Advantages and Disadvantages of an SMSF
People who set up self-managed super funds have the belief that they can make better investments than the big fund managers. But before establishing a SMSF, compare the advantages and disadvantages of setting up one for yourself.
Advantages of an SMSF
It can be a means to hold your business premises. Several SME owners hold their business premises in their self-managed super funds for tax purposes, succession planning, asset protection and security of tenancy. With this setup, your business has to pay commercial rent to the SMSF and, in turn, the fund will only pay concessional tax on the rent. This is a typical benefit from various tax breaks available to landlords which include tax deductions for interest on property.
Fund-held business premises are usually inaccessible to trustees in bankruptcy if a member gets into financial troubles, therefore, protecting your property.
It helps in buying and selling assets quickly. SMSF trustees or members can immediately change their investments and asset allocations in their portfolios. However, having large funds can lead to a frustrating lag between investment changes requests and the actual execution of these changes.
Allows other ways to make investments differently. SMSF allows members to invest in investments not available with most large super funds. Self managed super funds can have direct property, artwork, unlisted shares, and other unique or exotic investments. Trustees can also invest in selected investment fund managers and direct shares.
Potentially cut costs. Self-managed super funds that have huge balances, like those beyond $200,000 may require lesser fees than large super funds, and depending on circumstances. Administration expenses of self managed super funds are also likely fixed without regard of the fund’s balance. Direct investments by an SMSF through investments funds are also not liable for fees based on the percentage of investments.
Avoid weaknesses in the administration of large super funds. With SMSF, trustees are in control of their investments. They make investment decisions and ensure that no mistakes are made in running the fund.
Helps in managing or eliminating Capital Gains Tax (CGT). Several SMSFs, try to minimise the sale of assets as shares and real estate until the funds begin to pay pensions. This is done because no CGT is payable once an asset is backing payments for pensions.
Allows trustees to buy assets that they cannot otherwise afford. SMSF allows four people, like family members, to pool their retirement savings to purchase costly assets like direct properties that they may not afford on their own. Self managed super funds can also borrow money to invest with instalment warrants or comparable arrangements
Self-managed super funds allow flexible estate planning. Members of self managed super funds aged 60 or over can withdraw their benefits tax-free before their death and avoid potential death benefit taxes.
Disadvantages of an SMSF
Managing Self-managed super funds is time-consuming. Running your own super fund needs a considerable amount of time even with the help of an SMSF auditor, administrators and good financial planners. With other large funds, the administration takes care of day-to-day investment decisions and work with asset allocation or investment choices.
Trustees or members of an SMSF need some knowledge in investments. Members should have a thorough understanding of the basics of sound investment practices. They should also understand that a properly diversified investment portfolio can help spread their risks and potential returns. They should also be aware that excessive investment costs and taxation erodes returns.
Since SMSF members are directly responsible for their retirement savings, it is best that they should have this investment knowledge.
Huge penalties for non-compliance to laws that govern Self managed super funds. Non-compliant self-managed super funds, less non-concessional (after-tax) contributions, are taxed at the highest marginal rates. This can destroy the retirement savings of every member and trustees of an SMSF. Members could also face criminal or civil sanctions for serious violations or breaches.
Risk of poor investment diversity. There are self-managed super funds which are established for the simple purpose of purchasing a single valuable asset like a business real estate. The fate of the fund, therefore, depends on the performance of the asset. This is an example of inadequately diversified investments.
SMSF with smaller balances incurs high costs in management. Before establishing your SMSF, members should compare costs with those of large super funds. Self-managed super funds that have small balances are not as cost-effective as large industry funds. Their financial feasibility depends on the types of investments, the existing balance, levels of future contributions to boost the balance and the cost of getting professional assistance.
Hazards of having a dominant trustee. In most superfunds there is usually one member who is a dominant force in running the fund. This may include making investment decisions. Aside from signing documents, passive members usually have no involvement with the fund and do little to safeguard their interests.
Tight restrictions on investments. Members of superfunds, have more investment freedom than large funds but there are usually tight restrictions on investing. Superfunds have the sole purpose of giving retirement benefits to their beneficiaries and, therefore are prohibited from giving loans to members and their relatives. They are also not allowed to lease or have investments with related parties that involve fund assets worth more than five percent of the fund’s value.
Members are at risk of losing interest from the fund. Big ambitions for the fund may not happen and there is a great risk of losing interest. This may be because the funds have not performed as expected or members failed to boost the balance as planned. For rapidly ageing populations, members may become too frail or ill in managing their superfunds, especially after a spouse’s death.
Kingston Knight Audit are the Auditor Melbourne experts to contact when dealing with your trust account audit, SMSF Audit, financial statement audit, and internal audit requirements. Contact us today, Kingston & Knight Audit offers a free telephone consultation to establish how we can best help you achieve the assurance and compliance you require.