Self-managed superannuation funds are popular with Australians wishing to take on the responsibility and control of their retirement savings. SMSF Association policy adviser Franco Morelli explains what you need to know when considering this option.
A self-managed super fund (SMSF) performs the same role as other superannuation funds: by investing contributions and making them available to members on retirement. The general difference is that the members of SMSFs are also the trustees; that is, they control the investment of their contributions and the payment of their benefits. With all members being trustees, they are in a position to ensure their interests as members are protected.
What is involved in running an SMSF?
Running an SMSF can be complex, but it can be simpler than it sounds. While it is encouraged that you take advice from professional consultants to help run your fund, as an SMSF trustee, you are ultimately responsible for the success of your SMSF.
This includes taking control of your own investments and making effective and appropriate investment decisions, especially regarding asset allocation.
Regarding compliance, SMSF trustees need to act in accordance with their trust deed, the superannuation legislation and other general tax and trust laws. This requires making sure an SMSF is set up for the sole purpose of retirement, creating sufficient investment strategies and separating SMSF assets and personal assets, for example.
As an SMSF trustee you must:lodge the SMSF annual return with the Australian Taxation Office (ATO) – as opposed to retail and industry fund returns, which are lodged with the Australian Prudential Regulation Authority (APRA)engage an approved SMSF auditor to complete an audit of your fund ensure that fund assets are valued at market value so that your SMSF financial statements and annual return are accurate keep proper records as required by the superannuation and tax laws, such as trustee declarations.
We generally recommend that all SMSF members seek advice from an SMSF specialist whenever significant decisions are being made, due to the complexity that is often involved.
Why an SMSF? The benefits and costs
SMSFs are for those people who want to take direct control of their superannuation savings. Currently, there are about 1.1 million Australians who have taken this option. The number of funds exceeds 600,000 and the funds under management are slightly more than $725 billion. This makes the SMSF sector the biggest super sector at about 30 per cent of superannuation assets.
The benefits SMSF members enjoy include having this control, whether it be estate planning, investment choice, asset protection, potentially lower fees or pension planning.
An SMSF gives you control and choice over the specific investments you wish to hold in your SMSF.
Superannuation law is quite flexible on the investments that trustees can select as long the investments are for the sole purpose of providing retirement benefits. They can range from listed shares, term deposits, residential and commercial property to managed funds and unlisted investments.
SMSFs allow trustees to create a tailored investment and retirement strategy with substantial diversification benefits possible.
The capacity for a trustee to have his or her business property owned by the SMSF and then leased back to them is one of these advantages for building retirement benefits.
SMSFs also offer trustees control and flexibility over tax and retirement strategies. Through either strategic investment planning or internal structuring, funds can be extremely tax efficient, particularly for those trustees in retirement, where no income tax or capital gains tax is levied on income or gains related to retirement savings of up to $1.6 million.
There are also several strategies that can be employed to maximise savings in the lead-up to retirement, including salary sacrifice, transition to retirement pension, contribution splitting with a spouse, and contribution timing.
In the early stages of having an SMSF when the superannuation balance can be low, costs can be higher when compared with APRA-regulated funds. As super balances grow, the difference in costs narrows to a point where there is no discernible difference. Indeed, when balances exceed $500,000, there can be a cost benefit in having an SMSF. Importantly, it is also worth noting that technology and competition are driving down the cost of running an SMSF.
How much do you need before considering an SMSF?
How much you should have before starting an SMSF is very subjective and can depend on individual circumstances. There is no legislated minimum amount required to set up an SMSF. While cost comparisons with retail and industry funds can be made, cost is not always the major motivation. Investment flexibility, trustee control and estate planning might be more important, even if the cost of operating an SMSF is more expensive than for similar balances in APRA funds.
According to the Productivity Commission (PC), and based on cost comparison alone, an SMSF should have around $500,000 to be cost competitive. This is total SMSF assets not account balances per member. For example, the majority (more than 85 per cent) of SMSFs have two members, so the combined account balances could add up to $500,000 or more.
We believe that number is a little high. Before the PC report, the industry (including ASIC, politicians, Treasury and the ATO) had used $200,000 per SMSF when comparing the costs of different super arrangements.