Everyone seems to be talking about SMSFs these days. And while the value of assets held in SMSFs in August 2020 was certainly impressive – at $676 bn – the fact remains that this type of superannuation doesn’t suit everyone. There are potential benefits and potential disadvantages, depending on your circumstances, and given that both your retirement lifestyle and family legacy are at stake, this is not a decision to be taken without the guidance of an experienced and qualified professional.
SMSFs – key benefits
- An SMSF can be structured to meet your changing goals and circumstances through all phases of your life. Traditional retail and industry funds, on the other hand, are set up to address the assumed goals of their general membership without reference to you as an individual member.
- SMSFs offer a greater range of investment choices than traditional funds. These include investments in direct assets such as listed equities and property. There is also the facility to hold non-traditional assets, such as works of art.
- SMSFs provide a tax-effective environment within which to hold assets. During the accumulation phase, fund earnings are taxed at a rate of 15%. If an asset is sold within twelve months of purchase, then capitals gains are subject to a 15% earnings tax. If the asset sold has been held for more than twelve months by the fund, then the SMSF pays 15% earnings tax on two-thirds of the capital gain, or a tax rate of 10%. These rates are significantly below comparable rates for assets held outside superannuation.
SMSFs – potential disadvantages
- Strict compliance rules exist and there are penalties for non-compliance.
- There is no automatic coverage for life or disability insurance as is the case with retail funds. These are, of course, available through SMSFs, but must be established by the members.
Two key questions
Before setting up an SMSF, you should carefully consider the following questions in particular:
1. Do I have enough money in super to make it worthwhile to set up an SMSF?
The general consensus is that you really need a balance of $500,000 – $1 mil in order to make the transition viable. A key reason concerns costs. For a start, the accounting cost to have an SMSF audited each year is $2,500 – $4,000, depending on its complexity. If you only had $100,000 in an SMSF, you would need to earn a net 4% return just to cover the accounting cost. Other standard costs may increase that figure to 5% or 6%, so you would need an outstanding return in order for your small fund to cover costs and earn a decent return.
Another reason concerns the option of borrowing through your SMSF in order to purchase property using negative gearing. If the remaining balance in other assets was less than $200,000, it would be difficult to prove to the bank that the fund could service the loan repayments.
2. Am I confident that I have sufficient experience to maintain a hands-on approach with my SMSF?
If your answer is “No”, and you would still like to consider whether or not an SMSF may be appropriate for you, then you need to be confident that you have access to a professional team including a financial planner, accountant and solicitor, who can guide you through the process.
To talk to us further about the pros and cons of SMSF with reference to your unique circumstances, please get in touch. Phone Collins Mann on (07) 3251 3201 or email email@example.com