SMSF Compliance Checklist For June 30th (EOFY)

SMSF Compliance Checklist For June 30th (EOFY)

Ensuring your SMSF meets all compliance obligations is vital as we approach EOFY, i.e. the end of the financial year.

Failure to meet the ATO's strict rules can mean paying out significantly more tax than necessary.

Here are some key tasks trustees need to complete prior to 30 June 2022:

Check minimum pension drawdowns

Check that any members being paid an account-based pension have received the right amount for the current financial year.

Even though the government has extended its 50 per cent reduction in the minimum pension payment, underpayment can cause compliance problems for your SMSF. So ensure pensioner members have been paid at least their minimum percentage factor prior to 30 June. Documentation needs to be updated and minuted to avoid any problems with the fund’s auditor.

Trustees should also discuss with members receiving a super pension whether they intend taking advantage of the temporary extension in the coming financial year.

Stay within the contribution rules

For 2021-22, the general cap on concessional (before-tax) contributions is $27,500, while non-concessional (after-tax) contributions are limited to $110,000.

An individual member’s annual cap may be different to these amounts, so check that members have verified their current position before accepting contributions. Otherwise, they may face tax penalties.

Legislation has now passed abolishing the work test from 1 July 2022 for contributions made by older SMSF members. For this EOFY, however, trustees still need to check whether contributing members aged between 67 and 75 meet the work test (or work test exemption) before accepting their contributions.

Verify bring-forward contributions

An important EOFY strategy for many SMSF members is using a bring-forward arrangement to access up to three years annual non-concessional contribution caps. For eligible fund members, this can be up to $330,000 in a single year.

SMSF trustees should remind members commencing a bring-forward arrangement they need to meet all the eligibility criteria and that their personal non-concessional cap may be lower if they already have a large Total Super Balance (over $1.48 million).

Although members aged 67 to 74 are unable to commence a bring-forward arrangement in 2021-22, your fund will be able to accept these contributions from older members once 1 July 2022 arrives.

Review the fund’s investment strategy

Other important trustee tasks prior to EOFY are checking the fund has a documented investment strategy and that it has been reviewed for its ongoing suitability.

Trustees are required to minute all investment decisions, including why an investment was chosen and whether all trustees agreed with the decision.

You also need to ensure your SMSF’s investments (such as real estate and collectibles) are valued at market value prior to EOFY. The valuation must be based on objective data with supporting documentation, so if a professional valuation is required, don’t leave it to the last minute.

Get the paperwork in place

Trustees are also required to consider whether members should be provided with life and Total and Permanent Disability (TPD) insurance, so ensure this has been reviewed and documented.

If your SMSF is required to hold insurance for members, check the current insurance policies provide adequate cover and all premiums are paid before 30 June.

Also check the SMSF’s recordkeeping is updated, fully documented and ready for inspection by the fund’s auditor or accountant. This includes minuting trustee decisions; collating bank, dividend and investment statements; and preparing details of any asset purchases or sales.

Review the capital gains position

If your SMSF has members in accumulation phase, review any capital gains made during the financial year and the period these assets have been held.

It may be worth considering whether to dispose of investments with unrealised capital losses if the fund made capital gains during 2021-22. The realised capital losses can then be offset against the capital gains to potentially reduce the fund’s tax bill.

Prepare for the audit

Trustees must have appointed an approved SMSF auditor no later than 45 days before you need to lodge your SMSF annual return. You need to have an auditor organised, even if no contributions or payments have been made during 2021-22.

SMSF auditors are required to examine both the fund’s financial statements and assess its compliance with super law, so ensuring all the fund’s records are in order and ready for review will streamline the audit process.

If you would like help preparing your SMSF for the financial year end, contact our office today.

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Using an SMSF to invest in property: What are the rules?

Using an SMSF to invest in property: What are the rules?

Using a self managed super fund (SMSF) to invest in property has become very popular in Australia. With property prices rising sharply in recent times, interest in property investment has surged too. If you're thinking of using an SMSF to invest in property, it's important to understand the rules around this type of investment. In this blog post, we'll outline the basics of investing in property through an SMSF. We'll also discuss the benefits and risks associated with this type of investment. So if you're curious about using an SMSF to invest in property, keep reading!

In the September 2021 quarter, Australia’s SMSFs had almost $88 billion invested in non-residential real property, with another $47 billion in residential real property.

But before you add property investments to your SMSF, there are rules you need to be aware of.

Rules for SMSF property investments

All SMSF investments – not just property – must meet the sole purpose test. This means your SMSF must be maintained for the sole purpose of providing retirement benefits to fund members or their dependants.

Also keep in mind the related party rule, which prohibits SMSFs from buying real property from a related party. This means your relatives, business partners and their spouse or children, any company a fund member and their associates control or influence, or any trust a fund member or their associates control.

There are two exceptions. One is buying business real property like agricultural property, or a shop or office from which you operate your business. The other is if the value of the in-house asset is less than 5 per cent of your SMSF’s total assets.

Related parties and SMSF members can lease business and farming properties from your fund, but the arrangement must be at commercial rates and paid in full on the due date. Renting residential or holiday properties to related parties – even at market rent – is not permitted.

Borrowing the right way

Buying a property investment usually involves borrowing money. Again, strict rules apply.

SMSF loans are normally through a limited recourse borrowing arrangement (LRBA), although other structures such as tenants-in-common or related non-geared unit trusts may be acceptable. In the September 2021 quarter, SMSFs had almost $63 billion invested through LRBAs.

LRBAs prohibit lenders from seizing other assets in your SMSF if you default on your loan, so they tend to impose tougher loan conditions. Most lenders now require an SMSF to have a buffer of cash and/or shares equivalent to around 10 per cent of the property’s value.

You must also establish a bare trust (which is separate from the SMSF) to hold the property. And restrictions are imposed on the modifications you can made to your property, with significant changes requiring a new loan. Improvements must be paid for from cash already in the SMSF, not borrowed money.

Be mindful of diversification

Although including property in your SMSF can be a great idea, they are expensive assets. Unless the fund has a high balance, they can reduce diversification across asset classes. This can leave your SMSF exposed to investment risk and make it tricky to pay member benefits without needing to sell the property.

Adding an investment property must also fit the fund’s investment strategy in terms of diversification, liquidity and maximising returns to fund members. The ATO no longer automatically accepts buying an investment property is in the best interest of members, if it is the main asset and the fund’s total balance is low.

The fund’s trust deed must also provide the trustees with authority to implement a borrowing arrangement.

Tax benefits

A key benefit of using your SMSF to invest in property is the concessionally taxed super environment. Instead of paying your marginal rate, an SMSF only pays 15 per cent on investment income the property earns. Once fund members retire, rental income is tax-free.

There are also capital gains tax benefits. Properties held by an SMSF for more than 12 months pay a discounted rate of 10 per cent on any capital gain when sold.

Interest payments on borrowings are tax deductible and if your SMSF’s expenses exceed its income, a taxable loss can be carried forward to offset future income. Losses cannot, however, be offset against your personal income.

That said, not following the tax rules can be costly. If a property investment doesn’t meet the requirements of the sole purpose test for example, a SMSF becomes ineligible for the normal super tax concessions.

And if you finance an LRBA through a related-party loan, the loan must meet the ATO’s safe harbour guidelines. Otherwise, the income and capital gain from the asset will be taxed at the top marginal tax rate.

There’s a lot to think about, so if you would like to discuss property investments and your SMSF give us a call.

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Your SMSF: Wind it up or pass it on?

Your SMSF: Wind it up or pass it on?

Now that new legislation allows a maximum of six members in an SMSF, some fund trustees may be wondering if this could be an easy way to ensure a smooth transfer of their super to the next generation.

The simple answer is yes, but before you start adding your children and their spouses to your fund, it’s essential to develop a detailed SMSF succession plan to head off any potential problems.

Why make a SMSF succession plan?

Most SMSF trustees understand the concept of estate planning and the importance of deciding how you want your assets distributed when you pass away. But many overlook the importance of a succession plan.

Although your estate plan will cover who gets your assets when you die, your Will doesn’t determine who receives your super, or who takes control of your SMSF. The issue of control is also important if you become seriously ill or lose mental capacity.

By putting a detailed succession plan in place, you can ensure a smooth transition in the control of your SMSF and the payment of your super death benefits to your nominated beneficiaries. It also reduces the potential for the fund to become non-compliant and provides opportunities for death benefits to be paid tax effectively.

Whether to wind up your fund

Traditionally, most two-trustee SMSFs were wound up as members got older and became less keen on undertaking the myriad tasks involved in keeping a super fund compliant.

Super law requires SMSFs with an individual trustee structure to have a minimum of two trustees, so many funds are automatically wound up after the death or incapacity of a trustee.

But the introduction of six-member SMSFs provides families with more flexibility to use their fund as a tool for intergenerational wealth transfer.

Adding your adult children to an SMSF means they can take over some of the administrative burden as you age. It can also simplify the transfer of assets to younger family members.

There are potential downsides that need to be considered, however, as the trustees in control of your SMSF after your death, are the ones making decisions about the distribution of your super death benefits.

Appointing a power of attorney

Ensuring you have a fully documented Enduring Power of Attorney (EPOA) in place in the event of serious illness, death or loss of mental capacity is an essential element in a good SMSF succession plan.

Having an EPOA makes it much easier to keep a fund operating smoothly, as the attorney can step in as trustee and take over administering the fund, together with making decisions about fund investments and payment of death benefits.

Developing an effective succession plan

With a carefully constructed SMSF succession plan, you can reduce the potential for disputes and ensure a smooth transition of control to the next generation.

It’s important to remember any instructions you leave in your Will about payment of your super benefits – or control of your SMSF – are not binding on the fund’s trustees after your death.

That’s why it’s essential to have a binding death benefit nomination (preferably non-lapsing).

Part of your regular succession planning should be to review your SMSF’s trust deed and check it includes the necessary powers to achieve your estate planning goals. These powers include the ability to provide income streams to beneficiaries and appoint the executor of your Will to take your place as fund trustee.

Tax and your SMSF

Tax is also a vital consideration in estate and SMSF succession planning.

Super and tax laws use different definitions of who is and isn’t considered a dependant and how the benefits they receive are taxed, so this needs to be carefully managed.

An SMSF can pay super death benefits to both your dependants and non-dependants, but the tax implications vary. Super benefits generally have both tax-free and taxable components, so talk to us before nominating a beneficiary to ensure your super will be paid tax-effectively.

Nominating a reversionary beneficiary for your super benefit can also be tax effective. A reversionary pension means your beneficiary (usually your spouse), automatically receives your super pension so fund assets won’t need to be sold to pay the benefit. Asset sales can create a CGT bill.

If you would like to discuss your SMSF succession plan, give us a call today.

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


Women and Younger Australians Now Leading the Way With SMSFs

Women and Younger Australians Now Leading the Way With SMSFs

Self-managed super funds (SMSFs) have emerged from a difficult year stronger than ever. Not only have balances been repaired after the initial market shock in the early days of COVID-19, but more young people and women are taking control of their retirement savings. We take a look at what's attracting them.

At the end of March there were 597,396 SMSFs with 1,120,936 members, according to the ATOs latest SMSF Statistical Report for March 2021.

Numbers have been increasing steadily this financial year after a short decline in the June quarter last year. In the nine months to March this year, there were an additional 16,817 SMSFs in operation with 32,054 new members. And they are not necessarily who you might expect.

The changing face of SMSFs

It’s often assumed that SMSFs are for older, wealthy retirees, mostly men, who enjoy tinkering with their investments. While that may have been true once, times are changing.

The ATO report shows Australians under age 45 now make up around 47 per cent of all new SMSF trustees. The largest group by age to set up a fund in the March quarter was the 35-44 age bracket, accounting for 34 per cent of new funds. Coming a distant second, the 45-49 age group established 18 per cent of funds.

What’s more, women are diving in at an earlier age than men. While men still account for more SMSF establishments overall than women, at 56 per cent and 44 per cent respectively in the March quarter, 65 per cent of women were under 50 when they set up their fund compared with 62 per cent of men.

So what’s attracting younger people to SMSFs?

The advantages of starting early

The sooner you take control of your super, the better your retirement outcome is likely to be. SMSFs not only give you more control over your investments, but they also provide more flexibility to:

• Invest in assets such as real property and collectibles which you can’t access in other types of super funds,

• Manage your tax to suit your personal circumstances, and

• Develop an estate plan to ensure the best tax outcomes for your beneficiaries.
That said, it’s generally agreed that an SMSF becomes more cost effective than other types of funds once you have accumulated $200,000 or more in super. That means someone on a higher-than-average salary with Super Guarantee (SG) payments from their employer of $10,000 to $15,000 a year will likely be in their late 30s before an SMSF becomes cost effective.

This was backed up by the ATO report which revealed the taxable income range with the highest number of new SMSFs was the $100,000 to $150,000 bracket. This group accounted for 19 per cent of new funds, followed by the $80,000 to $100,000 bracket which accounted for 14 per cent.

Those who have the means may be able to build up their balance sooner via salary sacrifice or personal super contributions.

Shares and property bounce back

The rise in total funds and members was also reflected in a jump in total SMSF assets to $787.1 billion in the March quarter, up more than 13 per cent over the year.

For those curious about where other SMSF trustees are investing, the top asset types are listed shares (26 per cent of total assets worth $207.4 billion) and cash and term deposits (19 per cent or $149.4 billion). Shares have bounced back strongly since March last year, mostly at the expense of cash and term deposits, as SMSFs reinvest some of their cash holdings.

The booming property market was also reflected in the biggest increase in limited recourse borrowing arrangements (LRBAs) since 2019. LRBAs, popular with SMSF residential property investors, increased by $3.5 billion over the March quarter alone to $59.4 billion, or 7.5 per cent of total SMSF assets.

Happy SMSF customers

There’s nothing like booming markets to put a smile on investors’ faces, but a recent survey shows SMSF trustees are happier than most.

Roy Morgan’s April Superannuation Satisfaction Report showed overall super fund satisfaction increased by 7 percentage points to almost 72 per cent over the year. But SMSFs had the highest customer satisfaction at 81 per cent.i

Clearly, SMSFs are providing real value for more Australians at an increasingly earlier age. But getting expert advice is crucial, especially in the early stages, to ensure your fund is set up correctly to provide the outcomes you want.

If you would like to discuss your current SMSF strategy or whether an SMSF is appropriate for you, give us a call.

All statistics taken from the ATO SMSF Statistical Report for March 2021, https://data.gov.au/data/dataset/self-managed-superannuation-funds/resource/c2d3808d-fc2c-41bd-8122-b8e83fe22188

i http://www.roymorgan.com/findings/8703-superannuation-satisfaction-april-2021-202105250447

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


SMSF forms at End of Financial Year

Is your SMSF ready for the End of the Financial Year (EOFY)?

SMSF forms at End of Financial Year

Is your SMSF ready for the End of the Financial Year (EOFY)?

With the end of the financial year fast approaching, now is the perfect time to make some final checks and ensure everything is in order for your SMSF before 30 June.

The following are some matters that you might want to know more about, particularly if you have taken advantage of some of the COVID-19 relief measures.

If there is anything in this paper that you are unsure about, we encourage you to contact me to discuss your specific circumstances in more detail.

Contributions

From 1 July 2020, if you were under the age of 67 you were able to make voluntary contributions without meeting a work test. This was previously restricted to people below age 65. In addition, if 2020-21 is the first year that you no longer satisfied the work test, you may still be able to make voluntary contributions under the work test exemption if you had a total superannuation balance (TSB) of less than $300,000 on 30 June 2020.

Therefore, it is important to review your contribution strategies before 30 June 2021, to make sure you maximise your contribution opportunities whilst ensuring you are below your contribution caps.

Non-concessional (after-tax) contributions are limited to $100,000 for the 2021 financial year and only available if your TSB was less than $1.6m on 30 June 2020.

If you were under 65 at any time during the 2020-21 financial year, you can potentially contribute up to three times the non-concessional cap (or $300 000) at once. The maximum bring forward non-concessional contribution amount you can make will depend on your TSB on 30 June 2020. Please note that draft legislation to allow older individuals to make up to three years of non-concessional superannuation contributions under the bring forward rules, has yet to be passed.

Concessional (before-tax) contributions are limited to $25,000 for the 2021 year. You may also be eligible, subject to your TSB, to make larger concessional contributions if you have any unused concessional contribution cap from the 2019 financial year onwards.

Where you have made personal contributions and intend to claim a tax deduction in 2020-21, it is important that you reconcile all employer contributions and salary sacrificed amounts to superannuation to make sure you do not breach the annual concessional contributions cap. It is also important to ensure that the relevant notice requirements are met so that you can claim a deduction.

These annual limits will increase on 1 July 2021 to $110,000 for non-concessional contributions and $27,500 for concessional contributions.

The Government also announced in the latest Federal Budget that the work test will be removed altogether to allow voluntary non concessional contributions and salary sacrificed contributions to be made up to the age of 75. If passed, these changes are expected to be available from 1 July 2022.

Investments & COVID Relief Measures

SMSF trustees are required to value the fund’s assets at their market value as at 30 June each year in the annual financial accounts. Although it can be a straightforward process to value assets when it comes to term deposits or listed shares and managed funds, it can be quite difficult to ascertain the value of real estate or private companies and units trusts. When valuing SMSF assets, you must comply with the ATO valuation guidelines for SMSFs. Contact us if you have any questions or require assistance.

For the 2020-21 financial year, getting the value of the fund’s assets correct is important in assessing the impact of COVID-19 on your superannuation benefits. It is even more important for SMSFs relying of the ATO’s in-house asset COVID-19 relief. These SMSFs will have till 30 June 2022 to ensure that in-house asset levels are reduced to less than the allowable 5% limit.

For those SMSFs that took advantage of the property relief measures the ATO implemented to reduce rent in 2020-21, any form of rental relief must end by 30 June 2021. From 1 July 2021, COVID-19 will not be a valid reason for any rental relief and SMSF trustees will need to ensure that all rent is at an arm’s length rate.

For those SMSFs with a limited recourse borrowing arrangement (LRBA), there are additional considerations. Where your SMSF was provided with COVID-19 loan repayment relief to assist in meeting loan repayment obligations, this relief should cease by 30 June 2021. From 1 July 2021, any LRBA should revert to the original terms of the loan to ensure that the arm’s length requirements continue to be met. Where the COVID-19 loan relief has resulted in a variation to the original term of the LRBA, provided that interest continues to accrue on the loan and you repay any deferred principal and interest repayments in accordance with the varied terms, the LRBA will be considered to be consistent with an arm’s length dealing.

Meeting new pension requirements

To help manage the economic impact of COVID-19, the Government reduced the minimum drawdown requirements by half on account-based pensions and market-linked pensions for 2020-21. The Government recently announced the 50% reduced minimum pension drawdown requirements will be extended for 2021-22.

Whether or not you have taken advantage of this reduction, it is important that you reconcile all pension payments received to ensure you do not underpay the minimum pension payment required by 30 June 2021. Where this requirement is not met, SMSFs will be subject to 15% tax on pension investments instead of being tax free.

All pension withdrawals for 2020-21 must be paid in cash by 30 June 2021 and cannot be accrued or adjusted using a journal entry so it is important to attend to this as soon as possible. For example, if you are making pension payments via an electronic transfer, you need to ensure that online transfers show the money coming out of the fund’s bank account by no later than 30 June.

$1.6 million transfer balance cap and total superannuation balance

Ensuring that member’s benefits are shown at market value is important in calculating each member’s TSB and in determining whether a member will exceed their transfer balance cap (TBC).

The $1.6 million TBC applies to SMSF members who are receiving a pension and limits the amount of tax-free assets that can support a pension. To track the relevant events against your personal TBC, SMSFs are required to lodge with the ATO a transfer balance account report (TBAR). The TBAR is separate to an SMSF’s annual return and TBAR lodgment obligations, depend on members’ TSBs.

With the general TBC set to index to $1.7million on 1 July 2021 it is more important than ever to ensure that all your TBAR lodgments are up to date and that you seek help in correctly calculating your entitlement to any proportional indexation of the TBC.

How can we help?

If you have any questions, require assistance or would like further clarification with any aspect of your end of year superannuation matters, please feel free to contact us to arrange a time to  your particular requirements in more detail.

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


New SMSF Rule Change in 2021: member limit to rise to 6

New SMSF Rule Change in 2021: member limit to rise to 6

While it’s not yet in force, the limit on SMSF member numbers is set to increase from the current four to six members later this year.

For some SMSFs, this will be a welcome change and will mean additional family members can join their existing fund.

Implications of the rule change

The new legislation is currently before Parliament and should come into force in the second half of 2021.

Although 93 per cent of SMSFs only have one or two members, for larger families the reforms will provide greater flexibility to add extra members. This could include adult children and their partners.i

While adding members to your SMSF will be easier, there are potential drawbacks as well as opportunities to including multiple generations in the one fund. So it’s important to think through the ramifications and get professional advice before acting.

Benefits of additional members

Larger SMSFs can have a number of benefits, including the potential to lower the overall fees paid by members. Many annual running fees – such as the annual auditing fee – are charged on a fixed dollar basis, regardless of the number of members.

With more members, costs per member will reduce. Adding extra members to an existing SMSF also avoids the expense of running several SMSFs to cover all family members.

Adding members to your SMSF will also create a larger pool of super money to invest. A higher overall fund balance increases your choice of potential investments and can improve diversification.

You will also have more negotiation and purchasing power and it can make it easier to implement certain tax strategies.

Wealth transfer benefits

In many situations, having all the family members in a single SMSF can help with intergenerational wealth transfer.

It can potentially streamline your estate planning and provide tax advantages as ownership of key assets is retained within the SMSF, reducing buy/sell costs and capital gains tax bills.

Given the lower annual contribution caps since 2017, having more fund members can also help an SMSF have the capital to purchase larger assets such as your business premises.

Additional members also make it easier for one or more of the SMSF’s trustees to travel overseas for an extended period without endangering the fund’s complying status.

More complex decision-making

Expanded funds can work well if all the members agree and get along, but the SMSF structure can make managing conflict difficult.

More members mean more risk of a dispute. Relationship breakdowns between fund members can also be a problem, particularly if account balances need to be withdrawn or divided between divorcing partners.

Additional trustees also reduce the control an individual trustee has over decision making, which is often the key reason for establishing an SMSF.

Bigger funds also mean more complex administration and slower, inefficient decision making. Appointing and removing trustees can also become harder.

Considering the different generations

Investing appropriately for additional members needs careful management. If the SMSF includes several generations, designing your fund’s investment strategy will be more complex, as it must suit members with diverse risk profiles and investment horizons.

With more members, paying out death benefits can be trickier. Payment decisions made by other trustees may not be what the deceased member intended. If the SMSF’s key asset is a business premises, the fund may have limited liquidity to pay a benefit.

An enlarged SMSF can also create the potential for financial abuse, with elderly fund members outvoted or manipulated by younger trustees.

Look before you leap

Trust legislation in some Australian states prohibits more than four individual trustees in a trust, so SMSFs looking to add members need to check the rules in their state.

Trustees will also need to check the SMSF’s trust deed. Some deeds prohibit more than four members, so it must be amended before additional members can join.

Amendments may also be needed to cover who and how many trustees are required to sign documents and cheques on behalf of the SMSF.

If you’d like to discuss these proposed changes or the running of your SMSF please give us a call.

i https://data.gov.au/data/dataset/self-managed-superannuation-funds/resource/ad70308d-ff84-4313-81d1-e30d0b274f29

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


What are the pros and cons of an SMSF?

What are the pros and cons of an SMSF?

Many Australians like the idea of managing and investing their own super. It can make a lot of sense too, but it's definitely not for everyone. We take a look at the arguments for and against setting up your own Self Managed Super Fund (SMSF).

Taking control of your super

People choose to run their own SMSF for many reasons. From a desire for flexible investment choices through to dissatisfaction with their existing super fund, tax and estate planning concerns.

According to a recent SMSF Association survey, many people’s desire for control over their personal retirement income goals and the ability to take control of their financial future are key motivators in the decision to run an SMSF.

For small business owners, the ability to invest in assets related to their business – such as their business premises – is also very appealing.

All these reasons are valid and may make it worth considering an SMSF for your retirement savings.

Benefits of your own super fund

Key benefits are having control over your investment plan and selection of the assets in which your retirement savings are invested.

As an SMSF trustee, you are responsible for developing your fund’s investment strategy, so you get to choose which investment approach to use to grow your money.

There may also be cost savings compared to using a traditional, large super fund.

An SMSF can also give you more flexibility when it comes to tax management and estate planning.

SMSFs can be time consuming

On the other hand, running an SMSF can require significant amounts of time to complete and lodge the necessary paperwork and to meet the strict compliance requirements for super funds.

We can help take a lot of the hard work out of running an SMSF for you and ensure you comply with all the rules. Failing to comply can result in significant penalties.

Although many people enjoy being accountable for their own retirement and tailoring their investments, achieving strong returns requires investment knowledge and skills, plus sufficient time to actively research and manage your investments.

It’s also worth keeping in mind the ATO is the main regulator for SMSFs, so you will have the tax man looking over shoulder.

Are SMSFs cost competitive?

There is no hard and fast rule about the amount of super you need in order for your SMSF to be cost competitive with a large public super fund. Generally, an SMSF is less cost effective if your fund has low member balances.

Smaller balance SMSFs are also less able to achieve sufficient diversification with their assets compared with larger funds, making it harder to spread your investment risk.

Aside from the establishment costs, running your own SMSF incurs annual costs such as the annual ATO supervisory levy, auditing and legal fees, any administrative tasks and any investment-related expenses.

SMSFs can be cheaper

Despite these costs, running your own SMSF can actually be cheaper than using an APRA-regulated super fund to save for retirement.

The SMSF Association’s Cost of Operating SMSFs 2020 report found an SMSF can be cost-competitive with industry and retail super funds when it has an asset balance of $200,000 or more, even for a fund paying for a full administration service. An SMSF with accumulation accounts and a total asset balance of $200,000 using this type of service generally has annual running costs ranging from $1,518 to $3,078.

SMSFs are even more attractive for large asset balances. In fact, the study found an SMSF with a total asset balance of $500,000 or more is generally the cheapest alternative when it comes to a super fund.

For people interested in running their own SMSF but with a balance of only $100,000 to $200,000, you will need to keep an eye on your administration costs and consider what you may be able to manage yourself.

SMSFs with less than $100,000 are not cost-competitive.

If you are interested in controlling your retirement savings, make an appointment to talk to us about us about whether and SMSF is right for you and how we can assist.

This article is intended as an information source only and to provide general information only. The comments, examples, words and extracts from legislation and other sources in this publication do not constitute legal advice, financial or tax advice and should not be relied upon as such. All readers should seek advice from a professional adviser regarding the application of any of the comments in this article to their particular situation.


What is a Self-Managed Super Fund?

Superannuation is a savings arrangement where employers, employees, people who are self employed and others contribute to a trust fund which holds and invests the contributions made throughout a member's working life in order to provide benefits upon their retirement.

Read more