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Six advantages of an SMSF

Each type of superannuation fund has its own features but setting up an SMSF provides some unique advantages worth considering.

An SMSF gives the trustee options around tax efficiencies, investment flexibility and cost advantages once the fund has grown to a tipping point. Perhaps the biggest advantage of an SMSF is having active control over the investment decisions for your retirement.

Here are six features of SMSFs:

1. Business property leasing and deductions

An SMSF gives the trustee some unique options to make investments that are currently not available to funds of five or more members. For instance, an SMSF can buy business property from members and other related parties, with tax advantages when the property is then leased at market rates to a related party as it continues to build wealth within the fund.

If the related party in the SMSF is also running a business from the property, the rent would usually be tax deductible and help build further wealth for the member above the normal tax-deductible contributions that are being made to the fund.

2. Buying and selling investments

Many SMSF trustees use their fund to make direct investments in unit trusts, term deposits, listed and unlisted shares and property. Having control over your investment decisions means you have the flexibility in an SMSF to buy and sell when you decide.

Market timing is critical for making investment and sale decisions. SMSF trustees are uniquely placed to take advantage of income and taxable capital gains for investments that have moved to a retirement phase and could then provide tax-exempt or partially exempt income to the fund.

This would not be possible in other funds by selling an asset when the member’s benefit is in the accumulation phase.

3. Control the timing of investments for tax advantages

Control over the timing of buying or selling fund investments is critical in providing tax advantages.

For tax purposes an SMSF is treated in virtually the same way as the larger funds, but with greater flexibility in using the various tax rules for direct efficiencies. For example, the ability to defer the purchase or sale of an investment may provide a reduction in taxable income of the fund.

4. Potential cost savings

The cost advantages of an SMSF compared to other superannuation funds will vary according to the circumstances of the fund.

Generally, an SMSF with a low balance may be relatively cost inefficient compared with larger funds. However, there will be a break-even point for a member’s balance where the cost of running the SMSF will be relatively cheaper than a larger fund.

If cost is a priority over the flexibility and control, keep a watchful eye over the relative costs in both larger funds and SMSFs and wait until the best moment for your circumstances.

5. Estate planning alternatives

An SMSF provides an effective vehicle for estate planning. As many SMSFs have members either retired or nearing retirement, estate planning becomes a priority to ensure that any benefits accumulating for members are paid to the right beneficiaries. This is often done using binding death benefit nominations or reversionary pensions.

Intergenerational transfer of SMSF fund assets can also happen where other members of the family also belong to the fund, which will become increasingly important if the current proposal to increase the maximum number of SMSF members from 4 to 6 becomes law.

6. Asset protection from creditors

Creditor protection is an important and little-known benefit of an SMSF. Assets of an SMSF are protected from creditors if a member or their business should run into trouble. It’s more of a backstop rather than a primary reason to get into an SMSF, but it’s an added assurance that valuable assets designated for retirement are adequately protected when needed.

The satisfaction of running an SMSF

The main attribute in a word is control. The satisfaction of an SMSF is in your ability to control and direct the fund’s investments and fortunes. You are empowered to make decisions which are directed to the benefit of you and your family, which provides the greatest pleasure plus the confidence to own your future. SMSFs are not for everyone, especially those with insufficient time or knowledge to act as a trustee, but worth considering for many.

For more information on the best SMSF strategies, see our Expert Insights page.

 

Graeme Colley is the Executive Manager, SMSF Technical and Private Wealth at SuperConcepts, a sponsor of Cuffelinks. This article is for general information and does not consider any individual’s investment objectives.

For more articles and papers from SuperConcepts, please click here.

9 Comments
RICHARD SPALDING
October 27, 2018

Ref Dean's interesting comments on super wraps vs SMSF and Cuffelinks response.
I carried out said search on wraps within Cuffelinks.
It would be appreciated if anyone could post any additional links to what they might consider a fair assessment of super wraps vs SMSF and how the proposed labour party legislation changes may impact a super wrap.
I currently manage a SMSF in pension mode.
Many thanks

Mark
October 26, 2018

Hi Graeme, Happy to support your business real property assumptions but your other reasons don't carry much weight when I continually find competent Australians shooting themselves in the foot with poor asset mix, poor administration and poor portfolio construction rules. Many Australians simply should not be coerced into opening a SMSF when a modern wrap is available, with control. I'm with Ramani.

Stefy
October 26, 2018

One massive advantage I have found with my SMSF is that I can transfer money between pension and accumulation (or the other way round) in an instant. This has become increasingly useful as I have gotten older.
Try doing that with an institutional fund. Its a major hassle with hidden fees.

John De Ravin
October 25, 2018

Graham I agree with your stated advantages 1 and 4 but relative to the alternative of holding superannuation assets in a retail or industry fund your stated advantages 2, 3, 5 or 6 are only partially valid.

2 Buying and selling investments - if you are a member of one of the many retail or industry funds that allow "choose your own investment" options then you can time your own investment decisions, at least in relation to ASX300 stocks.

3 Control timing of disposals for tax advantages - same comment applies as for 2 above.

5 Estate planning - there is nothing to stop you from creating a reversionary pension within a retail or industry fund, nor is there anything to prevent you from making a Binding Death Benefit Nomination or (if the fund permits) a Non-lapsing Death Benefit Nomination. It is true that BDBNs in retail or industry funds generally need to be renewed every three years.

6 Asset protection - I am not aware of any distinction between an SMSF and a retail or industry fund in relation to asset protection.

Perhaps some of your "advantages" were intended to be advantages relative to non-superannuation investments?

Boyd
October 25, 2018

While SMSFs certainly have their place for well-informed and interested investors, a mention should be made of wrap accounts which offer most of the benefits of SMSFs without the problems of admin and legal responsibilities. It would be good to see an article about the differences and on the comparative admin costs of wrap accounts versus SMSFs for various quantities of money.
It is also my understanding that, under Labor's proposed changes to franking credits, wrap accounts would still get the benefit of excess franking credits whereas SMSFs would not.

Dean
October 25, 2018

Spot on Boyd. Super Wraps offer most of the benefits of SMSFs without the problems. I don't see any Wrap providers on the Cuffelinks sponsor list though. You may be waiting a while for that article.


In the meantime I can tell you that the good Super Wraps have capped fees over a certain level of assets, and they allow account aggregation between family members. So you can get the same fixed flat fee per family structure as you can with an SMSF.


Not sure you're correct re the franking credits though. Happy to be proven wrong!

Graham Hand
October 26, 2018

Hi Dean, Cuffelinks has published 2,000 articles written by over 500 authors, and the vast majority are not sponsors. So don't imply we only publish material from sponsors, and in fact, we often publish articles which are critical of sponsor products. Anyone is welcome to write an article on wraps and if you type 'wraps' into our search engine, you will find the subject is often raised.

Dean
October 25, 2018

Advantages compared to what?

The union funds have been running a misleading and deceptive marketing campaign for years by comparing their funds to the old, inflexible, expensive funds that were standard in the earlier days of superannuation. They deliberately ignore the fact that most older super companies have introduced much more competitive funds in the last 5-10 years, many of which are far better than the union funds.

A similar principle applies with SMSFs. The advantages often touted for SMSFs would certainly have been significant in the 80s and 90s. But these days there are plenty of non SMSF super products with very similar control, tax, investment choice, and cost advantages. Those products don't come with the risks, responsibilities, and admin overhead associated with being an SMSF trustee.

Ramani
October 25, 2018

At the margin, SMSFs do have advantages for the savvy, engaged and active saver. Many are not, and the relentless push by fee-focused planners and accountants drive some to the SMSF route. Far from being the liberating push for optimising long term savings, they could quickly turn into a millstone pull around the neck when personal, career and family risks eventuate.
Recently I came across a large institution-backed financial planner recommending a template move away from established low cost and well-performing super funds into a SMSF for a professional couple who had neither the ability nor willingness to commit to what it takes to run a SMSF, when rules such as event-based reporting complicate an already onerous responsibility.
In the interest of pro-active risk management we should have rules requiring SMSFs to review competence as members age. It is not victimless: the taxpayer who subsidises retirement savings is the collateral damage.
Horses for courses. Pedestrian savers should walk, not ride - risking a fall off the saddle.

 

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