Self managed superannuation funds (SMSFs) are an increasingly popular option for investors seeking greater control and flexibility of their superannuation. At the same time, you need to consider the wide–ranging reporting requirements and compliance obligations when deciding if an SMSF is right for you.
What is an SMSF?
SMSFs are sometimes referred to as ‘do it yourself’ super funds. Like other super funds, an SMSF invests members’ contributions and in turn provides benefits to members at retirement or death benefits to beneficiaries, in the event of the member’s death.
The main difference between SMSFs and other types of superannuation funds is that an SMSF member also acts as a trustee or director of a corporate trustee and must prepare and implement an investment strategy for their fund and manage the benefit payments.
Members of an SMSF are responsible for appointing an approved auditor and may choose to involve a tax agent, accountant and financial adviser, although the ultimate legal responsibility for ongoing compliance rests with the individual trustees or the directors of the corporate trustee.
What are the advantages of SMSFs?
SMSFs provide a greater degree of control and flexibility than a public offer super fund, making them suitable for sophisticated investment and retirement strategies.
An SMSF can support a wide range of investment options including:
- direct shares – both Australian and international
- direct property – residential and commercial property (that can be leased back to a member’s business)
- managed funds
- fixed interest
- alternative assets such as artwork and collectibles.
SMSFs are permitted to borrow funds for investment purposes under certain conditions (known as gearing). You have the added scope to invest up to 100% of an SMSF’s assets to acquire a commercial property providing it is leased back to a member’s business.
You also have the flexibility to pay retirement income streams from your SMSF as well as to take advantage of a number of estate planning features that only apply to these funds.
What are the drawbacks?
Establishing and maintaining an SMSF places a range of demands and obligations on members including:
- the responsibility to ensure that trustees act in the best interests of fund members
- making time to administer and monitor the fund’s assets
- costs of auditing, supervisory levies and administration
- taking on the risk of tax penalties if the fund fails to comply.
What type of investors does a SMSF suit?
With more than 420,000 SMSFs in Australia (each having up to four members), SMSFs have attracted a diverse range of investors including:
- sophisticated investors with a wide range of assets
- small business owners who want to acquire a commercial property that can be leased back to their business
- families who have complex wealth management and estate planning needs
- people who have the time, inclination and skills needed to administer a fund.
Everyone’s circumstances are different, so talk to Wealthwise about whether an SMSF is appropriate for your needs.