Benefits of an SMSF
Becoming more involved and having more control over investments is a very attractive factor that self-managed super funds offer. These are the same reasons why many people are now setting up their SMSF. Aside from these benefits, there are more which we will discuss further.
- Wider investment choices. In an SMSF members and trustees are given the control to choose the investment alternatives that they could invest in. Choices may include residential or commercial properties, collectibles, direct shares, term deposits, and more. Members also have access to derivatives and complex strategies to protect investments and reduce risks.
Self-managed super funds are recommended for small business owners because the business can be owned by the SMSF and then leased back to the business. This technique will give the SMSF a steady income, free up capital to grow the business and provide guaranteed tenancy.
- Borrowing to invest is allowed. With the revised rules that allow self-managed super funds to borrow, members can now purchase large assets like residential properties. However, there are some important rules that SMSF trustees have to adhere to, otherwise penalties apply. One of these rules is that property investments like a residential unit purchase through an SMSF cannot be lived in by any members of the trustees or anyone related to them. Borrowed funds can be used for the maintenance of the property but cannot be used to renovate, improve or develop the property. Self-managed super funds are not allowed to buy land with the view of building a property in it at a later stage. Trustees are not allowed to develop the site or make renovations on an existing property.
Borrowing from the fund to buy property have risks involved. First, there are higher costs than a normal home loan. SMSF property loans are more expensive. Cash should always be available in the fund to pay for the loans. Undoing the arrangement or selling the property can incur losses to the fund. Tax and depreciation losses from the property will not be offset through taxable income outside the SMSF. Alterations to the property cannot be made if they change the property’s character. These can only be made once the loan is 100% paid.
- Taxes will be minimised. SMSF gives trustees the flexibility when it comes to contributions, timing of contributions, allocating earnings and implementing reserves. This helps trustees and advisers minimise the amount of tax that the members pay within the fund based on their circumstances. Fund members are also allowed to make strategic decisions on contributions, distributions and reserves. Large superannuation funds that do not consider your unique circumstances may make decisions that will affect your tax position negatively and is difficult to prevent from happening.
- Tax control. Structuring, timing pensions and titling investment strategies to utilise the concessional tax treatment of funds can reduce tax, and when in the retirement phase, can be claimed as refunds from ATO for the excess credits. For members who have retired and not paying any taxes, tax advantages can be realised through the allocation of earnings from members who are not yet retired and therefore taxable by 15%.
- Tax benefits can be passed on. Family members of trustees can have large tax deductions, which is, in fact, make the fund tax-free for many years after the member’s death. This strategy is known as the Future Service Benefit Deductions.
- Minimised transaction costs on brokerage, buying and selling and spread costs on CGT. SMSF allows a seamless transition from the accumulation stage to the pension stage without the need to sell assets. Not setting assets will help members avoid capital gains tax and other transaction costs. Retain the investments and draw down on the SMSF balance as an income.
- Ability of the fund to transfer wealth to the next generation. Self-managed super funds can offer more benefits, control, and flexibility on the estate plans of members which will ensure that the funds will go to the right people, at the right time and in the most tax effective way.
With an SMSF, you can create a strategy that will implement your wishes on how to distribute your wealth. This may include leaving taxable pensions to your dependents who will receive them without paying any taxes or to your non-dependents.
It is also possible to give your dependents tax-effective income streams, like to disabled children or sick spouse. The trustee can control when these pensions or lump sums should be paid.
- Asset protection. Superannuation is protected from creditors. They can protect members from litigation and bankruptcy. If a business venture fails, and the remaining asset of the members is only their superannuation balance, the fund cannot be used to sustain the struggling business.
- Savings on the cost of SMSF operation. The cost of having a self-managed super fund can be lower than alternative public super funds, especially if there is a high balance greater than $200,000. Administration of a self-managed super fund can cost around $2,000 to $3,000 per annum, inclusive of auditing and accounting fees. Retail super funds charge about 1.5% or $3,000 per annum on an account balance of $200,000.
If you are thinking about putting up an SMSF you need to consult a Certified Financial Planner or an SMSF auditor. But before you dive into it, you should be willing to take on the responsibilities of an SMSF trustee or member. Be ready to have control of your superannuation, investment decisions, maximise tax effectiveness and have effective estate plans and protection strategies for your assets.
If you want to find out more about Self-managed super funds, talk to us and we will help you.
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.