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In one of our recent Financial Fofu Podcasts headed by Sarah Eifermann (SFE Loans) and Trudi Cowan (TCK Accountants), they talk with Nick Zaras from Consilium Wealth about Self-Managed Super funds (SMSF’s).Perhaps not a well-known subject, but SMSF’s are another way you can plan for your retirement, and generally have more control.
As opposed to Industry and Retail Super Funds, an SMSF is a private Fund you manage and are responsible for yourself and/or with the help of professionals.
Managing your own SMSF can be attractive; you are choosing your own investments and insurance, but it does come with risk, responsibility and a lot of work. Superannuation is a very heavily regulated area. Making sure that even though you're managing your own Superannuation, you're still meeting the requirements and regulations of the SIS Act, the Superannuation Act, is an important criteria.
As Nick informs “a Self-Managed Super Fund is basically just a Super Fund, first of all. When you are setting up you are responsible for any decisions, and complying to make sure that you are within the rules. You are personally liable for all the funds' decisions i.e. where you're investing, and you can get assistance from your Accountant, your Financial Planner, and also your Mortgage Broker with regards to getting the loans done. But you're solely responsible for the whole thing basically, that's the main thing to be aware of.”
So why set up an SMSF?
An SMSF gives the Members of the Fund via their Trustee more control over the Asset types, and where the Fund places its investments.
Setting up a Self Managed Super Fund depends on the individual person or Trustee’s situation, but must meet the criteria for the purpose of providing retirement advantages for the Members or Dependents.
A common reason why people utilise a Self Managed Super Fund is for the purpose of purchasing a Commercial Property, (Real Property)where they are able to operate their business from, rather than leasing another premises. As Nick mentions “They might be a particular occupation, that is renting a premises, and they've seen that their business is growing, and rather than giving rent to somebody else, if they’ve got enough money in their Super Fund, they can use it as a deposit to buy Commercial Property. And in that way, they basically then pay rent to themselves via their Super Fund.”
Another option is for people wanting to purchase residential property for investments purposes, holding the property for a long time and having the rental income from that property go into the SMSF.
A third reason Nick suggests is for Estate Planning purposes to have more control within the Fund if a member dies.
Is there a minimum amount to start a SMSF, and what costs must you be aware of?
Nick usually recommends a minimum of $200,000. The reason for this is the cost in setting up a SMSF and the ongoing costs of running it aren’t cheap. If you tend to have less than this amount, the costs can soon outweigh the benefits. Furthermore, if you need lending within the fund, most lenders require a min of $200,000(for mainly the same reasons).
Some of the costs related to the running of an SMSF include –
- Tax and Financial Advice
- Reporting fees to prepare the Annual Return Report
- Audit fees
- Investing Fees
- Insurance and Legal fees
- Accounting Costs
These cost can equate to around $10,000 for initial set up and $2500 yearly for compliance.
What are some of the risks?
When managing your own Super Fund all Members/Trustees involved are responsible for complying with the law. Some risks involved are:
- Investments not returning as expected
- Personal liability of the decisions made with regards to the fund. Even if you receive help from Professionals, you are still ultimately in charge and held accountable.
- Disagreements with members involved in the Trust
- One member wanting to leave the Fund and the impact on the investments
Tax Considerations
Like all investments there are benefits and risks to be considered.
The tax benefits of a Self-Managed Super Fund, usually relate to property and capital gains tax.
As Trudi states, the main benefit of holding Property within an SMSF comes from the tax rulings around the 15% tax rate of the SMSF and the Pension phase which may incur no tax at all.
“If you hang on to that commercial property and your SMSF is in pension phase, potentially you pay no tax at all on the sale of that property....there definitely can be big, big tax benefits for the sale of that asset [within the fund].”
If you buy a factory for $500,000 now and hold on to it for 25 years, and it's worth $2 million then, it's a one and a half million-dollar gain that is potentially tax-free.
Sounds great right? But you must remember that once money goes into a Super Fund (of any kind) it cannot be withdrawn unless you are in Pension Phase or suffering from Financial Hardship and you make an application to the Trustee. This is another reason that Tax and Financial Advice should be sort prior to deciding an SMSF is right for you.
People can take for granted the responsibility and the serious nature involving having your own SMSF, with all the moving parts. There are some benefits to setting up your own Super Fund, the control for example, but do establish that you are 100% committed, and understand what's involved before incurring the costs of setting up a Fund you don’t actually use.
Everyone’s situation is different, before you make any decisions on SMSF’s and any investments ensure your always seek licensed Financial Advice.
If you'd like to listen to the Podcast Click Here
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