This is a guest post written by Christopher Tsiknas for LawPath. LawPath is Australia’s leading provider of online legal services for businesses and individuals, providing technology powered legal solutions at a fraction of the time, cost and complexity of the traditional system.
Generally speaking, Australians have an ‘out of sight, out of mind’ attitude towards superannuation and the management of their funds. Currently only 42% of the population are aware of their super fund balance, with young Australians further behind at 37%.
There are many different types of super funds and portfolios available. One of the lesser known options that is worth researching is a self managed super fund.
What is a SMSF?
A self managed super fund (SMSF) is an alternative superannuation option to industry or retail funds.
An SMSF differs from standard funds in that it allows you to be in complete control. This is in contrast to the traditional system of having someone manage your fund for you.
You can have up to four members in your SMSF, all of which must act as trustees. As a result, you will need to create a trust deed in order to establish a SMSF.
The Australian Taxation Office (ATO) is the government authority responsible for regulating these funds. They provide guidance for new SMSF users to help you understand your obligations and compliance requirements.
A SMSF gives you the chance to get on top of your super and have an influence on the way your retirement is funded. Below is a list of benefits that come with establishing a self managed super fund.
As outlined above, one of the key advantages of a SMSF is the control it provides you. However, what does this exactly mean?
Being a member of a SMSF allows you to dictate the investment strategies. As a result, you are able to choose specifically where you want to invest your money instead of relying on the choices of a fund manager. By doing this, the performance of your investments won’t be reliant upon the ability of another individual.
In addition to being able to choose your own investments, you are also afforded a wider range of options with a SMSF. Mainstream retail and industry funds can restrict the investment options available to the strategies their company prefers. As a result, you may be missing out on the opportunity to maximise your super fund to its full potential.
Many of the large retail and industry funds can also be expensive and incorporate hidden fees. Self managed super funds can be competitive on these fees, and with the right amount of research savings can be made. Having members within your SMSF who are able to conduct the administrative and investment based work, will be especially beneficial. Typically, self managed funds with larger balances will be more cost effective and experience the most savings.
With a SMSF allowing up to four members, you are able to combine each individual’s super assets together within the fund. This can provide multiple benefits given the size of the fund’s balance will substantially grow. With more money to play with, your fund will have access to greater investment opportunities. In addition, only one set of fees will apply which lowers the personal cost you incur.
Having a self managed super fund affords you the unique option of transferring your personal assets into your fund. The standard personal contribution method in other funds would be via a transfer of money. A SMSF allows for contributions that are alternative to just straight cash. This is known as an “in specie” contribution.
ATO regulations set out what contributions can be accepted into your SMSF and who is allowed to make them. The advice of a super lawyer can be helpful if you’re unsure about the nature of these regulations.
Implications of a SMSF
Despite the benefits, there is still some risk involved, especially if you underestimate the complexities of a SMSF. It can be very easy to fall foul of the rules and in turn face unwanted penalties.
Sole purpose test
The main implication you will face with a SMSF is the requirement of compliance with taxation and superannuation laws. The governing legislation, known as the SIS Act, incorporates a sole purpose test that dictates what a SMSF can be used for. Individuals who opt for self managed funds must do so with the purpose of providing support to members once they retire. Additionally, this support can be provided to dependants if a member of the fund were to die. In order to be a member of a SMSF, you must comply with the sole purpose test.
This compliance will also impact the way in which you will be taxed. The income of your self managed fund will typically be taxed at a rate of 15%. However, in order to be applicable for this rate, you must be compliant with the relevant superannuation laws. Funds that do not comply, will be taxed at a higher rate. The ATO will assess the following components of your SMSF income:
- Employer/Personal Contributions
- Net Capital Gains
The ATO also outlines investments that will fall outside the 15% rate. This commonly includes non-arms’ length income, which is taxed at the highest marginal rate. If you are considering a SMSF, it is important to understand the importance of compliance and the potential impacts.
For example, lending money out of your SMSF to a member or relative will breach regulations. The ATO could then deem your fund non compliant, which will increase your tax rate and incur penalties.
Commonly, those who use a self-managed fund tend to be business owners or the self-employed. In addition, they often tend to have a general knowledge in investing or finance. However, as education around super funds continues to develop, self managing your retirement savings may be a feasible option for you (this is provided you are willing to conduct a significant amount of research to educate yourself on the topic to ensure compliance with the requirements).
TFC Disclaimer: Guest posts are posted in good faith. I cannot attest to the accuracy and originality of each article. If you have any concerns about the content, please contact the author of the article outlined above.