Having control over how your retirement savings are invested is one of the many benefits of self-managed super funds (SMSF). On the flip side, the responsibilities and management skills required to run a SMSF are significant. This is because you’re accountable for your SMSF’s regulatory compliance—not your accountant, financial adviser, or solicitor. We consider what might make an SMSF more attractive than investing through a super fund, and some of the downsides to consider.
Having an SMSF provides more choice and freedom to access investment options that would otherwise be unavailable through a super fund. This includes assets like art and collectibles as well as physical precious metals and alternative assets like cryptocurrencies.
Unlike investing with an industry or retail super fund, your SMSF can borrow to invest in property or shares, typically using a structure called a Limited Recourse Borrowing Arrangement (LRBAs). This strategy may be an attractive option to help expand your investment portfolio. However, there are restrictions and compliance requirements. The Australian Taxation Office (ATO) has recently warned investors of the dangers of over-investing (and over borrowing) into property within SMSFs.
If you’re an SMSF trustee, you’re entitled to the same reduced tax rates that are available through industry or retail super. Your investment return is therefore currently taxed at a maximum of 15% rather than your marginal tax rate which could be as high as 45% outside of superannuation.
An SMSF fund can have up to six (6) members. Bringing six investors’ money together, offers greater scale to access investment opportunities that may not be available to you as an individual investor. Having scale may also help to keep fees down.
Managing an SMSF is not easy. As the trustee, you need to ensure the fund complies with all relevant regulations otherwise you could face severe consequences for getting it wrong. If the fund is deemed to have breached its compliance responsibilities, penalties can include fines and civil or criminal proceedings. Depending on the transgression, tax penalties could be levied, including fund returns being taxed the top personal marginal tax rate as opposed to the concessional super rate of 15%.
What investors often overlook is the financial and investment expertise required to run, or be involved in running, an SMSF.
As a trustee, you’ll be responsible for creating and implementing your own investment strategy—one that will need to deliver enough returns to adequately fund your retirement. The importance of this cannot be understated.
This means you need to:
You’ll also need to remain up to date on any changes to legislation that affect SMSFs as these may have compliance requirements. An understanding of how to manage legal documents, such as a trust deed, is also beneficial. However, a legal professional could help you with this.
The administration and management of an SMSF is time intensive so if time is something you’re short of, an SMSF may not be a good option. On the other hand, many SMSF investors enjoy the sense of involvement and purpose that running their own fund brings.
If you find you don’t have the time or investment knowledge to manage your SMSF, you can outsource this to investment managers, financial advisers, or other experts. This will come at an additional cost though and may defeat the purpose of “self-managing” your super (ie would you be better served with a managed super fund via an industry or retail fund?).
There is a lot of controversy around what should be a reasonable amount to set up an SMSF. Depending on the fund’s complexity and structure, set up costs, administration, reporting and legal fees can become expensive, so a general rule of thumb is to have around $500,000 as a minimum although there is no legal minimum.
Bottom line: SMSFs are not for everyone, they can offer significant benefits. Running an SMSF successfully requires investment, legal, super and admin skills—or the ability to get help from people who have those skills. A conversation with a financial adviser or accountant could help you decide whether going it on your own is a good option.
At Accorti Accountants & Advisors we specialise in helping clients with establishment and ongoing compliance for SMSFs. Contact us now. We work with clients all over Australia and have offices in Brisbane and the Gold Coast.