Self Managed Superannuation Fund SMSF
A self-managed super fund (SMSF) is a private superannuation fund that you manage yourself. It is a legal tax structure that is regulated by the Australian Taxation Office (ATO) and the Australian Securities and Investments Commission (ASIC). It must be set up for the sole purpose of providing for your retirement.
If you set up your own self-managed super fund, you can decide your investment strategy. However, like ordinary super funds, you must comply with relevant laws when making those investment decisions, as well as when setting up and administering your SMSF.
It’s best to seek expert advice if you are considering managing your own super.
Whether a self-managed super fund is a good choice for you depends on your situation, including:
- Your age
- The super funds you have available
- How much spare time you have available to manage your SMSF
- What type of assets you want to invest in
- Your financial goals.
What are the advantages of a Self Managed Superannuation Fund SMSF?
1) A very low tax rate
A self-managed super fund has an income tax rate of 15% on concessional contributions. Concessional contributions are those made before tax, such as employer contributions and those made from a salary sacrifice arrangement. Earnings on assets in the fund are taxed at 15%.
There is no other legal structure in Australia that has such a low flat tax rate as superannuation. Further, SMSF benefits received after you have retired and are over 60 years of age are tax-free. And earnings on assets in the fund when it is in pension mode are also tax-free.
Given the current high income tax rates, the low tax rate of an SMSF is very attractive for tax planning purposes.
2) Asset protection
A self-managed super fund is a very good structure to protect your assets against the future risk of bankruptcy. However, it doesn’t provide as much protection against family law claims.
3) Control over your investments
Self-managed super allows you more freedom to invest. Essentially, you can invest in many of the investment products available to large superannuation funds. You can also invest in assets that are not available to most public industry and retail super funds.
For example, with an SMSF you can invest directly in residential or commercial real estate, rather than being limited to a product such as a public property trust.
Depending on the amount of funds in self-managed super fund, the cost of running it can be an advantage or a disadvantage. Generally, once you are above a minimum amount, the higher the level of funds in an SMSF, the more will be saved in administration costs compared to a public superannuation fund.
Public funds usually charge a fee of between 1-2% of funds under management.
What are the disadvantages of a Self Managed Superannuation Fund SMSF?
1) Your funds may be inaccessible for a long time
Generally, you can only withdraw your superannuation if you satisfy a condition of release. The conditions of release are:
- Reaching your preservation age and retiring
- Reaching your preservation age and starting a transition-to-retirement pension (TRIP)
- Ceasing employment between the ages of 60 and 64 years
- Reaching the age of 65
- Ceasing employment and having certain pre-1999 super benefits
- Severe financial hardship
- Compassionate grounds
- A terminal medical condition
- A temporary resident permanently leaving Australia Permanent disability or permanent incapacity
- Temporary incapacity
- A decision to take your super benefit as a lifetime pension or annuity
- Having a preserved amount of less than $200
The most common superannuation condition of release is retirement, provided you have reached your preservation age. This age depends on your date of birth, as outlined in the table below:
|Date of birth||Your preservation age|
|Before 1 July 1960||55|
|From 1 July 1960 until 30 June 1961||56|
|From 1 July 1961 until 30 June 1962||57|
|From 1 July 1962 until 30 June 1963||58|
|From 1 July 1963 until 30 June 1964||59|
|On or after 1 July 1964||60|
2) Regulatory changes
Since the introduction of compulsory superannuation in Australia in 1992, there have been many changes to the rules. The super system (like the tax system) reflects government policy changes over the years.
Given that there will be an increasing demand on funding for age pensions in the future due to our ageing population, it’s not likely the government will significantly alter the basics of the superannuation system. However, it seems that governments can’t resist the urge to tinker with it.
3) Knowledge and time to administer
There are several rules that must be complied with when running an SMSF. Since the sole purpose of superannuation is to provide for retirement, there is a strict prohibition on accessing super funds unless a condition of release is met (see above).
As a result, precise financial records must be kept, and there are restrictions on how self-managed super funds can be invested. It will take you time to learn the rules and ensure compliance.
An SMSF needs annual financial statements, a tax return and audit to be done. In total, these costs can range from $1,000 to $3,000 per year, depending on the complexity of the fund’s investments. If you don’t have a reasonable level of funds, then your annual administration costs may end up being a higher percentage than a public superannuation fund.
For example, if your self- managed super fund balance is $100,000 and your annual admin costs are $2,000, that’s 2% – a higher percentage than many public superannuation funds currently charge.
SMSF Capital vs Revenue Expenses
Self-managed super funds (SMSFs) have access to a range of tax deductions for expenses incurred. However, how the SMSF expenses are classified will affect your eligibility for claiming these deductions. Self-managed super fund expenses can be considered as either being either:
- Capital in nature (these fund outgoings are not deductible), or
- Revenue-related (these expenses are deductible under Section 8-1 of the Income Tax Assessment Act 1997. This is known as the general deduction provision. It allows any expense incurred in gaining the SMSF’s assessable income to de deducted. However, expenses incurred in gaining exempt income or that are of a private or domestic nature are not deductible.
The Australian Tax Office (ATO) considers an expense that is incurred in establishing or making enduring changes to an SMSF’s structure or function as capital in nature. For example:
- The costs of establishing a self-managed super fund.
- An expense incurred in acquiring capital assets.
- Creating a trust deed when setting up your SMSF.
- Executing a new trust deed for an existing fund.
- Amending a deed to enlarge or significantly alter the scope of the self-managed super fund’s activities.
These types of capital expenses are not deductible.
However, if trust deed amendments are required to facilitate the ongoing operations of the self-managed super fund, they are generally deductible. For example, if an SMSF amends a trust deed to keep it up-to-date with changes in legislation, this would be deductible.
Furthermore, expenses incurred in making changes to the internal organisation or day-to-day running of the self-managed super fund are not considered to be capital in nature if these changes do not result in lasting advantages.
In addition, if a super fund is carrying on a business, it may also be entitled to deduct certain capital expenses under the specific deduction provision (Section 40-880 of the ITAA 1997). It’s best for the fund’s trustees to seek professional advice.
How we can help
There are multiple factors to consider when deciding whether an SMSF is a good option for you and how to structure it and manage it in the most tax effective way.
Our expert SMSF Accountants would be happy to speak or meet with you to discuss your situation. We’ll take the time to understand your circumstances and provide advice that maximises your financial position.
You can contact us on 1300 883 597. We have offices in Brisbane, Sydney and Melbourne and provide full SMSF services Australia wide via internet, email and phone.