Is an SMSF right for you?

The popularity of SMSFs with professionals, small business owners and those with higher super balances is due to four key reasons:

1. Control
2. Tax advantages
3. Flexibility
4. Potential cost savings

Control SMSFs offer full control over the investments your fund makes. As a trustee, you will determine the investment strategy of the fund and select which assets to acquire. You may be able to choose investments such as commodities, artworks and collectables, in addition to standard options such as shares, managed trusts and property.

A possible advantage for business owners is the potential for the SMSF to purchase their business property and then lease that property back to the business.

You also have greater control over the distribution of superannuation death benefits. While super laws govern who can receive a death benefit, SMSFs have some flexibility over how the benefit is paid and you can exercise discretion if a binding death nomination has not been lodged. You can ensure the death benefits are paid in accordance with the wishes of your fund’s members, as well as make sure the benefit is paid in the most tax effective way.

Tax advantages

An example of this is that you may elect to invest largely in companies that pay a high level of franked dividend and then use these franking credits to offset the tax payable on other investment income or on concessional contributions.

Another significant advantage of SMSFs is the tax treatment on the transfer of assets in the accumulation phase to assets supporting the payment of a pension. When this occurs, there is no capital gains tax payable on the transfer of the asset as there is no change of legal or beneficial ownership. While the tax treatment above is not unique to SMSFs, it’s very difficult for this to occur in other types of funds as the asset is not individually linked to the member.

Flexibility

SMSFs can potentially be more flexible than other super funds, allowing you to implement very personal and tailored investment strategies. You can also implement more complex retirement planning strategies, such as maintaining both accumulation and pension accounts for the same member or running multiple pension accounts for the same member.

Your SMSF may also be able to adapt to any legislative or taxation changes earlier and more specifically than a large retail or industry fund, which needs to consider the interests of possibly thousands of members.

Cost savings

There are, potentially, no investment manager fees, no entry or exit fees, no financial adviser fees, and no weekly administration fees. There are, of course, costs involved in running your own SMSF and not all trustees will save money.

And the cons

A SMSF could be more expensive than an existing superannuation fund. Also, importantly, the investment performance may not be as strong as it could be with a professional investment manager.

Plus, you’ll be taking on considerable legal obligations and could find yourself spending many hours on administrative and compliance tasks.

One further caveat – if you are planning to live overseas for an extended period of time, then you may be well advised not to establish a SMSF until you return to Australia, as there are residency requirements to meet.

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