Considering an SMSF? It's About Choice & Control

Superannuation is a long-term savings vehicle that cannot be accessed until somewhere on or after your 60^th birthday. Typically, it doesn’t interest young people setting out on their career path. There’s no better evidence of this lack of thought of long-term financial planning than the $16 billion in lost super accounts.

But time changes all that. These young and disengaged super members get to a stage in life where conversations switch to property ownership and investing, from apathy to interest. When a super balance reaches six figures, suddenly it’s a tidy nest egg. At $200,000 the conversation becomes “we could do something with this!"

Younger groups are increasingly choosing a self-managed superannuation fund (SMSF) — ATO data for the March 2023 quarter showed women aged between 35-44 were the largest group establishing them. One reason seems to be property investment via an SMSF. ATO data shows that there is $46.9 billion of residential property assets owned by SMSFs and lending arrangements (LRBA’s) of $61.6 billion in place.

Choice and Control

But an SMSF is about much more than a means of entry into the property market. In essence, it’s about two things: choice and control. These two words best describe what you get with a SMSF.

Establishing a SMSF gives you total control as trustee of your superannuation. That means work, decisions and ultimate responsibility. As trustee you have a fiduciary duty to act in the best interest of your other members and beneficiaries and sole responsibility for the administration and compliance of your fund. It doesn’t matter how many professionals you engage, get it wrong and you will pay the price. [I will go into more detail about this in future articles.]

As trustee you get to choose who will be the other fund members, how much work you do versus what you outsource, and who those service providers are.

Costs and Balances

Cost is a major consideration for assessing the viability of a SMSF. They have set-up and ongoing administrative costs, but because these costs are usually fixed, SMSFs can be more cost-effective for those with larger balances. An SMSF can still be a cost-effective option for members with smaller superannuation balances if they plan to grow the fund quickly or can administer it themselves. Either way, keeping the costs down is critical as failure to do so will potentially erode returns.

As trustee, you make investment decisions that are aligned with your fund’s documented investment strategy and each member’s financial goals and risk tolerance. This investment control extends to choosing where your funds are invested, whether in listed securities (Australian or international), in property (commercial or residential) and can include debt to acquire property assets (this is unique to SMSFs), or other assets such as collectibles. Unlike traditional superannuation funds, which might have limited investment options, an SMSF can encompass a wider choice of assets, potentially leading to enhanced returns.

Tax Benefits

SMSFs offer a range of tax benefits: For example, SMSFs can allow members to pool their assets and take advantage of different tax offsets and deductions resulting in the fund paying its net tax bill after receiving the ATO assessment. This keeps your funds working and earning for your retirement for longer when compared with an APRA fund.

It is important to get good advice before setting up an SMSF to ensure that it is appropriate for you, which trustee structure is best, and to source quality documents because a good trust deed is vital to get the most out of your SMSF. All these measures will save you money in the long run.

Not For You

Who shouldn’t set up a SMSF?

Before setting up an SMSF you need to determine if you can do so, with the first test being, are you a disqualified person? According to the ATO, a disqualified person is someone who:

• Has been convicted of an offence involving dishonest conduct.
• Has had a civil penalty order made against them.
• Is an insolvent under administration, or
• Has been disqualified by the regulator due to contraventions of the SIS Act or because the regulator believes the person is not a fit and proper person to be a trustee.

If you are a disqualified person, you can’t be a trustee or a director of a corporate trustee of the SMSF.

Factors to Consider

Although the advantages of SMSFs are appealing, it's essential to acknowledge that this investment vehicle is not suitable for everyone. Here are some factors to consider before establishing an SMSF.

Running an SMSF involves a significant time commitment. Trustees are responsible for administrative tasks, investment decisions, and compliance with regulations. Individuals with limited time or those who prefer a more hands-off approach might find the responsibilities onerous.

Although SMSFs offer the flexibility to invest in a range of assets, it's important to recognise that making sound investment decisions requires expertise. Individuals who lack the necessary knowledge or are not inclined to seek professional advice might struggle to optimise their investment portfolio or remain compliant with the Superannuation Industry Supervision Act 1993 (SIS Act).

Informed Choices

SMSFs can offer a world of possibilities for individuals seeking more control, flexibility, and potential tax advantages over their retirement savings. However, establishing and managing an SMSF requires careful consideration and a thorough understanding of financial markets, taxation rules, and superannuation regulations. Making uninformed decisions can lead to poor investment outcomes, compliance breaches and potential administrative penalties. If you lack the necessary financial literacy, seeking professional advice is essential.

Before deciding to establish an SMSF, you should seek advice from a financial adviser who can assess your individual circumstances, goals and objectives and determine whether an SMSF is appropriate for you. By carefully weighing the advantages and disadvantages, you can make an informed choice that aligns with your financial goals and aspirations. Remember, your retirement future is a journey, and choosing the right path requires thoughtful consideration.