The significant benefits of an SMSF have led to over a million Australians being members of self-managed super funds. Collectively they hold around $800 billion in assets.

Why are so many Australians choosing a private super fund for their retirement savings? 

The Pluses of Self-Managed Superannuation Funds

Tax benefits, control, and flexibility are often given as reasons for electing a self-managed super fund (SMSF) over other super funds. 

Here we will address just a few of the many benefits associated with these three terms.

Tax Benefits of SMSF

SMSFs have the same tax rates as other super funds. However, an SMSF is more easily able to come up with tax strategies to maximise the tax advantages of an SMSF.

Here are some ideas:

Control Over Contributions

If you contribute more than the concessional limit ($27,500), the excess is taxed at your tax rate.

However, you have some control over this. 

For example, 

• You can manage the timing of contributions.  All contributions to 30 June each year count towards that financial year. You can delay payments to the next year – for example, by requesting your employer to suspend SG contributions. 

• If you have not contributed the maximum for a year, you may add the balance to a later year. For example, if you paid $5,000 less than the maximum in year one, you could have a cap of $27,500 plus $5,000 in the following year – i.e., $32,500. The proviso is that you have a total super balance of less than $500,000.
• You can add personal funds as part of these additional concessional contributions – e.g., from a personal business, interest, dividends, or the sale of personal investments. In this way, you reduce taxable income in your name and the personal tax payable.

Tax on Investments

During the accumulation or pre-retirement phase, returns on superannuation assets are taxed at 15% rather than members’ tax rates. 

If an investment is sold during the accumulation phase, capital gains tax (CGT) of 15% will apply for assets held for less than 12 months, and 10% if kept for longer. By comparison, individuals pay CGT at their personal tax rate (with a 50% discount for assets older than 12 months), and companies pay 30% with no discounts.

There is zero tax on returns and no CGT in the pension phase.

Here is an example of potential CGT savings in the pension phase (from the SMSF Association):

“If a median-priced property of $667,000 is bought by a typical investor and sold a decade later for double the value, their capital gains tax can be $157,000. If it eventually doubles again in value, the tax bill climbs above $300,000.

But if an SMSF holds that property in the retirement phase, Australia’s superannuation rules cut the CGT to zero.”

Control of Retirement Savings

Members of self-managed super funds have control over their retirement savings in ways that are not possible for members of other super vehicles.

For example,

• They decide on an investment strategy that suits their personal objectives and circumstances.

• The costs of running the fund are not charged as a percentage of the fund. They can control costs by undertaking some administrative tasks on their own or selecting the most cost-effective outside administrators and financial advisers.

• They can select the insurance cover that is best for them. If they choose to hold insurance within the fund, the SMSF covers the costs, and the benefits are added to the fund’s assets in the event of their death. In addition, some of these payments may be available as tax deductions for the SMSF.

• Individuals can pool resources with up to five others and consolidate small amounts into more viable funds. Some of the benefits include
  • Cost-saving, as only one set of fees is payable 
  • Potentially better investment opportunities from a larger fund
  • Personal financial advice customised to the specific circumstances of all members 

Flexibility of Self-Managed Super Funds

There are many areas of flexibility, but we will address investment choice, especially around property, and retirement options.

Flexibility in Investment Decisions

Depending on their financial situation and the objectives set in their investment strategy, SMSFs can access investment opportunities and investment markets the same way as other superannuation funds. 

However, self-managed super funds 

• Can pivot more easily and quickly use market information and different investment options.
• May also borrow to purchase an asset – usually property.
• Can invest in collectables or personal-use assets (e.g., art, rare books, boats) or even cryptocurrencies.

Of course, the Australian Taxation Office has many regulations and conditions that apply to these investments. Trustees should seek personal financial advice and be wary of exaggerated or false promises.

Let’s look at some benefits (and conditions) around property investment.

Investment Choices Around Property

All supers may have direct property as part of their investment portfolio, but only a self-managed superannuation fund may decide to invest in a specific property or choose to invest predominantly in property. They may also borrow to acquire property.

LRBAs

Self-managed funds can use limited recourse borrowing arrangements (LRBAs) to acquire property and ensure asset protection. 

• Loan repayments and any income from the property are for the SMSF account, but the property is held in a separate trust (a bare property trust).
• In the event of repayment default,  the lender can claim the property but no other SMSF assets.

Special Rules for Commercial Property

An SMSF may not buy residential property from a member or anyone related or associated with them. Members may not live in the property or lease it to a related party.

However, it can deal with related parties for commercial property, provided

• The purchase and returns reflect true market value. 
• Transactions are at commercial arm’s length. For example, if an SMSF member is leasing a property owned by the SMSF, the rental and lease agreements must be the same as for a non-related lessee.

These provisions offer significant benefits for small business owners. 

• They can sell their business property to the fund and then pay a market-related rental directly to the SMSF. 
• They have themselves as reliable tenants, pay down the loan, and own the property after retirement. 
• There is no capital gains tax if they sell after retirement.

Fund members can also make in-specie contributions of commercial property – i.e., transfer ownership of the property to their SMSF. The capital value of the fund increases, and the member’s balance increases as a result of the contribution.

Options at Retirement

SMSF members have some flexibility in how they handle their funds at retirement.

• They do not have to cash out their retirement savings (provided the trust deed allows for this). Assets can simply be transferred to the retirement account, avoiding CGT and transaction costs.

• They can choose a lump-sum payment or a pension (an account-based income stream).

• Alternatively, they can leave their funds in their accumulation account. Or they can have funds in both their accumulation and retirement accounts. 

The pros and cons depend on the individual financial situation, but some of the reasons might include

• Dealing with the transfer balance cap, for those who have more than the maximum $1.7 million that can be transferred into their tax-free pension account. 
• Having an accumulation account available for payments for those who continue to work or receive contributions after retirement.

There are other options – for example, rolling over lump-sum payments or accessing funds before retirement through a Transition to Retirement Pension (TRIS/TRAP). 

They all have rules and tax traps that need detailed and in-depth knowledge and experience. 

How SMSF Engine Can Help to Realise the Benefits of SMSF

While SMSF members may have tax, control, and flexibility benefits, they must comply with multiple laws and regulations that are best left to professionals such as SMSF administration providers like SMSF Engine.

SMSF Engine provides SMSF administration services to SMSF accountants and financial advisers and also directly to SMSF trustees.  

We are 100% Australian-based and have a team of specialised SMSF and tax accountants with SMSF experience stretching back to 2004. 

To find out how we can help you, please speak with Mark Phillips or Alex Polorotoff 

• On 1300 364 597
• Via email at mark.phillips@interprac.com.au or alex.polorotoff@smsfengine.com.au
• Or book an appointment to speak to us  – Mark Phillips or Alex Polorotoff.

You can also visit our Resources page for updated news and tips. Here are some recommendations: 

• The Ultimate Guide on Self-Managed Super Fund Costs
• Self-Managed Super Fund Investment Strategy
• ​​The Simple Guide to Excess Concessional Contributions