Benefits of self-managed super funds
Access to more investment options
Having an self-managed super fund provides more choice and freedom to access investment options that would otherwise be unavailable through a public super fund. This includes assets like real property, art and collectibles — such as stamps and coins — as well as physical gold.
Unlike investing with an industry, bank or retail super fund, your self-managed super fund can borrow to invest in property, using a Limited Recourse Borrowing Arrangement (LRBAs).
This strategy is a good option to help expand your investment portfolio. However, there are restrictions and compliance requirements. The Australian Taxation Office (ATO) has warned investors of the dangers of over-investing (and over borrowing) into property within self-managed super funds.
Control
If you’re a member of an self-managed super fund, you have greater control over how your super’s invested while working, and how it’s paid when you retire.
This means you can invest in many of the products available to public super funds, as well as some products that aren’t. For example, self-managed super funds can invest directly in real estate, rather than being restricted to property trusts as many public funds are.
Tax benefits
You’re entitled to the same reduced tax rates that are available through super so your investment return is taxed at a maximum of 15% (provided that your self-managed super fund is a complying fund) rather than your personal income tax rate which could be as high as 45%. In addition, any payments received after the age of 60 are tax free.
These tax benefits are common to all super funds, not just self-managed super funds. However, self-managed super funds have more flexibility to use tax strategies around capital gains, taxable income or franking credits.
More scale to access opportunities
Generally speaking, an self-managed super fund can have up to six members. Bringing six investors’ money together, offers greater scale to access investment opportunities that may not be available to you as an individual investor.
Having scale may also help to keep fees down. This is because you can pool your assets and share expenses, leading to potential cost savings, which means you may have more funds available for investment growth.
Estate planning
One often overlooked advantage of self-managed super funds is they can provide greater flexibility or control with estate planning, if a member was to pass away.
An SMSF trust deed may also provide how and to whom death benefits will be distributed as long as these align with super law. The deed may also allow for cascading death benefit nominations or the exclusion of certain beneficiaries. Benefits could also be distributed to beneficiaries in a tax effective way.
Considerations to be aware of with self-managed super funds
Responsibility
Managing an self-managed super fund is not easy. As the trustee, you need to ensure the fund complies with all relevant regulations otherwise you could face severe consequences for getting it wrong.
If the fund is deemed to have breached its compliance responsibilities, penalties can include fines and civil or criminal proceedings. Depending on the offense, tax penalties could be increased, including fund returns being taxed at the top marginal tax rate as opposed to the concessional super rate of 15%.
Expertise
What investors often overlook is the financial and investment expertise required to run, or be involved in running, an self-managed super fund.
As a trustee, you’ll be responsible for creating and implementing your own investment strategy — one that will need to deliver enough returns to adequately fund your retirement.
This means you need to:
You’ll also need to remain up to date on any changes to legislation that affect self-managed super funds as these may have compliance requirements.
An understanding of how to manage legal documents, such as a trust deed, is also beneficial. However, a legal professional could help you with this.
Time
The administration and management of an self-managed super fund is time intensive so if time is something you’re short of, an self-managed super fund may not be a good option. On the other hand, many self-managed super fund investors enjoy the sense of involvement and purpose that running their own fund brings.
Higher insurance costs
Public super funds can generally provide cheaper insurance to their members than self-managed super funds. This is because they have large memberships and can negotiate discounted bulk premiums with insurance providers.
Outsourcing your self-managed super fund to professionals
If you find you don’t have the time or investment knowledge to manage your self-managed super fund, you can outsource this to investment managers, financial advisers or other experts. This will come at an additional cost though.
Minimum amount required for self-managed super funds
There is a lot of controversy around what should be a reasonable amount to set up an self-managed super fund.
There's no minimum amount required to set up an self-managed super fund but depending on the fund’s complexity and structure, set up costs, administration, reporting and legal fees, it can become expensive. It’s generally more cost-effective if your self-managed super fund has a higher balance.
Frequently Asked Questions
Can I borrow money through my self-managed super fund to purchase an investment property?
Yes. Self-managed super funds can borrow money to invest in property through a Limited Recourse Borrowing Arrangement. However, there are specific rules and conditions that must be met to do this.
What are the penalties for non-compliance with self-managed super funds regulations?
Self-managed super fund members can be subject to heavy penalties for not complying with regulations, including:
- Their fund losing its concessional tax treatment
- The trustee being disqualified from their roles so they can no longer be members of the SMSF, nor can they start a new fund
- The freezing of SMSF assets
- Fines or imprisonment, depending on the seriousness of the legislative breach.
Are self-managed super funds suitable for everyone?
Self-managed super fundare not suitable for everyone. It depends on the person’s circumstances, financial goals and investment knowledge. If you are considering an self-managed super fund, seek advice from a financial adviser to determine if this is the best course of action.
