Recent reports have emerged stating that the pool of money Australian’s use from self-managed super funds (SMSFs) to fund their retirement is set to double in the next decade. The current pool is resting at $296 billion and is tipped to almost double by 2023 to $562 billion, according to news.com.au.
Latest Australia Taxation Office (ATO) statistics show in June this year, there were more than 509,000 SMSFs with more than 963,000 members. These figures have continued to trend upwards, rising from June 2012 when there were 475,000 SMSFs and more than 899,000 members.
One of the main reasons behind the growth in SMSFs is that people are engaged and they are interested in controlling their savings and retirement investments. SMSFs are not for everyone; however if you do decide to proceed with a SMSF, there are many advantages and disadvantages to consider.
There are many advantages of SMSFs including:
1. Means to hold your business premise- Many business owners hold their business premise in their SMSF for tax effectiveness, asset-protection, succession planning and security of tenancy. Although your business would have to pay a commercial rent to your SMSF, your fund would only pay concessional tax on the rent and benefit from many of the usual tax breaks available to landlords.
2. Control- You are solely responsible for your SMSF and have complete control over your fund. Especially if you have a background in finance or business, this control can be extremely beneficial if used wisely.
3. Leverage– You can make the money in your SMSF work harder by using it as a deposit and borrowing to buy investment properties that grow in value.
4. Ability to quickly buy or sell assets – SMSF members can instantly change their investments and/or the assets allocation of their portfolios. This again gives you more control and allows you to do things the way you want to do it.
5. Potential to cut costs – If you have a large balance (eg above $200,000 or so), the fees you attract are lower than many large super funds. This is namely due to the administration costs of a SMSF are more or less fixed-regardless of the balance. You can also eliminate the frustrations of dealing with large super funds, for example, miscalculations of your balance, long roll over times, customer service queries etc.
6. Diversified super portfolio – Your portfolio will not just be reliant on one investment, instead, you will have better financial security for the future.
However, there are also many disadvantages which make SMSFs not right for everyone and risky. These include:
1. Time consuming – By having complete control over your account, this requires you to put in the time towards your fund. You’re responsible for your fund and will have to deal with the day to day operation of it. Also, due to the stringent legislation, there is a greater time demand required in ensuring that the SMSF remains compliant.
2. The cost – The cost of a SMSF tends to be higher if not used correctly, this is why you need to be in a solid financial position to establish your own SMSF. There may also sometimes be higher fees involved in borrowing to buy property through your SMSF. There are also higher associated costs for small balances, before setting up a SMSF, members should compare its likely costs with those or a large super fund. We strongly recommend doing some prior research into the associated costs and having a conversation with us at Fortis Accounting Partners to discuss all possible costs.
3. Need for investment and compliance knowledge – If you don’t have the knowledge or the assistance of someone who does, it’s strongly recommended you do your research and talk to us. Ideally, SMSF members should have a much more thorough understanding of at least the basics of sound investment practices than members of big funds. You are directly responsible for your retirement savings so it’s essential that you know what you’re doing and you know the legislation.
4. Penalties for non-compliance – As mentioned in our previous blog, there are many factors you must comply with. The Tax Office has the power to remove a fund’s complying status and impose sanctions for non-compliance. The market value of a non-complying fund, less non-concessional contributions, is taxed at the highest marginal rate. This could destroy much of the retirement savings of every member of a SMSF.
If you would like to know more about SMSFs or you’re interested in setting one up for yourself and would like to speak with a knowledgeable and experienced financial planner or accountant – please don’t hesitate to get in touch with the team at Fortis Accounting Partners/Fortis Financial Planning. You can reach us on 02 9267 0108, or via info@exemplary-financial.flywheelsites.com.
