The benefits of running your own super fund
By Graeme Colley
There’s been a lot of talk about the upcoming super changes, whether you can make non-concessional contributions, moving super between accumulation and retirement phases, and resetting the CGT cost base of the fund’s investments.
While there's 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’.
Why would I want to start an SMSF?
The main reason for having an SMSF is the greater control and autonomy it provides. Other common reasons include:
SMSF trustees are able to 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, such as business property, artworks and collectibles, and private companies and unit trusts.
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.
Monitoring and controlling the fund’s transactions is directly done by the trustees, which provides greater visibility of the fund’s investments and their performance at any time.
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.
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.
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.
Growing in popularity
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, an age segment which is steadily increasing year by year. Not only is this demographic after greater control of their retirement savings — but being more tech savvy than older generations they want innovative admin solutions offering real time account access.
Advantages of using an SMSF
An alternative approach in business premises ownership
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.
Buy or sell investments quickly
SMSFs 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 are otherwise hard to 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.
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.
But ... remember to do your homework
In deciding to set up an SMSF there are a number of factors to weigh, to ensure it's right for you.
Some people may like to spend a lot of time reviewing their SMSF, others less so. This needs to be taken into account in working out the total effort required in operating the fund.
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.
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.
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.
At the end of the day an SMSF offers a number of distinct advantages, but also entails greater responsibility compared to being a member of a retail/industry fund. It pays to do your homework — and if in doubt speak to a professional ensuring they're licensed to give SMSF advice.