By Graeme Colley
Every kind of superannuation fund has its own advantages, but setting up a self-managed superannuation fund (SMSF) provides some unique advantages worth considering.
An SMSF gives the trustee some unique options around tax efficiencies, unparalleled investment flexibility, and cost advantages once your fund has grown to a tipping point.
However the biggest advantage of an SMSF is having active control over the investment decisions you want to make for your retirement.
Lots of SMSF trustees use their fund to make direct investments in unit trusts, term deposits, listed and unlisted shares, and property.
An SMSF gives the trustee some unique options to make investments that are currently not available to funds of five or more members.
For instance, an SMSF can buy business property from members and other related parties, which creates tax advantages when the property is then leased at market rates to a related party as it continues to build wealth within the fund.
If the related party in the SMSF is also running a business from the property the rent would usually tax deductible and help build further wealth for the member over and above the normal tax-deductible contributions that are being made to the fund.
Having control over your investment decisions means you have the flexibility in an SMSF to buy and sell when you decide.
Market timing is critical for making investment decisions. SMSF trustees are uniquely placed to take advantage of income and taxable capital gains for investments that have moved to retirement phase and could then provide tax-exempt or partially exempt income to the fund.
This would not be possible in other funds if you sold an asset when the member’s benefit was in the accumulation phase.
As discussed, the control over when you buy or sell any of your fund investments is critical in providing tax advantages.
For tax purposes an SMSF is treated in virtually the same way to the larger funds, but you have much more flexibility in using the various tax rules to get direct efficiencies for the fund. For example, the ability to defer the purchase or sale of an investment may provide a reduction in taxable income on the fund.
The cost advantages of an SMSF compared to other superannuation funds will vary according to the circumstances of the fund.
Generally an SMSF with a low balance may be relatively cost inefficient compared to larger funds. However, there will be a break-even point for a member’s balance where the cost of running the SMSF will be relatively cheaper than a larger fund.
If cost is a priority over the flexibility and control, keep a watchful eye over the relative costs in both larger funds and SMSFs and wait until the moment you have determined will provide the best advantage to your circumstances.
An SMSF provides an effective vehicle for Estate planning. As many SMSFs have members either retired or nearing retirement, estate planning becomes a priority to ensure that any benefits accumulating for members are paid to the right beneficiaries. This is often done using binding death benefit nominations or reversionary pensions.
Intergenerational transfer of SMSF fund assets can also happen where other members of the family also belong to the fund, which will become increasingly important if the current proposal to increase the maximum number of SMSF members from 4 to 6 becomes the law.
Creditor protection is an important and little-known benefit of an SMSF. This allows assets of an SMSF to be protected from creditors if a member or their business should run into trouble. It’s more of a backstop rather than a primary reason to get into an SMSF, but it’s an added assurance that valuable assets designated for retirement are adequately protected when needed.
In a word: Control. The satisfaction of an SMSF is in your ability to control and direct the funds investments and fortunes. You are empowered to make decisions which are directed to the benefit of you and your family, which provides the greatest pleasure and confidence to own your future.
For more information on the best SMSF strategies, see our Expert Insights page where you can receive regular emails from Australia’s leading SMSF experts.
