the fund.
- SMSFs do not have access to the Superannuation Complaints Tribunal.
The trustees of the SMSF are personally liable for any actions of the fund. Failure to comply with regulations may mean that the fund is a non-complying fund, which will be subject to substantial penalty tax rates. These risks can be easily managed and reduced through the use of an SMSF Administration Service like The SMSF Club.
The main reason so many Australians are using SMSF’s to manage their superannuation nest egg is to ensure they control the investment decisions. After all, usually the person who is going to take the most interest in looking after your money is you. This is only the case if you are educated in this area.
Knowledge is only the first step of many in the journey to accumulate assets for retirement; taking action begins with speaking to a licensed investment adviser.
If you would like to learn more about Self Managed Super Funds, register now for the next SMSF Education Evening, hosted by Justin Beeton, Founder and Managing Director of The SMSF Club.
Locations include Adelaide, Perth, Melbourne, Brisbane and Sydney.
Disclaimer: while due care is taken, the viewpoints expressed by contributors and/or sponsosrs do not necessarily reflect the opinions of Your Investment Property.
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