Is an SMSF right for you?
Do-it-yourself superannuation, in one form or another, has been around for about 30 years. But it has only been over the last few years that these smaller super funds (or as they are more commonly called, self-managed superannuation funds, or SMSFs) have made an indelible mark on Australia’s retirement savings landscape.
The SMSF sector now claims a bigger slice of the super pie than it ever has, in terms of asset values and number of funds. The 496,028 SMSFs in the country have an average balance that is generally within striking distance of $1 million. With more than $432 billion of superannuation assets, SMSFs represent roughly a third of Australia’s total.
This stunning data is contained in the Tax Office’s statistical report on SMSFs up to the end of December 2012, released in February 2013. An earlier government statistical summary stated that the SMSF sector grew at an annualised rate of 20% over five years, compared to around 8% for other super funds.
By asset value, SMSFs have now surpassed retail and industry super funds. The regulator of superannuation, the Australian Prudential Regulation Authority (APRA), says retail funds account for around 28% of total superannuation assets, industry funds about 20%, but that SMSFs accounted for the biggest slice – more than 30%.
Right choice for you?
But is an SMSF for you? Basically, a self-managed superannuation fund is a trust that is established for one to four members, who are also the trustees (or directors of a corporate trustee), and so control the fund. Therefore it is the members themselves who decide how the fund will operate, and where it will invest (within the boundaries of the superannuation law and the fund’s own trust deed).
Wanting greater control is often cited as one of the chief reasons that people want their own SMSF, followed closely by the desire to have greater flexibility over investment choice.
So given the fact that an SMSF is more hands-on, they are a type of super fund that will need a commitment to run, as managing your own super takes knowledge, time and skill. Members may be fine about investment control, but there are also regulatory responsibilities to shoulder and manage. So while an SMSF will be suited to a lot of people, they are not for everyone.
One more thing that running a self-managed super fund takes is money. An interesting item to come from a government review was that SMSF members in the peak earnings age range (from 35 to 60) had an average taxable annual income of $106,000. Other types of super fund members earned an average annual income of $55,000. Compared to other types of super, SMSF members are on average older, the report says, earn more money, and have larger balances.
The latest estimate of an average SMSF assets is just over $888,400 and over the last five years the proportion of smaller funds (less than $200,000) in the total SMSF pool has been declining. So SMSFs seem more suited to those who have the wherewithal to set one up. Operating expenses must be taken into consideration as well, with the average running costs (based on paying third-party professionals such as tax agents and auditors) estimated by the government at $6,500 a year – although this can vary significantly depending upon the nature of the assets and value of transactions. The Super System Review puts the average audit fee at $664. So to be cost-effective, the bigger the balance the better.
Operating expenses are unavoidable however, as it is compulsory under the legislation (theSuperannuation Industry (Supervision) Act, or SIS) to have all accounts audited by approved auditors every year. The Tax Office says there are around 11,500 approved auditors operating across the SMSF sector.
SMSFs also need to pay a $200 supervisory levy every year to the Tax Office (which will increase to $300, effective from the 2013-14 financial year) which is included in the SMSF annual return. It was previously $150 from the 2007-08 year, but started out as just $45.
SMSFs are taxed, like most super funds, at a concessional 15% rate on the income of the fund, including contributions for which the member (or their employer) has claimed a tax deduction. Realised capital gains on investments held for more than 12 months are taxed at an effective rate of 10%, and the usual tax-lowering tools of franking credits and offsetting capital losses against capital gains are still available.
How do you start your own SMSF? The first step is to organise for a trust deed to be written, which spells out the rules, rights and obligations for members of the fund. In fact, there are a few main steps to setting up your own SMSF:
- get a trust deed
- appoint trustees
- register with the Tax Office
- open a bank account.
The trust deed is a legal document that sets out the rules for operating the SMSF and the powers, duties and responsibilities of the trustees/members. It also sets out under what circumstances contributions may be received, how benefits are paid, appointing professionals and so on (such as auditors) and other details. You will need the help of a lawyer and a tax professional to get this going.
Appointing trustees is simple (all members have to be trustees or directors of corporate trustees, and vice versa) but they need to sign a declaration, which states that the trustees accept their appointments and understand their duties and responsibilities. After that the SMSF must register with the Tax Office, which will see the fund get a tax file number and an Australian business number as well as ‘elect to be regulated’. The SMSF will need to register for goods and services tax if annual turnover (for GST purposes) is more than $75,000, such as where there is a substantial rental income producing real property element to the investment portfolio.