SELF-MANAGED superannuation funds (SMSFs) have grown to be the biggest type of super by value. One of the main reasons for this popularity is the control members have over their own super.
This control comes at the cost of wide-ranging responsibilities and obligations for the members, who are also the trustees of the fund.
Q I have been a small-business owner for nearly 40 years and in 2006 I invested some asset sales in an SMSF, including shares on the stockmarket. The SMSF has too much complexity and red tape. What are my options?
A If you would like to retain the level of control you have with an SMSF you could use either an SMSF service company or a firm of accountants that specialises in this area. By doing this the complexity and red tape would become their problem. This would come at the cost of increased administration fees.
If you did not want any of the responsibilities related to being the trustee of an SMSF, your only option would be to roll over your superannuation to either an industry fund or to a commercial fund. To do this you would need to convert to cash all the investments in your SMSF so it can be rolled into the new fund.
Although you will no longer have to worry about the management of your SMSF there will be disadvantages by closing your SMSF. Because you must sell all the investments in your super fund, capital gains tax could be payable. If you choose a commercial fund the administration costs could be a lot higher than if you kept your SMSF, even after taking into account the extra cost of having more professional help in managing the red tape and complexity.
The final disadvantages will be reduced investment options and the lack of flexibility. This loss of control, and having to put up with a great deal of bureaucratic red tape every time you want to do something with your super, will be the worst if your choose an industry fund. Before finally deciding to wind up your SMSF, you should seek the advice of a specialist.
Q My husband and I are planning to set up an SMSF with about $450,000. Will consolidating our super into an SMSF negatively affect our tax-free or non-preserved elements?
If we start an SMSF but still want to leave some investments in managed funds, will that negate the benefits of the lower cost of an SMSF?
A When you roll over accumulation benefits from one super fund to another the components of your superannuation remain the same. This means you would not be disadvantaged in rolling over into an SMSF with regard to any current level of tax-free or
non-preserved super you have.
If you were in pension mode, and had a high level of tax-free benefits in the pension account, you could be disadvantaged. This is because the proportion of taxable and tax-free benefits in a pension super account are locked in while the pension is paid. There are steps that can be taken in this situation that would mean you would not be disadvantaged if you set up an SMSF.
The negative impact of having to use managed investments in an SMSF are minor. This is because industry and commercially managed super funds also have fund manager costs. In addition you should not be setting up an SMSF just to lower your costs. The prime benefit of an SMSF is the control that members have over their super future.
Questions can be emailed to max@taxbiz.com.au
Self-Managed Superannuation Funds: A survival Guide by Max Newnham is available in bookstores.
Frequently Asked Questions about this Article…
Why are SMSFs (self‑managed super funds) so popular with everyday investors?
SMSFs have grown to be the biggest type of super by value because they give members direct control over their superannuation investments. That control is the main attraction for many investors, but it comes with wide‑ranging responsibilities and trustee obligations.
My SMSF feels too complex and full of red tape — what are my practical options?
You can keep the control of an SMSF but outsource the administration to an SMSF service company or an accounting firm that specialises in SMSFs (which will raise administration fees), or you can roll your super into an industry or commercial fund — but to do that you must convert your SMSF investments to cash so the balance can be transferred.
If I close my SMSF and roll into another fund, will I face tax consequences like capital gains tax?
Yes — because you must sell all investments in the SMSF to roll the balance over, capital gains tax could be payable on assets you dispose of when winding up the fund.
Will consolidating about $450,000 into an SMSF affect my tax‑free or non‑preserved super components?
If you roll over accumulation benefits, the components (tax‑free and non‑preserved elements) remain the same, so you generally won’t be disadvantaged. However, if you’re already in pension mode with a high level of tax‑free benefits, the locked‑in proportions in the pension account could create disadvantages unless specific steps are taken — get specialist advice first.
If I still want to hold managed funds inside an SMSF, will that negate the cost benefits of having an SMSF?
Not necessarily — the negative impact is minor because industry and commercial funds also charge fund manager costs. You shouldn’t set up an SMSF solely to lower costs; the prime benefit is member control and flexibility.
Are administration costs likely to be higher if I move from an SMSF to a commercial super fund?
They can be — choosing a commercial fund may mean much higher administration costs than keeping your SMSF, even after you factor in the extra fees for professional help to manage SMSF administration.
How will moving to an industry fund affect my investment options and flexibility?
Moving to an industry fund usually means reduced investment options and less flexibility. You’ll also face more bureaucratic red tape when you want to make changes — loss of control is often most acute with industry funds.
Where can I get more specialist help or further reading about SMSF setup and winding up?
The article suggests seeking specialist advice before closing an SMSF. You can email questions to max@taxbiz.com.au, and a useful reference is Self‑Managed Superannuation Funds: A survival Guide by Max Newnham, available in bookstores.
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