Tax Benefits

All types of superannuation funds have unique features whether they are large or small, individually managed or administered by a professional manager. Self-managed superannuation funds (SMSF) certainly have some unique advantages worth considering. An SMSF provides efficiencies around the tax benefits of super, unparalleled investment flexibility and cost advantages which depend on its size. But the biggest advantage is the active control people have over building wealth for their retirement.

  1. Tax benefits in an SMSF

The trustees of an SMSF, which includes the members, can use their fund to invest in a wide range of opportunities such as unit trusts, term deposits, listed and unlisted shares, and property.

Trustees of SMSFs are provided with some unique options and can make investments not available currently to the larger funds. The maximum number of members of an SMSF is limited to four members but the government is proposing to increase this limit to six members1.

One unique opportunity available to an SMSF is that it can buy business property from members and other related parties. This creates tax advantages as the property can be leased at market rates to related parties, which allows it to build wealth within the fund from any rent received and capital gains.

If the related party leasing is using the property to run a business, any rent paid to the SMSF may be tax deductible to the business in addition to any tax-deductible contributions made to the fund.

  1. Buy and sell investments with your SMSF

Having control over the SMSF’s investment decisions provides flexibility to buy and sell when the trustees decide rather than depend on the opinions of others.

Market timing is critical for making investment decisions. SMSF trustees are uniquely placed to take advantage of income and capital gains especially when they move to retirement phase, which could provide tax-exempt or partially exempt income to the fund.

Buying and selling investments when the trustees consider is the ‘right time’ may not be possible in other funds – depending on whether the asset is in accumulation or pension phase.

  1. Control the timing of investments for tax advantages

Control over buying and selling the SMSF’s investments is critical when considering any tax advantages.

The tax rules treat an SMSF virtually the same way as other funds, but trustees are provided with greater flexibility and can respond quickly to achieve greater efficiencies for the fund. For example, the ability to defer the purchase or sale of an investment may provide a reduction in tax paid by the fund.

  1. Strong cost advantages on an SMSF

The cost advantages of an SMSF compared to other superannuation funds can vary according to the circumstances of the fund such as its size, complexity and whether it is in retirement or pension phase.

Generally an SMSF with a low balance may be relatively cost inefficient compared to larger funds. However, there is a break-even point for a member’s balance where the cost of running the SMSF will be relatively cheaper than larger funds2.

If cost is a priority over the flexibility and control, keeping a watchful eye over the relative costs in both larger funds and SMSFs may provide the best advantages depending on each person’s situation.

  1. Estate planning advantages of an SMSF

An SMSF can provide an effective vehicle for estate planning. As members retire or near retirement, estate planning becomes a priority to ensure that any benefits on a member’s death are paid to the right beneficiaries at the right time. This can be achieved by using a binding death benefit nomination or paying reversionary pensions to surviving beneficiaries.

Estate planning can also open up the intergenerational transfer of SMSF fund assets which can allow family members, who may also belong to the fund, use business property productively and tax effectively.

  1. Asset protection from creditors

Creditor protection, especially for members who own a small business, is an important and little-known benefit of an SMSF. This allows assets of an SMSF to be 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.

Summary – The satisfaction of being an SMSF

In a few words: The satisfaction of having an SMSF for trustees and members is the ability to control and direct the fund’s investments and help build retirement wealth. An SMSF empowers members to make decisions for themselves and their family, which can provide the greatest pleasure and confidence to own their future. SMSFs may not be for everyone, especially those with insufficient time or knowledge to act as a trustee, but still worth considering.

Graeme Colley

Executive Manager

Wealth – Super Concepts

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