For example, consider a husband and wife who each have $ 1.5 million in super. A typical super fund charges 0.3 percent to manage each fund, which in this case would equate to $ 4,500 per fund or $ 9,000 in total.
“Compare this to the annual audit and accounting fee for running a joint SMSF that would total $ 3000- $ 4000. The reason for this is that SMSFs tend to have a fixed fee regardless of size, while industry and retail funds are [charged as a] percentage of funds under ceiling management. ”
Modeling Rice Warner, prepared for the SMSF Association, found SMSFs generally more cost-effective than retail and industry funds when balances exceeded $ 250,000, although this depended on the complexity of the fund and the administrative burden the individual was willing to bear (see table).
For example, for a person with a low-compensation pension portfolio who is willing to take on some of the administrative burden of running a self-managed fund, SMSFs are more cost-effective than retail and industry funds when balances exceed $ 200,000 according to the model .
However, if someone wants to outsource the entire administration of the fund, including investment management and reporting, a higher balance of $ 250,000 would be needed to justify starting an SMSF.
However, BFG Financial Services CEO Suzanne Haddan warns that starting an SMSF to save costs is the wrong angle to approach the decision.
“SMSFs often engage a range of professionals to help them with strategies, investments and compliance – including accountants, financial advisers, lawyers or an SMSF administration service – and the fees involved can be significant,” she adds.
“There are also potential costs if something goes wrong, as members of SMSFs, unlike members of conventional funds, are not entitled to compensation under early retirement laws if SMSF suffers a loss due to theft or fraud in the investment assets.
“Nor do members have access to free external dispute resolution schemes to help resolve disputes. The courts or mediation are generally where the members lead, and it is at their own expense and can be very expensive. ”
Purchase of a residence
The Financial Framework’s Hewitt says there are “real benefits” to using an SMSF to buy property.
“First, unlike other superfunds where debt is not allowed, you can use leverage with text messages to help the fund buy a property through a limited recourse structure.
“This increases the purchasing power of the superbox. For example, you could possibly buy a $ 1.2 million investment property with $ 500,000 in super and $ 700,000 in debt, giving it 58 percent, ”he says.
The downside, says CreationWealth senior financial advisor Andrew Zbik, is that real estate is a low-rated asset class that can diminish the diversification of your portfolio.
“Being overweight over an asset can be detrimental to the fund if the property does not live up to expectations,” he adds. He also recommends having a plan in place to repay the debt before retirement.
Fitzpatrick’s Private Wealth’s Lewis says investing in residential real estate could justify starting an SMSF.
“However, be aware that if you invest in residential properties, you can not use it while it is in super,” he adds, as internal asset rules prevent SMSF members from using the property to their own advantage.
Buy commercial real estate
The only exception to this rule, Lewis says, is to buy a commercial property used by your business.
“You pay effective rent to yourself in a tax-efficient way, and it can help qualify you for the small business CGT [capital gains tax] concessions when it’s time to sell your business as super do not count towards the maximum net worth test of $ 6 million – so if you approach this limit, it can be useful to protect the business premises in super, ”he adds.
Owning your business premises in an SMSF would also provide protection against creditors in the event of bankruptcy, Lewis says.
Story Wealth Management CEO Anne Graham says that while buying corporate property is an attractive option for many small business owners, she encourages them to seek advice first.
“Cash flow is important, and if you need to borrow to buy the property, you must first talk to a broker, as the rules for borrowing in super are more complex (and expensive) than borrowing in your own name,” she adds.
Collaborate with friends and family
While it can be prohibitively expensive to buy a property for one person, it is possible for friends or family to “go together” via a multi-member SMSF, says the Financial Framework’s Hewitt.
“The advantage here is again that you get a certain economies of scale and are better able to finance property purchases. The downside is the old adage that sometimes too many chefs ruin the broth, ”he adds.
SMSFs can now have up to six members following changes that went into effect on July 1st.
But multi-member SMSs can be used for more than just buying real estate, says Townsend Law employee Jeff Song.
“This allows large families to consolidate family wealth for retirement into a single SMSF, save costs, allow younger family members to take advantage of larger investments and gain economies of scale,” he adds, noting that he does not have an Australian financial license services and therefore does not recommend starting an SMSF.
“While there are some disadvantages associated with unpredictable family dynamics and transparency in superbalances for all members, the benefits of multi-family SMSF may outweigh the disadvantages in certain circumstances,” he says.
Song says that SMSFs give individuals flexibility with their property planning as it is not mandatory to pay the benefits from super before the member passes away.
“After their death, early retirement benefits do not automatically form part of their personal property, and members have the flexibility to design their early retirement planning.
“Under certain circumstances, it is possible to retain the benefits in the same SMSF and pass them on to the recipients without switching and possibly access for creditors,” Song says.
“One of the beautiful SMSFs is that members have a choice to be flexible with their guidelines in their binding death benefit nomination (BDBNs).
“Due to the conditions and limitations of the pension fund legislation that only apply to APRA funds, but not SMSFs, BDBNs used in relation to APRA funds will not have the same level of flexibility, and the member’s decision will in the most cases only extend to completing a designated form that names who will receive what proportion of their deaths. “
Retains assets in the family
Fitzpatrick’s Private Wealth’s Lewis says assets can be stored in an SMSF for generations.
“Provided that an SMSF has the resources and liquidity to pay benefits as they fall due – including death benefits – then an asset can be stored in an SMSF for a very long time,” he explains.
“For example, a property from which a family business is run can remain super for different generations of family members when they join the business and SMSF.”
Invest in collectibles
Although uncommon, it is possible to use an SMSF to invest in collectibles such as antiques, art and wine.
But that does not mean you can buy an antique to display in your home, Lewis says, as it is against the law to get personal benefit from the investment.
“Be aware that there are very strict rules and regulations when investing in collectibles – such as valuations, insurance and storage. You can also not use it (like residential areas), so you can not hang the painting on the wall at home or in your office, ”he adds.
Platform for life
Meg Heffron, CEO of the SMSF specialty company Heffron, says that sticking to an SMSF throughout your working life and into retirement can save you the cost of switching funds.
“It can be a big thing to move funds. This may mean triggering capital gains tax or other transfer costs. It may even mean that you are selling assets at a loss – but if you move to a new fund, you can not take those losses with you and use them to reduce the tax you pay on capital gains in the future.
“The good thing about an SMSF is that it is possible to change pretty much everything else without changing money. You can change advisor, change accountant, completely change the types of investments you have, but you do not have to change funds. ”
Heffron says SMSF members could choose not to sell a particular asset to avoid incurring a large CGT bill or sticking to past capital losses to reduce future tax bills – choices not possible in a retail or industry fund .
Quick response to legislative changes
Another benefit of SMSFs, Heffron says, is that trustees can make changes right away rather than wait for their super fund to execute their request.
“It never sounds so valuable before it is,” she says. “When members were able to access $ 10,000 of their super during the early days of the COVID-19 pandemic, we had a couple of clients who quickly needed the money. The good thing about having an SMSF in their case was that it was completely under their control. Right the moment they had approval from ATO, they could transfer the money from their SMSF to their own bank account. ”
“Similarly, there are times when a quick decision needs to be made to do things like start retirement, make benefit payments – and again, all of this can be done immediately and completely within the member’s control of an SMSF.”
But BFG’s Haddan describes the ability to quickly act as “a double-edged sword” that can cause shop stewards to inadvertently break the law.
“Some managers (generally when not using professional administration services or other professionals) neglect to monitor the rule changes and are less than timely when updating acts of trust and other processes,” she explains.
“This puts the shop stewards and the SMSF at risk of inadvertently acting on outdated and incorrect rules that risk audit violations and are on the wrong side of the ATO.”
Fitzpatrick’s Private Wealth’s Lewis says SMSFs do not have to pay tax until the fund’s annual regulatory return is filed, which means your money works longer for you before tax is paid.
“In an ordinary fund, 15 per cent is deducted. Deposit tax generally when the fund receives a grant (before tax) contribution or at the end of the month in which it is made — this applies to the Superannuation Guarantee and / or payroll contribution — or a statement of intent is submitted to claim the tax deduction.
“But in an SMSF, any tax to be paid after the fund’s annual legislative return is filed – which can be up to two years after the contribution is given,” he adds.