Self Managed Super Funds (SMSF)

Gaining control and other advantages of an SMSF

By Graeme Colley
Executive Manager, SMSF Technical and Private Wealth, SuperConcepts Sydney, Australia

Setting up a self-managed superannuation fund (SMSF) can have a number of advantages over other types of superannuation funds. This can include investment flexibility, tax efficiencies and cost advantages. But the main reason for having an SMSF is control over investment decisions.

Many trustees of SMSFs prefer to invest directly by purchasing listed and unlisted shares, units in unit trusts and managed funds, term deposits and real estate. SMSFs are in a unique position to make some investments which are not available to funds with five or more members. As an example, an SMSF can acquire business property from members and other related parties. This provides the fund with a number of tax advantages as the property can be leased to a related party at market rates and it will help build wealth within the fund. In addition, if the related party is running a business from the property the rent would usually tax deductible and help build wealth for the member over and above the normal tax-deductible contributions that are being made to the fund.

Linked with the control over investments decisions is the flexibility that comes with the ability of the trustees to buy and sell investments. This allows trustees to take advantage of market timing. This is an advantage because the income and taxable capital gains for investments that have moved to retirement phase could provide tax-exempt or partially exempt income to the fund. This would not have been the situation in other funds if the decision to sell the asset occurred when the member’s benefit was in the accumulation phase.

The control over the timing of the purchase and sale of investments can result in tax advantages. An SMSF is treated for tax purposes in a virtually identical way to larger funds. However, it is the way the tax rules are used which provides efficiencies for the fund. As an example, by changing the timing of income and expenses, the overall tax position of the SMSF may change. If a fund defers the purchase or sale of an investment tax may be reduced.

Cost advantages of an SMSF compared to other funds really depends on the circumstances of the fund. As a general rule, a low balance SMSF may be relatively cost inefficient compared to larger funds. However, there will be a break-even threshold for a member’s balance where the cost of running the fund will be relatively cheaper than a larger fund. You need to keep an eye over the relative costs in both larger funds and SMSFs as the time will come that transferring benefits to or from an SMSF to another type of fund may be to your advantage.

On another note, an SMSF can provide the right vehicle for effective estate planning. When you consider that a high proportion of SMSFs have members who are close to retirement or have already retired then estate planning is front of mind. Making sure that any benefits accumulating for members are paid to the right person is important by using binding death benefit nominations or reversionary pensions. However, in some cases, intergenerational transfer of fund assets can occur where other members of the family also belong to the fund. This will likely be more important if the current proposal to increase the maximum number of SMSF members from 4 to 6 becomes the law.

One important, yet less known, benefit for SMSFs is creditor protection. This allows assets of an SMSF to be protected from creditors if a member or their business should run into trouble. Think of it more as a backstop rather than the prime reason for having an SMSF.

Control, when it comes to having an SMSF, is manifested in many ways. However, it’s the satisfaction of making decisions which are directed to the benefit of you and your family which provide the greatest pleasure.

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Important notes

While every care has been taken in the preparation of this article, AMP Capital Investors Limited (ABN 59 001 777 591, AFSL 232497) and AMP Capital Funds Management Limited (ABN 15 159 557 721, AFSL 426455)  (AMP Capital) makes no representations or warranties as to the accuracy or completeness of any statement in it including, without limitation, any forecasts. Past performance is not a reliable indicator of future performance. This article has been prepared for the purpose of providing general information, without taking account of any particular investor’s objectives, financial situation or needs. An investor should, before making any investment decisions, consider the appropriateness of the information in this article, and seek professional advice, having regard to the investor’s objectives, financial situation and needs. This article is solely for the use of the party to whom it is provided and must not be provided to any other person or entity without the express written consent of AMP Capital.

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