Self-Managed Super Funds (SMSF) are funds managed by an individual or a family as a means of saving for retirement. All members of an SMSF are trustees of the SMSF and are responsible for the investment decisions and compliance of the super and tax laws. An SMSF has its tax file number (TFN), Australian business number (ABN) and a bank account. The Australian Tax Office (ATO) regulates SMSF.
It takes time, money and expertise to run one’s SMSF. One has to make sure that they invest their super wisely, so it gives them the best possible returns. Also, one needs to have a high level of financial expertise and strong knowledge of how to manage risk. Thankfully, bodies are providing SMSF administration services.
There are two ways to set up an SMSF:
- Individual SMSF Trustee Structure: In individual SMSF, there can be 2 to 4 members. Each member needs to be a trustee. If a trustee is removed or added, titles of SMSFs assets need to be changed, which is lengthy and costly. If one breaches super laws, the trustees must pay the administrative penalty.
- Corporate SMSF trustee structure: In Corporate SMSF, there can be 1 to 4 members. Each member of the fund needs to be a director of the corporate trustee. One needs to pay ASIC one time charges to register a corporate trustee. Recording and registering assets is relatively straightforward when there are changes in membership.
There are costs involved each time an SMSF trustee buys/sells an investment. These costs impact the profits of the SMSF. Below are some of the costs involved in managing an SMSF.
- Reporting fee to prepare SMSF’s annual return report
- Auditor’s fee for an independent auditor registered with ASIC
- Fee-related to the valuation of SMSF’s assets
- Insurance and legal fees
- Broker and financial advice fee.
Benefits of investing in an SMSF
Choose Where to Invest – One has a wide range of options to choose from while investing in an SMSF. These include residential property, commercial property, shares, collectables and term deposits; some of which are not a part of the retail and industry super funds. One can even invest in derivatives downside protection and hedging the portfolio risk.
Borrowing made easy for SMSF members to invest in their property – Being a member of SMSF, one can invest in a property that otherwise seems unaffordable. However, the buyer trustee or other trustees cannot themselves live in it themselves. Also, one can use the borrowed funds to maintain a property but cannot use them to improve a property. This rule also means that one cannot buy an empty plot of land with the plan to make a house or building on it.
Tax-saving – Through timing pensions and tilting a structuring investment strategy to utilise concessional tax treatment, one can reduce taxes for most retirement phases.
Cost-saving for Higher Balances – The cost of holding an SMSF can be more economical than investing in other super funds for many, significantly when the balance rises to $300,000 or above.
The annual cost of SMSF administration is usually between $2,000 and $3,000, which includes accounting and audit fees. Retail super funds usually charge around 1.5%, which comes to $3,000 on a balance of $200,000. Given the benefits, many Australians are considering investing in SMSFs. SMSFs approximately hold one-third of the total superannuation funds in Australia. It is often a preferred choice for people actively engaged in superannuation and retirement planning. So, if one has not yet thought of starting to save for retirement, now might be a good time.