When it comes to managing your superannuation, there’s no one-size-fits-all solution. Some options are straightforward and low-cost but come with limited flexibility. Others, like Self-Managed Super Funds (SMSFs), offer unparalleled control but with a bit of extra work. If it’s control and flexibility that you’re after, you should consider an SMSF.
What Is an SMSF?
An SMSF is a super fund that you manage yourself. You set up your own fund, take on the role of trustee, and bear the responsibility of managing and maintaining it. As the trustee, you’re responsible for ensuring that your SMSF complies with superannuation laws and regulations, including the Superannuation Industry (Supervision) Act 1993 (SIS Act). Like most things in finance, SMSFs aren’t for everyone. Whether an SMSF is right for you depends entirely on your unique situation and financial goals.
Reasons to Consider an SMSF
Let’s start with the perks. Here are some compelling reasons why an SMSF might be a good fit for you:
- Invest in Property: Australians have a soft spot for property, and an SMSF allows you to invest in real estate using your superannuation funds. However, it’s important to follow strict rules, particularly around borrowing and related party transactions, to ensure compliance.
- Buy Commercial Property for Your Business: If you’re a business owner, you can purchase commercial property through your SMSF and use it to run your business. This way, you’re paying rent to your super fund instead of a third party. Just remember that any property purchase must adhere to the “sole purpose test,” ensuring it benefits the members’ retirement savings.
- Invest in Unique Assets: With an SMSF, the world of investing opens up. You can invest in a wide range of assets, from cryptocurrencies and artwork to global shares and physical commodities, as long as you stay within the rules.
- Pool Super Balances: An SMSF can have up to six members, allowing you to pool funds with family or friends to invest in larger assets.
- Borrow Within Super: SMSFs allow borrowing to invest in large assets like property. However, this involves complex limited recourse borrowing arrangements (LRBAs) and carries significant risk, especially for smaller or less diversified SMSFs.
- Capital Gains Tax Flexibility: An SMSF gives you the power to manage capital gains tax (CGT) more effectively, especially when transitioning assets from accumulation to pension phase. Many industry and retail funds will force you to sell the asset during this transition, triggering CGT, whereas assets can be seamlessly transferred in an SMSF.
- Defer Contributions Tax: Contributions tax in an SMSF can be deferred until it’s actually due, allowing your investment earnings to compound in the meantime. This contrasts with larger funds that deduct tax at the time of contribution.
- Estate Planning: SMSFs typically offer better flexibility for paying out death benefits compared to public offer funds, making them an attractive option for those focused on detailed estate planning.
- Control Costs: As the person in charge, you have control over the platforms and services you use, giving you some leeway in managing costs. There are fixed costs to maintain an establish an SMSF, such as accounting and audit fees, however there are some very cost-effective solutions available.
As you can see, SMSFs come with a lot of potential benefits. But as with anything, there are two sides to the coin.
Reasons to Think Twice About an SMSF
Before jumping in, here are some reasons why an SMSF might not be the best choice:
- Considerable Workload: As the trustee, you’re responsible for compliance, administration, and investment decisions. This requires significant work and financial knowledge. While you can hire a Financial Adviser to help, this will add to your costs. Keep in mind that meeting regular reporting and auditing requirements is non-negotiable.
- Fixed Costs: Despite the flexibility, SMSFs usually aren’t cost-effective for smaller balances because of fixed costs like accounting and audits. The general recommendation is not to start an SMSF unless your fund balance exceeds $200,000, though some argue this threshold could be higher or lower depending on individual circumstances.
- Residency Requirements: To remain compliant, the majority of SMSF members must reside in Australia. If you plan on living overseas for more than two consecutive years, this could be an issue. The Australian Taxation Office (ATO) requires that the central management and control of the SMSF must ordinarily be in Australia.
- Risk of Poor Investment Choices: The flexibility of an SMSF can be a double-edged sword. Some people use their SMSF to invest in highly speculative assets, which can end in disaster. While a small amount of speculation is be okay, your retirement savings should largely be invested in strategies that preserve capital.
- No Access to Government Compensation Schemes: Unlike some public funds, SMSFs don’t have access to government compensation schemes, such as the Financial Claims Scheme, in case of losses due to circumstances beyond your control.
The Bottom Line
Operating an SMSF is not something to take lightly. We can’t stress enough the importance of understanding the compliance obligations involved. Too often, people set up an SMSF as a status symbol—thinking that complexity equals sophistication. In reality, complexity often equals headaches. The best financial plans are the ones that are simple and easy to execute.
However, for those that an SMSF is appropriate for – it can open a whole new world options and strategies for your retirement planning. It is important to treat your money in superannuation with as much care and attention as you do money in your own name, and an SMSF let’s you do this.
The Guided Investor approach
In Phase 2 of Wealth Creation, we place a spotlight on superannuation as it can be a great vehicle to help build wealth tax effectively. Considering an SMSF to better manage and invest your superannuation is a strategy we may deploy in this phase of your wealth creation.
If you do decide to go down the SMSF route, we strongly recommend getting professional advice to ensure you’re on the right track from a compliance perspective. For any general queries about SMSF, feel free to have an educational session with us through Ask an Adviser. If you want specific advice on the appropriateness or establishment of an SMSF, let us help you with Tailored Advice.
