It seems almost every second day the financial media is discussing Self-Managed Superannuation Funds (SMSFs). Over the past decade SMSFs have become very popular, although they are not necessarily well understood. So, what is a Self-Managed Superannuation Fund, and what makes them different from a “standard” superannuation account?
At a high level, SMSFs operate under the same tax rules as every other superannuation account – earnings in accumulation phase are taxed at 15%, the same capital gains tax discounts apply and contributions are treated the same. SMSFs are designed for the same purpose as other superannuation accounts – to provide a mechanism for wealth creation, specifically to fund your retirement.
A SMSF is set up for a small group of people – no more than four persons may be members of a SMSF at any time. All members of a SMSF must also be willing to take a more “hands on” approach to investing and managing their superannuation, as each member of the SMSF must also be a Trustee of the fund or directors of a Company acting as Trustee.
Similar to a Family Trust, Trustees are involved in, and responsible for, the operation of the SMSF in accordance to the Trust Deed and relevant legislation, regulation and guides. Children can be members of a SMSF, however they will need a Legal Personal Representative to handle their Trustee responsibility until they reach age 18.
The accounting and administration of a SMSF can be outsourced to professional providers but the responsibility for operating the fund always sit with the Trustees. The costs to engage professional assistance in operating your SMSF can be substantial with basic administration of a simple SMSF ranging anywhere between $2,000 to $3,000 each year. In some cases these administration costs are greater than other superannuation options, however depending on a number of factors they can be less.
The operation of SMSFs is heavily regulated. If a SMSF is not properly run, the ATO (who govern SMSFs) can classify your fund as “non-complying” – the penalty for which is the capital of your fund (excluding any tax-free monies) is taxed at the highest marginal tax rate. This tax applies each year the fund is or remains non-complying.
The main reason given for setting up a SMSF, and generally their greatest benefit, is the increased control you have over the investment and eventual payment of your superannuation assets. Whilst other superannuation accounts may provide access to a range of managed funds, term deposits, or direct shares – a SMSF typically has a much wider range of investments it can own – including direct property. Further, SMSFs tend to have more flexibility in regards to “gearing” by borrowing funds (sometimes from the members themselves) to invest – although the rules around this are quite specific and easy to breach.
The increased control within a SMSF also allows you to move funds between the accumulation phase and pension phase of superannuation, without the need for physical transactions. This means investments can move from being concessionally taxed, to tax-free, without being sold. This is helpful for the longer-term investor who may have twenty years of unrealised gains on an investment, which if sold in accumulation phase would create a large tax liability.
Another benefit of SMSFs is the ability to have a single investment portfolio for multiple superannuation and pension benefits. Within a SMSF you are not required to have separate assets for each member, or to pick which assets relate to accumulation interests and which relate to pensions. Each member’s interest in the Fund is recorded as part of the annual financial position, and investment earnings are distributed across all members of the fund. This can give great benefits of scale, particularly where smaller member accounts are bundled together to create an overall fee saving through increased purchasing power.
The above is not a definitive list of the differences of a SMSF to other superannuation accounts by any means but hopefully provides an indication as to what a SMSF is, and how it differs to other superannuation accounts.