Insights From Your SMSF Advisor
Superannuation is a very tax-effective way to invest in Australia. Considering it is a form of forced saving for retirement, we should be taking a keen interest in what we do with our superannuation. Individuals have the ability to choose how to invest their superannuation, from a list of investments provided by the trustee. Retail and industry funds offer a selection of investment options, some offer a small selection, some offer a few more. Regardless of the number of options available, members are limited to the options prescribed by the fund trustee.
A self-managed super fund (SMSF) provides its members with the ability to have complete control over their investments. Trustees have access to direct shares (listed and unlisted), managed funds, term deposits, property and fixed interest. However, SMSF’s can also invest in alternative investments such as collectibles, cryptocurrencies, and residential property.
An SMSF is governed by its investment strategy, which is set by the trustees (members).
Greater control over investment choices is only one advantage of SMSF’s. Self-managed super funds provide many other advantages.
Financial Goals + Potential Savings on Fees
As many costs associated with self-managed super funds are fixed, they are often cheaper than other super funds once the balance reaches a certain amount. Retail and industry funds fees are often a percentage of the fund balance. So, the higher the balance, the higher the fees. Depending on how an SMSF is invested, members can often benefit from fewer ongoing fees. As there are establishment fees and initial advice fees, asking a financial adviser to do a cost analysis is a good way to check if you will benefit from ongoing fee savings.
Advantages of Self-Managed Super Funds
The Ability To Pool Your Assets With Others
Self-managed super funds can now have up to six members. This means you can pool your superannuation balance with up to five others to provide more investment flexibility as the combined assets could potentially be able to purchase an asset that an individual could not afford on their own.
The Ability To Borrow
Self-managed super funds are the only super funds that allow its members to borrow within the fund. A limited recourse borrowing arrangement (LBR) enables members to purchase a single acquirable asset using borrowed funds. This strategy has been very popular over the past ten years or so as many members often use these borrow funds to purchase a property within their super fund. Holding assets inside super with the purpose of capital growth over the long term, provides members with tax concessions on rental income every year, and also the possibility of eliminating capital gains tax if the asset is held until the member retires and transfers their assets to ‘pension phase’.
The Ability To Purchase Direct Property + The Ability For Your Fund To Own Your Business Premises
As mentioned above, self-managed super funds are the only way members can purchase direct property with their superannuation. Members can purchase a residential or commercial property and rent it out to unrelated parties at market rates.
Similarly, business owners can purchase a commercial property and operate their own business from it. This provides the fund with rental income which the members can claim a tax deduction for. Members can benefit from tax advantages year on year whilst helping to boost their retirement savings.
Greater Flexibility For Estate Planning
Self-managed super funds provide more choice around how death benefits are paid as they can be paid to a dependant as a pension rather than a lump sum, allowing the SMSF to continue operating. Also, self-managed super funds can allow property or shares to be transferred directly to a beneficiary.
Members have the ability to distribute their assets to their beneficiary’s tax effectively.
Financial Advice for Asset Protection
Under the Bankruptcy Act, superannuation is not considered property. This provides members, particularly business owners, with asset protection with any assets held within the fund.
Control of The Timing of Investment Transactions
Sometimes the timing of selling an investment can alter the taxable income of a fund. For example, it may be prudent to hold off selling an asset and incurring a capital gain until the next financial year to reduce the superannuation funds taxable income in the current year (or vice versa). Members of retail or industry funds do not have total control over this as the super fund trustee makes the decisions as to when to buy and sell assets.
Are There Any Disadvantages To Having A Self-Managed Super Fund?
In a word – yes, self-managed super funds are not without their challenges. Firstly, they require more time, responsibility and investment knowledge of its members. For trustees/members who do not have the knowledge or the time, these services can be outsourced but this adds another fee that cannot be ignored when deciding whether a self-managed super fund is right, for you.
Trustees of an SMSF are responsible for ensuring the fund remains compliant. To this end, trustees need to allocate a certain amount of time to their self-managed super fund. It can not be a ‘set and forget’ structure that some other super funds can be seen as.
Establishment fees can be high, particularly if the fund will include borrowed funds.
The majority of members must permanently reside in Australia so if you intend on residing somewhere overseas, you run the risk of your fund becoming non-compliant and therefore will be liable to penalties.
Your Self-Managed Super Fund, Canny Advisory + Our Financial Advisory Services
Going into retirement is one of the biggest life choices and changes that will happen to us throughout our lives. With a self-managed super fund, you have complete control over one of the biggest assets you have worked for your entire life. With our team besides your and working with you, like the team at Canny Group, we are able to sit down with you to ensure that your goals are clearly mapped out and you are in the driver’s seat when it comes to your self-managed super fund and making investment choices.