The pros and cons of SMSFs

As at March 2014, there were 528,701 SMSFs in Australia, with a total of $558,553 million worth of assets.[1] There are many compelling reasons why SMSFs are so popular — and equally persuasive reasons as to why they don’t suit everyone.

The pros

If you’re a keen to learn with at least $200,000 to invest — and the time and interest in managing your own investments — an SMSF could be a good choice.super 2

One advantage is that SMSF administration costs stay fixed — unlike a retail fund, which charges fees as a percentage of the value of your portfolio. So for example, if your super fees are 1% of your fund’s balance, you would pay $2,500 if you had $250,000 worth of super savings.

Then, if your portfolio balance grew to $500,000, you would pay $5,000. But, with an SMSF you would pay the same amount in administration costs, regardless of how much your balance grows.

Also, if you have experience in investing in property and are considering your next property purchase, the only way to do so using your super savings is via an SMSF.

In particular, if you’re a business owner, there may be advantages for your business premises to be owned in your SMSF and then leased it back to the business:

  • The income your SMSF receives as rent is usually taxed at just 15%.
  • If your SMSF borrows money to buy the premises, the repayments can be tax-deductible to the fund.
  • You’ll also be effectively your own landlord, providing security to your business’ tenancy, but the arrangement must be on commercial terms.

Overall, SMSFs offer the most flexible way to save tax-effectively for the future for those who want to take control of their super.

And now the cons

But remember, running an SMSF may be complicated, time consuming and require considerable knowledge about and interest in investments. Even if you pay for professional help from firms like Lockwood and Ward you remain responsible for creating and documenting your fund’s investment strategy, recording your investments and transactions, and ensuring that your fund is adequately diversified to help manage the risks of investing.

It’s also vital that a qualified auditor looks over your fund each year to ensure it is compliant. And there can be significant penalties for non-compliant funds.

Finally, if there is a conflict between you and the other trustees of your fund you’ll need to resolve them privately, as SMSF trustees and members aren’t able to appeal to the Superannuation Complaints Tribunal to resolve disputes. This could result in large legal fees and relationship breakdowns with the other trustees — who may be family members or business partners.

Get expert independent advice

If you think an SMSF might be right for you, it’s important to seek professional advice from a specialist.

Feel free to speak to us – call Michael Rees-Evans, our Partner-Wealth Consulting who is also an SMSF Specialist Advisor (SSA), on (02) 9299 7044. We can help with the right strategy for your future financial freedom.

Michael Rees-EvansCFP® SSA is a registered tax agent (Financial services and superannuation). However, if you wish to rely on the general tax information contained in this communication to determine your personal tax obligations, we recommend that you seek professional advice for your specific circumstances.

[1] ATO (2013) Running a Self Managed Super Fund. Download a Copy.
[2] ATO (2014) Self Managed Superannuation Fund Statistical Report. View the ATO SMSF Quarterley Reports.

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