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