A Self Managed Superannuation Fund (SMSF) has become a popular way for many Australians to build wealth towards their retirement.
But are they all they’re cracked up to be? Is an SMSF really a suitable vehicle for the average person?
An SMSF has many benefits, but these benefits do come at a cost.
So, what is a Self Managed Superannuation Fund?
What is a SMSF?
A Self Managed Superannuation Fund is a super fund with six members or less, where each member of the SMSF is also a trustee.
The trustees are responsible for the management of the SMSF, including the Fund’s investment strategy, administrative requirements and tax obligations.
The onus is on the trustees to abide by superannuation legislation and regulations, as well as the Fund’s own trust deed, to ensure it remains compliant.
By maintaining its compliant status, a SMSF retains eligibility for the tax concessions available to regulated superannuation funds.
Learn more: SMSF CGT discount
Unlike retail and industry superannuation funds, SMSFs do not have professional trustees. SMSFs are run and managed by the members of the Fund.
A SMSF can have either individual trustees (also SMSF members) or a corporate trustee (SMSF members are directors of the corporate trustee).
Having individual trustees is a lower cost option, but can expose the Fund to greater asset protection risk (due to the individuals being the legal owners of the SMSF assets); it can add confusion to the ownership of the SMSF assets and make adding and removing members and trustees more difficult.
Having a sole purpose corporate trustee provides greater protection of the SMSF assets, provides greater clarity of the SMSF asset ownership and makes the process of adding and removing members much easier. However, setup costs and ongoing costs are more expensive for a corporate trustee compared to individual trustees.
A SMSF is defined as a superannuation fund that has fewer than seven members where each member is also a trustee of the Fund, or a director of a corporate trustee; and each trustee (or director of a corporate trustee) is also a member.
Trustees of a SMSF are unable to receive remuneration for their role as trustees.
Further, no member of the SMSF can be an employee of another member of the Fund, unless the members concerned are relatives.
The definition of a Self Managed Superannuation Fund is defined in section 17A and 17B of the Superannuation Industry Supervision (SIS) Act 1993.
SMSF Benefits – What are the Advantages?
The benefits of a Self Managed Superannuation Fund revolve predominantly around control and investment flexibility. Though, there are also many ancillary administrative and taxation benefits.
While many retail and some industry superannuation funds allow you to invest in a wide range of managed funds, ASX-listed shares and ETFs; only a SMSF allows you to invest in direct property, such as a residential investment property or commercial property (business real property).
A SMSF also allows you to choose any bank account, term deposit provider, managed fund or shareholdings; whereas retail or industry funds will limit your choice, based on their investment menu.
Read more: SMSF investment strategies
Because a SMSF is managed and run by the trustees and members of the Fund, the day-to-day operations and activities are not delayed by administrative processes, functionality and reliance on super fund staff members to process requests. Therefore SMSFs can make more tactical decisions, capitalise on opportunities and react quicker to legislative changes or economic events.
The other main benefit not available within other superannuation funds is the ability to borrow to invest into assets such as property and shares via a limited recourse borrowing arrangement (LRBA).
For all the advantages of SMSFs, there are just as many disadvantages.
In my opinion, SMSFs are suitable for very few Australians with very specific objectives.
Unfortunately, every day many Australians who should never have a Self Managed Superannuation Fund are encouraged to set up a SMSF by their trusted advisers or enticed by promoters of property schemes with ulterior motives and worrying conflicts of interest.
You may think you want a SMSF, but for the vast majority of you, any respectable adviser would probably suggest considering otherwise.
The reason I say this is because a Self Managed Superannuation Fund comes with higher costs (generally), constant paperwork and many legal responsibilities.
Then there’s practical issues that arise when certain circumstances arise that aren’t complicated if your super is held in an ordinary superannuation account.
For instance, dealing with the implications of a member’s death, marital breakdown, change in relationship, sale of a business or a member wanting to leave an SMSF can create issues; especially when illiquid investments such as property, private equity, or unlisted trusts are involved and owned under a pooled investment strategy. Most SMSF members and trustees don’t usually have exit strategies or contingencies in place for such events.
Also, most SMSFs aren’t actually self-managed at all. If you have a SMSF, you will usually need to employ the services of an administrator/accountant, auditor and possibly a financial planner.
That’s right, SMSFs can be costly; time-wise and on the hip-pocket.
Learn more about the pros and cons of SMSFs, here:
SMSF Fees – Setup and Ongoing Costs
The fees associated with a Self Managed Superannuation Fund (SMSF) can vary depending on how the SMSF is set up, who it is set up through, who helps manage it and the types of investments held.
SMSF Setup Costs
As a guide, a SMSF will generally cost around $1,500 – $2,000 for a basic setup, including a corporate trustee. Additional costs will be incurred if you are intending on establishing an investment loan through a bare trust. This fee will be paid to an accountant or SMSF administrator.
Costs for purchasing investments or any advice obtained relating to the SMSF and its investments will be on top of setup costs.
Read more: How Much Does It Cost To Set Up An SMSF?
SMSF Ongoing Costs
The ongoing costs will again be determined by who you use to assist with the management of your SMSF and the type of investments held.
On average, running a SMSF will cost around $2,000 – $4,000 per annum in total, including all accounting, audit, administration and regulatory fees. Fees may be higher if you have a LRBA in place or complex investments that add time to completing annual tax returns and financial statements.
Investment management costs and ongoing advice fees will be in addition to general SMSF running costs.
As excited as you might be at the prospect of setting up a SMSF, be sure to do your research beforehand. Understand all of your responsibilities and obligations. Get to know your legal risks and calculate the hours required each year to meet your onerous administrative duties. Because, not only can it be expensive to establish an SMSF and run an SMSF, but closing it down will cost you too.
Keep in mind that for every two SMSFs that are established, one is closed down. So, don’t go wasting your time unless you’re certain.
Our financial planning firm, Toro Wealth, specialises solely in helping 50 to 70 year olds optimise their financial position in the lead up to retirement. If you’re interested in learning more about our service and cost, click here.