Self-managed superannuation funds (SMSFs) have been the fastest growing sector of the superannuation industry for the past decade, as many investors and retirees have begun to realise the potential benefits. According to data from the Australian Taxation Office (ATO), the number of SMSFs in operation has grown from less than 100,000 in 1994 to 582,000 at September 30, 2016, with a record 1,100,000 Australian members.
Benefits of an SMSF
An SMSF is a superannuation structure which enables members of the fund to exercise a greater level of control over their superannuation investments. Members of an SMSF also become the trustees of the fund making them solely responsible for the investment decisions of the fund. An SMSF can have up to 4 trustees, which allows the accumulation of balances thereby increasing the funds available for investment. This provides greater investment capacity for retirement. Along with this, there are several other benefits, including taxation benefits.
For self-employed individuals, an SMSF can enable you to own your business’ real estate within the fund. ATO rules will then allow the fund to lease the real estate back to your business. For this reason alone, many self-employed individuals choose to establish an SMSF. It can be more tax effective for the fund to buy the asset rather than you buy the property in your own name using after-tax income.
If you’re considering this approach, you must ensure the level of investment in business real property still meets the investment strategy of your SMSF, including diversification of assets, liquidity and maximisation of returns. That’s something you can work out with the help of your financial adviser.
SMSFs also have the added benefit of being able to borrow or gear to purchase an investment, provided the investment is one approved to be held by an SMSF. Leveraging, or borrowing money to buy investments, can be one strategy to consider to help you reach your retirement goals more quickly.
You are also able to transfer personally owned shares and listed securities directly into your SMSF, as long as certain criteria are met; such as they are transferred at market value and at arm’s length. This means you do not have to sell the shares and then repurchase via the SMSF. Simply, the transfer can be done off market. However, you should carefully consider the tax implications of such transfers and discuss this with your licensed tax agent. Your financial adviser can also assist you in understanding the impact of these transactions.
SMSFs can suit many Australians
A broad range of income earners are beginning to operate SMSFs, as the table below from the Australian Taxation Office illustrates. In 2016, the group responsible for setting up the greatest proportion of SMSFs was those earning between $100,001 and $150,000.
If you have an SMSF, you are responsible for managing the fund and ensuring it complies with all relevant laws and SMSF administration requirements. The ATO can be very strict with the operations of an SMSF and it has the ability to shut funds down if they are not being run in a fit and proper manner. A financial adviser can take you through the additional requirements of operating an SMSF and the costs involved, which can, in some cases, be more than traditional funds.
If you’re thinking of operating an SMSF, it’s worth seeking advice. Experts can help you manage the ongoing operations of the fund to ensure your SMSF complies with the law. As superannuation laws change from time-to-time, they can also keep your fund running smoothly and make sure it meets any necessary requirements.
It’s worth noting that speaking with a financial adviser can help ensure your investments remain sufficiently diversified. Official Australian statistics presently show a dangerous overexposure to Australian assets, especially cash investments and shares. A risk profile that follows this present strategy is one that appears to be highly exposed to the Australian economy and rising inflation, which eats away at returns on cash investments.
ATO data shows total SMSF assets were $635.9 billion in the September quarter, with Australian shareholdings standing at an all-time high of $192.4 billion, or around 30% of all SMSF assets. Despite very low interest rates, another $157.4 billion was invested in cash and term deposits, or 25% of all assets, again an all-time high. In contrast, the same data shows SMSFs held less than 1% of their holdings in international shares.
Speaking with a financial adviser can help you understand your risk profile and investment objectives, which in turn can help to ensure your investment strategy is diversified adequately to meet your investment timeframe. Additionally, an SMSF won’t suit everyone and your financial adviser will be in a position to recommend an approach that suits you. If you’re interested in exploring whether an SMSF may suit you, then speaking with a financial adviser should be your first port of call. They can give you an in-depth overview of an SMSF, the benefits, drawbacks and overall suitability for your needs.
General Advice Disclaimer: The information provided on this information sheet is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information contained in this information sheet you should consider the appropriateness of the information having regard to your objectives, financial situation and needs.