Self-managed super funds are the fastest growing part of Australia’s superannuation industry and are the preferred vehicle for professionals and business entrepreneurs. This is due to four key reasons:
- Tax effectiveness
- Potential cost savings
Take control of your super
Let’s start with control – and in particular, control over the investments your fund makes. As the trustees, you will determine the investment strategy of the fund and select which investments the fund will acquire. Subject to some further rules, you can invest in direct property or alternative investments, such as artwork and collectables, in addition to the normal investment classes such as shares and fixed income.
For many business owners, one of the unique aspects of an SMSF is the potential ability of the SMSF to purchase the business’s property and then lease that property back to the business.
Improved control also extends to how superannuation death benefits will be distributed. While super laws govern who can receive a death benefit, SMSFs have some flexibility over how the benefit is paid and you can exercise discretion if a binding death nomination has not been lodged. Moreover, you can ensure the death benefits are paid in accordance with the wishes of your fund’s members as well as make sure the benefit is paid in the most tax effective way.
SMSFs can be more tax effective
While all super funds are subject to the same taxation arrangements, as an SMSF allows you to control the investment selection and the timing of any investment, you can potentially exercise greater control over taxation outcomes. For example, if it doesn’t suit the members to crystalise capital gains in the portfolio and for the SMSF to pay tax, then you don’t initiate those transactions. In a retail or industry fund, these decisions are being made to optimise the position for all members, which may not always be the best outcome for your personal situation.
To take advantage of the taxation benefits of dividend imputation, you may elect to implement an investment strategy that favours the selection of shares in companies that pay a high level of franked dividend. These franking or imputation credits can then be used to offset the tax payable on other investment income (such as interest on a term deposit), and potentially the tax payable on concessional contributions. In some cases, SMSFs end up paying no tax – and in a few cases, the SMSF ends up getting a tax refund from the ATO.
The tax treatment on the transfer of assets in the accumulation phase to assets supporting the payment of a pension is also a consideration. When this occurs, there is no capital gains tax payable on the transfer of the asset, as there is no change of legal or beneficial ownership. When the asset is subsequently sold in the pension phase to fund the payment of the pension, the asset is also exempt from capital gains tax.
Let’s look at the example of Bob, who is in his 60s. His SMSF has owned a property for the past 15 years. Bob now wishes to sell the property, and as he is eligible to take a pension, he commences a pension and transfers the property over to the pension phase of his SMSF. When he later goes on to sell the property, it will be classified as a segregated current pension asset and Bob’s fund will not pay capital gains tax.
While the tax treatment above is not unique to SMSFs, not all retail or industry funds facilitate the tax free transfer of assets from the accumulation phase to the pension phase. Some funds require the member to redeem from the accumulation pool of assets and to reinvest in the pension pool of assets, and then charge the member an ‘assessed’ capital gains tax impost.
SMSFs may save you money
Many trustees save money by running their own SMSF. There are, potentially, no investment manager fees, no entry or exit fees, no financial adviser fees, and no weekly administration fees. There are, of course, costs involved in running your own SMSF and not all trustees will save money. If you are thinking of setting up an SMSF, read Is an SMSF right for me?
As you might expect from something you “run yourself”, SMSFs can potentially be more flexible than other super funds. The flexibility may extend to the implementation of more complex strategies, for example maintaining both accumulation and pension accounts for the same member, or running multiple pension accounts.
Further, should there be any legislative or taxation changes, your SMSF may be able to adapt to these changes earlier and more specifically than a large retail or industry fund, which needs to consider the interests of potentially thousands of members.