TO HAVE OR HAVE NOT-
A Self Managed Superannuation Fund (SMSF)
According to the Australian Taxation Office (ATO) up to the end of September 2016, there were 581,736 SMSFs in existence, a 23% increase since June 2012.
There are just 42 industry funds and 39 public sector funds that between them account for $831 billion in funds under management or 40 per cent of all super. On top of that there are 142 independent retail funds managing $545 billion, 26 per cent of all super, and then 579,550 SMSFs that manage $624 billion, 30 per cent of all super.(SMH Nov 2016.)
You must appoint a trustee/trustees and be subject to a trust deed.
Trustee structure options:
Corporate trustee – a company acts as the trustee and each member is a director. This structure allows simpler recording and registering of assets, providing administration efficiencies and flexibility in membership. Company establishment and ongoing fees are applicable with this structure.
Individual trustee – each member is appointed as a trustee, with a minimum of two trustees.
An SMSF is a private superannuation fund, regulated by the Australian Taxation Office (ATO), that you manage yourself. SMSFs can have up to four members. All members must be trustees (or directors if there is a corporate trustee) and are responsible for decisions made about the fund and compliance with relevant laws. Family Super Fund is an option.
An SMSF is a legal tax structure with the sole purpose of providing for your retirement. SMSFs operate under similar rules and restrictions as ordinary super funds. As a trustee you must:
- Carry out the role of trustee or director, which imposes important legal obligations on you
- Set and follow an investment strategy that is appropriate for your risk tolerance and is likely to meet your retirement needs
- Have the financial experience and skills to make sound investment decisions
- Have enough time to research investments and manage the fund
- Budget for ongoing expenses such as professional accounting, tax, audit, legal and financial advice
- Keep comprehensive records and arrange an annual audit by an approved SMSF auditor
- Organise insurance, including income protection and total and permanent disability cover for super fund members
- Use the money only to provide retirement benefits.
If you decide to set up an SMSF as Trustee, you are personally liable for all the decisions made by the fund – even if you get help from a professional or another member makes the decision.
Therefore it is essential that you have the support of professionals to help you manage your SMSF.
ADVANTAGES OF A SMSF
An advantage or disadvantage of operating a SMSF must be based on individual circumstances. Having a SMSF is not for everybody.
- SMSF gives you total control and opportunity for diversification of your Super by allowing you to choose where you invest your Super Benefit however you must develop an appropriate Investment Strategy. SMSF can invest in a wide range of investments e.g Term Deposits, Australian & International Shares, Residential & Commercial Property. You can create your own trust deed terms in regards to your spouse and beneficiaries and through death benefit nominations. A SMSF may invest in Residential & Commercial Property through related party or through lenders in limited recourse borrowing arrangement.
- Save on fees. An SMSF can also be the most cost effective type of Superannuation Fund however it is generally accepted that a minimum balance of $300,000 is preferred.Consolidate 4 members’ Super in one SMSF to reduce the average fee per member to run an SMSF. Costs of administration are generally consistent over the years even though your investment grows.
- Accumulation and Pension Funds. With Retail and Industry Funds your benefit is typically invested separately in a Pension or an Accumulation Account. An SMSF is a Pension and Accumulation Funds in one. You can commence a Pension and continue contributing to the same SMSF. There is no need to split your Super Benefit into multiple Funds. You may commence a Transition to Retirement Pension after 55 years that can provide tax free income .
- You can make In Specie contributions by the transfer of assets from your personal name to an SMSF. This may allow you to consolidate your Family Assets under the one SMSF tax advantaged umbrella however taxation and capital gains tax issues should be considered.
- Tax Concessions. SMSF funds are taxed at 15% and are able to claim tax credits from franked dividends unlike companies. If a fund is in the pension phase, the tax credit is refundable. If the fund is in the Pension phase all income is tax free in retirement unlike ordinary tax payers who pay tax over the concessional amount of $18,200.00. The amount of Capital Gains Tax is subject to a 33.333% equivalent to a 10% capital gain tax. Members who meet the conditions of release/retirement/pension phase after reaching 60 years receive their income tax free.
7.Small Business Concessions. You may utilise super rules which permit SMSF’s to invest in business real property either directly in commercial property or through non geared Unit Trusts or warrant trusts and lease back the property to a related party.
- SMSF and Spouse contributions. You have the opportunity to even out superannuation balance between spouses by splitting the lower of 85% of the concessional contribution cap.
- Advantages of Superannuation Contributions generally-
You may claim as a personal tax deductions from 1st July 2017 for personal superannuation contributions up to the maximum limit to your SMSF however this is not exclusive to SMSF nor is the opportunity to make salary sacrifice arrangements with your employers to provide for your retirement.
You may also claim insurance deductions for life cover, total and permanent disability, salary continuation etc through the fund that you could not claim personally.
Re-contribution Strategies. You may also maximise the tax free component of your SMSF balance for estate planning purposes by recontributing your balance in your SMSF in the retirement phase.
DISADVANTAGES OF A SMSF
1.Ongoing time Commitment. There is the time cost of preparing and signing documents as well as managing investments. An administration service would reduce this time commitment.
2.Non-Compliance Risk. Risk of prosecution of the trustees individually, tax penalties and trustees are held to be personally liable. An administration service would reduce this risk of non-compliance.
- Ongoing Costs. Superannuation funds with small balances may find the ongoing costs of running a SMSF prohibitive otherwise a retail superannuation fund may be preferred. There is no national compensation scheme or complaints tribunal for losses, matters are heard by the courts, losses however can be carried forward and used to reduce future tax liabilities. Trustees must manage a SMSF in accordance with the SMSF Investment strategy to provide for the future retirement of members or their beneficiaries. Trustees must ensure that there is sufficient liquidity so that the SMSF may meet its debts as they fall due.
- Breach of Rules. Members and the trustees cannot breach the In-House rules, must meet the sole purpose test at all times and not use SMSF assets for their personal use or benefit.
- Keeping current with laws of precedent and regulations. An administration service should keep the trustees informed, update documents and reduce the risk of non-compliance.
- Consistency with life goals and ambitions and personal estate. Our individual circumstances, needs and wants are all different and any changes should be consistent with life goals and ambitions and with any intentions regarding personal estates. A solid informed discussion and seeking the advice of a licensed ASIC financial service provider should greatly assist in allowing individuals to make determinations.