Self-managed super funds (SMSF) are a popular choice for many Australian investors. Deciding to manage your own super is a popular option, however, is it the right option for you and your situation? To help you decide, Financial Adviser, Christina Tran outlines some considerations of having a SMSF.

What is a self-managed super fund (SMSF)?

A SMSF is a private super fund established by one to six people that provides benefits to its members upon retirement. A SMSF experiences the same concessions and tax advantages as retail, corporate and industry super funds, yet the point of difference is the ability for members to have unlimited control over their investment decisions.

Pros of SMSF

  • Direct Control and Investment Flexibility

Members can control every aspect of their investment portfolio and can decide to invest in a range of assets including securities, property, vehicles, gold, cars or even racehorses. If you are looking to purchase a property (commercial or residential), a SMSF is the only way to do this using their superannuation fund.

  • Increased Purchasing Power

A SMSF allows up to six members to combine capital into one fund, which creates an increased total balance and together families can have access to greater investment opportunities.

  •  Tax-Effective

Superannuation income is taxed at 15%. This rate also applies for Capital Gains Tax in the first year of ownership, after which it drops to 10% and no capital gains tax is payable on the sale of a property in the pension phase.

  • Limited Recourse Borrowing Arrangement (LRBA)

If there aren’t sufficient funds within the SMSF, a SMSF is able to borrow money through a Limited Recourse Borrowing Arrangement (LRBA). This way, members are able to purchase an investment property using borrowed funds. Although there are many benefits associated with gearing, there can also be many risks involved. Purchasing property within an SMSF can be a prosperous investment strategy, however, it is not the solution for every investor.

Cons of SMSF

  • Establishment and Ongoing Costs

The setup and administration costs associated with a SMSF are often more expensive than other super fund options. SMSF’s are required to have an annual tax return and audit by a qualified and registered tax agent. There will also be costs associated with the type of trustee you select (corporate or individual), investment types, for example, legal fees and stamp duty on a property investment. Often members will choose a financial advisor to manage their investments, which is another additional cost that should be considered before choosing a SMSF.  The ATO has reported that ongoing SMSF costs can range from $3,000 to $13,000 a year!

  • Compliance Burden

Establishing and controlling a SMSF can be difficult for members that do not have skills in finance and tax. ASIC has advised that it can take over 100 hours a year to run an SMSF. Financial and legal consequences can occur if managed incorrectly. SMSF professionals can assist with the management of the fund however the ultimate responsibility falls upon the trustees and members of the fund. Failure to meet compliance obligations can mean substantial penalties and the fund losing half its assets through fines and penalties.

  • Reduced Diversification

A SMSF can be subject to a lack of diversification (having all eggs in one basket), often due to member’s own biases. This can also occur with smaller SMSF balances invested in large assets, such as direct property. ASIC has cautioned that a SMSF should have at least $500,000 in assets to be cost effective in comparison to other types of super funds.

Overall, there are many benefits to a SMSF as well as any pitfalls which people should be aware of before entering what could be a very costly setup. Yes, you may have more options and flexibility however, a SMSF does not suit everyone and it is best to get professional advice on whether a SMSF is suitable for you.