The key benefits of SMSFs
With over a million Australian’s taking control of their superannuation via a Self Managed Super Fund, SMSFs have become the single largest pool of money in the superannuation system. As at May 2019, there are now around 600,000 active SMSFs, over 1 million members, with close to $750 billion of assets in them.
So why have they become so popular, and grown so much ?
Let’s look at the key benefits of a SMSF.
The most obvious benefit of a self managed super fund is that of investment choice. There is no doubt this wider choice of investments and the direct control that the trustees of the SMSF can exert over those investments has been the key motivator for the establishment of many of these funds over the years.
However, it is not just the “choice” of investment that many trustees are interested in, it can also be the ability to use more advanced strategies around your investments. For example, rather than just investing in some large cap Australian shares, a trustee may want to use a “covered call” strategy to produce extra income. Alternatively, SMSF trustees may wish to use hedging instruments (such as put options etc) to manage the risk that may have built up in global share markets, or perhaps just their own suit of favourite boutique fund managers. Large commercial funds generally don’t provide that ability,
And of course there is the ability to invest in direct property if that is a trustee’s preference. For many years, small business owners have been able to lease their business real property (property that is used by their business) from their SMSF, along with investing wholly in other real property.
With investment control at the top of the list, the benefit of taxation flexibility is often forgotten about. Quite apart from the low tax environment that superannuation in general offers, a SMSF can put in place tax effective measures, particularly for those in the pension phase who may even receive franking credit tax refunds from the ATO.
With up to 4 different members, but only doing one tax return, a SMSF can provide flexibility in terms of how tax liabilities of the fund are dealt with.
For members of large industry and retail super funds that charge on a % basis, fees and charges can be significant when account balances are large.
SMSFs on the other hand tend to have a fixed cost of annual administration and audit. So depending on a member’s account balance, and the cost of annual admin & audit, significant savings can be had as the account balance increases. For example, if your annual costs in a SMSF are $2,000 and the account balance is say $400,000, then the costs are 0.5% of the fund value.
This compares very well with industry and retail funds. However, if the account balance is $800,000, then the cost has reduced to 0.25% pa, which is very cost effective when compared to other super fund choices.
Unfortunately, litigation and bankruptcy can be a reality for those unlucky enough to find themselves in either situation. A member’s balance in their SMSF is generally protected in either of these situations, even if they need to withdraw (if eligible) some of it via lump sums to live on.
SMSF’s are flexible superannuation vehicles when it comes to what happens to superannuation benefits when a member passes away. Firstly, SMSFs can make binding death benefit nominations that do not lapse (subject to the trust deed).
However, more to the point is the level of strategy that can be created. For example, this may include leaving a tax advantaged income stream to a dependant beneficiary, with some added stipulations around when they receive a lump sum. Particularly for child beneficiaries, the SMSF has significant estate planning advantages.
One of the long standing rules around superannuation was that a super fund could not borrow money. Whilst this prohibition is still a general rule, there exists an exception called a “limited recourse borrowing arrangement”, which is predominantly used where trustees are buying property in the fund. The advantage for SMSFs is that this type of borrowing can be fully utilised by SMSFs, however not so for members of industry or retail super funds.
When a super fund goes from the accumulation phase to the pension phase, the SMSF provides a seamless transition. There is no need to alter investments (unless the actual investment strategy changes and it may do so) and any built up capital gains in your investments suddenly exist in the “tax free” pension phase (subject to your account balance and the transfer cap limit).