We are often asked “what is a self managed superannuation fund? A Self Managed Superannuation Fund (SMSF) is a privately run super fund. Technically it is a trust that elects, under tax law, to comply with the Superannuation Industry Supervision Regulations which then gives that trust a range of tax benefits.
The SMSF laws regulating how the trust is created, operated, invested and managed are complex. And because every SMSF member must also be a trustee (or a director of the corporate trustee) it is important that every member is across what the SMSF is doing and why they are a member.
Of course: superannuation is not the only option to invest. And understand the best way to structure your affairs for stock market investing is an important part of your tax strategy.
How do I set up a SMSF?
It is relatively easy to create a SMSF and Westcourt can help people with the creation and operation of a SMSF. However, the decision if a SMSF is right for you is a complex one and will depend on your wealth, financial education, time, risk and alternative propositions. And the decision of opening a SMSF should always be done with a licensed investment advisor a licensed insurance broker or a financial planner (who often does both roles).
To create a SMSF you will need:
- A trustee – be it individuals or a company
- A trust deed
- A tax election
- Tax registrations including a tax file number and an Australian Business Number
- A bank account
- A method of recording your cloud accounting transactions like BGL 360
- An investment strategy (this is where a licensed investment advisor can help as well)
- Some form of education and understanding on your roles
The act of undertaking the above can all be created by Westcourt (with the exception of the investment and insurance selection). It will typically take less than a week to create a SMSF.
The difficulty in creating a SMSF is that the Australian Taxation can sometimes take a long time to update the register of compliant SMSF’s. And sometimes that process can take over 6 weeks – so if you are thinking of getting a SMSF ready to purchase property, and you want to roll-over another super fund to your SMSF, open a bank account or get a loan – their might be a longer delay in getting the banks on board with your new SMSF.
Benefits of a SMSF
The classical benefits of an SMSF are:
- Better control and flexibility
- Reduced costs for some SMSF’s
- A bigger range of investment options
- Tax benefits
- Family pooling of assets
Because you are the trustee of an SMSF you directly control the decisions of the SMSF. And this might be a last minute withdrawal of monies from a bank account at 4pm on 30 June.
The increased flexibility of an SMSF and increased control is viewed by many as a direct reason for opting for a SMSF. And while other options, like directed super funds, might offer similar level control options the ultimate ability to manage to the micro second of a decision cannot be beaten by any other option than a SMSF.
Reduced costs for larger SMSF’s
The accounting fees for a SMSF are typically a fixed amount. If you have a bank account with $20m in it, or a bank account with $200k in it, the cost of managing and recording the bank account is the same.
So as the SMSF increases in value the accounting fees do not increase at the same rate. So many large SMSF balances the cost of managing money within a SMSF is typically much lower than an industry superannuation fund or a retail superannuation fund which often charge fees as a percentage of funds under management.
Greater investment options
The choice of investments by a SMSF trustee are determined by the SMSF trustees. So provided that the fund is properly investing – the SMSF can invest in direct real estate, gold, exotic financial instruments like Bitcoin or other investments like artwork that many other retail and industry super funds simply cannot assist with.
Contrary to popular opinion – a SMSF does not have any additional tax benefits over and above that of other superannuation structures. However the ability to combine investment control with fund control can generate options for the SMSF that are not available to other funds.
An example can be if the SMSF acquires direct real estate. The fund can pay down the loan on the real estate using the 15% concessional tax rate and then sell the real estate in the SMSF once the SMSF is converted to pension phase – avoiding the tax liability on the sale.
To enjoy the tax benefits in your SMSF, including a tax free retirement income, additional steps need to be implemented properly. Quite often the tax strategy is easy but the correct implementation and management of the tax strategy is hard – so getting a quality SMSF administrator like Westcourt is critical to ensure you enjoy the best SMSF tax benefits you can.
Family pooling of assets
A SMSF can have 6 family members in the one SMSF. So this allows a family to combine their collective wealth into one fund and enjoy reduced costs and increased investment options that an individual family member could not otherwise enjoy.
Of course having 6 family members involved in the decision making might also be a downside. And a decision to do this type of extended family SMSF should be carefully done to ensure harmony and proper ongoing management.
You can enter into a Binding Death Benefits Nomination for a SMSF. This will give the SMSF trustee’s no discretion as to how your SMSF balance should be paid out on your death and it can be a powerful tool with your estate planning.
Downsides of a SMSF
Operating a SMSF has many downsides including:
- Dealing with the duties and obligations of running a SMSF
- The time commitment in running a SMSF
- The obligation to make your own investment decisions
- A lack of government compensation schemes
- Insurance choice
- Costs of running a SMSF
- Difficulties for relocating
The additional duties and obligations for running a SMSF should not be overstated. And while you can enjoy professional advisors (like Westcourt) to assist in these obligations: the responsibility cannot be delegated.
If you are looking into a succession strategy your executor also needs to be aware of the existence of the SMSF and who to engage with moving forward.
The time commitment for operating a SMSF can vary greatly depending on the type of investments made in a SMSF. Direct real estate, in particular, can be time consuming by the SMSF trustee’s.
For many passive investors, with professional advice, the time commitment is manageable – but if you are simply not prepared to contribute your own time to managing a SMSF then you might want to reconsider your options.
If you are in an industry or retail super fund the investment choice is managed by somebody else. So if you are suffering market turmoil it can be emotionally comforting to know that “it is not your fault”.
With a SMSF you chose the investments. And while you might have an investment advisor helping you – you are still responsible for making the decision.
If you are subject to fraud in a SMSF you do not get access to government compensation schemes like the Australian Financial Complaints Authority.
Insurance and superannuation go hand in hand. Life insurance is tax deductible in a super fund and is typically structured in a super fund to enjoy the tax benefits.
If you open a SMSF and you shut the old super fund down you might cancel the old life insurance policy. Or you might lose the ability to obtain insurance on the same terms and conditions.
Getting insurance advice from a licensed insurance broker or a personal risk insurance advisor is important to make sure you do not inadvertently incur higher insurance costs or under-insure your position.
A SMSF does incur costs including accounting fees, tax advice fees, audit fees, valuation fees, and actuarial fees. These costs, for the main part, cannot be avoided and should be compared to other super products that might be better for you.
In addition a SMSF will often engage with a financial planner for investment advice so the SMSF will incur investment advisory fees. The same can happen with legal advice.
If your SMSF has a lower fund balance these costs can very quickly destroy the value of your fund. So comparing alternate insurance products is incredibly important before you start.
If you move overseas you run the risk of changing the tax residency of your SMSF. And while this can be potentially managed it is an additional issue that you should get tax advice from before you open a SMSF if relocating is on your agenda.
Are SMSF’s the best option?
The decision of course is that “it depends”. And we have a range of investment advisors we can refer you to who can show you other superannuation alternatives that might work better for you.
If you however have a particular purpose, you are clear on what you want and you have done the numbers – then a SMSF might work with you. What is important is that your long term tax strategy is done properly for a SMSF and the implementation of the tax strategy is done carefully by a firm of tax experts with a local and international network to cover all of your investment options.
At Westcourt we are an independent firm of tax advisors. We are not connected to any investment groups and work collaboratively with investment advisors, banks and real estate agents to ensure your SMSF works for you – not the advisors. Given our single focus on families in business, our international network and commitment to excellence in independent tax advice we are logical choice for managing your SMSF – so why not give us a call?