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?
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.
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:
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.
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.”
Members of self-managed super funds have control over their retirement savings in ways that are not possible for members of other super vehicles.
There are many areas of flexibility, but we will address investment choice, especially around property, and retirement options.
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
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.
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.
Self-managed funds can use limited recourse borrowing arrangements (LRBAs) to acquire property and ensure asset protection.
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
These provisions offer significant benefits for small business owners.
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.
SMSF members have some flexibility in how they handle their funds at retirement.
The pros and cons depend on the individual financial situation, but some of the reasons might include
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.
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.
To find out how we can help you, please speak with Mark Phillips or Alex Polorotoff
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