There are many benefits to self-managing your superannuation but, as with all financial decisions, it is important to weigh up the risks, rights and responsibilities of managing your own fund before making the decision to proceed.
Benefits of a self-managed super fund (SMSF)
The obvious benefit of self-managing your superannuation is the direct control you have over your retirement savings. Many users enjoy being able to directly control their investment strategies and act immediately on their decisions. They also benefit from relying on their own investment skills rather than those of fund managers.
In addition, more direct control over your super assets enables more control over the associated costs: there may be a reduction in management fees and the ability to take a more cost-considered approach when seeking investment advice.
1. Take back total control of your Super
An SMSF gives you total control of your super by allowing you to choose where you invest your Super Benefit. Many of you might be disappointed with your superfund’s performance or simply think that you can do a better job investing your Super Benefit yourselves! Trust me, this is your first step towards choosing to establish and manage your own SMSF!
Having total control means the members of the SMSF can invest in a wide range of investments. For example, with an SMSF, you can invest in Term Deposits, Australian & International Shares, Residential & Commercial Property and can make overseas investments also.
2. Manage up to 4 members’ Super in one SMSF
You can set up an SMSF for yourself and add up to three other people and consolidate the super balance from each member into one SMSF. This enables you to reduce the average fee per member to run an SMSF given our annual fee is the same for all the members. In this way as SMSF can also be the most cost effective superannuation fund for you.
3. Tax strategies
Like all super funds, SMSFs benefit from concessional tax rates. In the accumulation phase, tax on investment income is capped at 15 per cent; in the pension phase, there is no tax payable until 30th June 2017, not even capital gains tax. Carefully considered tax strategies can help trustees grow their super savings and reduce tax payments as they transition to retirement.
It is possible for Members to make contributions of assets instead of cash such as Shares, Managed Funds, and Commercial Property from the Members’ personal names into an SMSF (called in specie contributions). In specie transfers allow you to consolidate your Family Assets under the one SMSF tax advantaged umbrella.
4. Flexibility & Quick Response to Market Movements
SMSFs allow multiple members to run a mixture of accumulation and pension accounts. With Retail and Industry Funds, your benefit is typically invested separately in a Pension or an Accumulation Account. This means that when you wish to draw-down your Super Benefit as a Pension your Super Benefit will need to be transferred to a separate Pension Account and any additional contributions you make will be added to a separate Accumulation Account.
In 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. Trustees can adjust their investment mix as it suits them, allowing for a fast response to changes in market conditions, super rules or personal circumstances.
SMSFs offer significant transparencies that allow trustees to align their personal goals with their investment decisions. Whether you’re passionate about property, shares or sustainable and ethical investing, SMSFs allow you to better understand where your money is invested, with complete visibility over performance and tax treatment.
While every investment carries a degree of risk, the ATO points out that there are several specific risks associated with operating an SMSF.
Like company directors, trustees of an SMSF assume full legal responsibility for all aspects of the fund, and as such are ultimately responsible for any decisions contrary to superannuation regulations. Responsibilities include placing funds in approved investment classes, as well as accurately reporting investment returns, costs and deductions. A working knowledge of the regulations for SMSF trustees will minimize such a risk, but it is one to be constantly aware of.
Arguably the biggest risk factor for SMSF trustees, though, is the reduced legal protections in place in the case of theft or fraud. Current regulations do not afford SMSFs access to statutory compensation. In addition, SMSFs are also ineligible to lodge a claim with the Superannuation Complaints Tribunal. Thus, SMSF trustees must be confident in their own vigilance and risk appetite when investing funds and in their dealings with associated advisers.
Understanding your Role as a Trustee
Average operating costs for an SMSF are estimated by the ATO to be 0.50 per cent of the fund’s value, meaning there is a cost/benefit consideration when determining the viability of self-managed superannuation. That is because there are administration fees and operational costs to cover to ensure the SMSFs are managed according to superannuation regulations.
However, as well as financial impacts, there are other demands placed on you as a SMSF trustee that can affect the returns achievable and even the legality of the fund’s operation. Considerable time is required on the part of trustees to manage investments and oversee tax, valuation, accounting and investment contributions. As such, financial and time constraints need to be weighed up to determine the viability of taking on an SMSF.
Knowing how to set up an SMSF from the outset is essential to ensuring its ongoing success. If you are still unsure about whether you would be able to operate an SMSF, CPA Australia operates the free Self-Managed Superannuation Fund Trustee Education Program, which goes through the responsibilities for anyone managing their own super.
Preparing for the Upcoming Changes
If you are already an SMSF trustee, you might have had a busy 2016, with a raft of government changes and policy flip-flops keeping the industry on its toes. With the countdown to 30 June underway, what areas should you focus on ahead of the financial year-end?
The positive side is, SMSF Trustees will be hoping for no major budget surprises in 2017, after the federal government was forced to back down on budget changes last year. The backflip included replacing the proposed $500,000 lifetime non-concessional contributions cap with an annual $100,000 limit, and barring individuals with a super balance exceeding $1.6 million from making further non-concessional contributions from 1 July 2017.
Already this year, the Australian Taxation Office (ATO) has warned SMSF advisers and trustees about the need to comply with arms-length terms concerning limited recourse borrowing arrangements (LRBAs) by 31 January, or terminate the fund if necessary. The ATO has previously warned that SMSFs will face a full evaluation should incorrectly-structured LRBAs not be rectified by the financial year-end.
Other changes have included the new-year introduction of changes to the pension assets test, with higher assets test thresholds and a doubling of the taper rate. However, the biggest change is likely to be the timings of when payments are received, rather than the overall level of entitlements.
Meanwhile, for those likely to have super balances at or over $1.6 million by 1 July, there are plenty of issues to consider, including whether to commute the excess from pension back to accumulation phase, or withdraw the excess from super and invest it outside super in a less tax-friendly environment.
Under the changes, trustees have a grace period where amounts up to $100,000 over the cap will not incur the excess transfer balance tax, provided the breach is rectified within six months. This does not give trustees much time to finalize their 2017 accounts to determine their 30 June 2017 pension balances.
Changes to the contributions cap may also require a review of salary sacrificing arrangements, while time is fast running out for those needing to make any extra contributions. Also, from 1 July, access to the three-year bring forward rule for non-concessional contributions will be restricted not only by the individual’s age, but also by how close their total super balance is to $1.6 million at the most recent financial year-end before the contribution year.
Another issue for trustees who are retirees is the ability to claim capital gains tax (CGT) relief on any investments in their pension, which will become taxable from 1 July. Claiming CGT relief can also become more complex where a fund has two members or more.
What to Discuss with your Adviser
As an SMSF trustee, the first thing you can do is to sit down with your adviser as early as possible to review your fund and check whether the new rules affect you.
You could have the following agenda for the meeting:
- Consider per-July 2017 opportunities, including CGT relief options, re-contributions and CGT triggering, and possibly using the three-year bring forward rule,
- Check current member balances and future contribution strategies,
- Consider super splitting, where appropriate,
- Consider whether insurance should be moved out of the fund, due to the new caps,
- Check if you have an enduring power of attorney that covers your SMSF needs if you become ill or injured or are planning to go overseas,
- If in transition to retirement, check whether you can meet the full condition of release by 1 July 2017 to move to an account-based pension and avoid the 15 per cent tax on earnings,
- Consider the tax implications of member balances above $1.6 million (for all super accounts).
Before you Start
An SMSF can be a great vehicle to take back control of your Super but an SMSF may not be right for everyone. In the article, I have summarized benefits, risks and other factors to consider when contemplating setting up an SMSF. We can also assist you in understanding what is involved in the ongoing management of your SMSF. The decision to self-manage your super fund is not one that should be made lightly. But if you have a clear understanding of the benefits of an SMSF, as well as the operational challenges you’ll need to address, from the outset, there’s no reason you shouldn’t consider making the switch.
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