The ultimate guide to cracking the mystery of SMSFs.
There are many types of super funds, but one type of small super fund has become increasingly popular recently – self-managed super funds (SMSFs). Just how popular? Take a look at the infographic below.
As you can see, the membership and number of SMSFs have increased steadily in the past three years and continue to grow at a rapid rate.
SMSFs are regulated by the Australian Taxation Office (ATO). They are limited to four members and it provides the trustees with greater control over their own finances. SMSFs are a legal tax structure with the sole purpose of providing for your retirement.
SMSFs are suitable for people who have accumulated at least $250,000 in superannuation or are high net worth individuals. These smaller funds can be suitable for people with extensive skills in the finance industry.
The majority of small super funds are SMSFs and the other type of small funds are small Australian Prudential Regulation Authority (APRA) funds.
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The finer details of small funds
Self-managed super funds make over $430 billion in assets with approximately 447,000 funds in the sector. It’s the fastest-growing sector in the superannuation industry.
SMSFs are super funds that are controlled, operated and managed by its members, who are also the trustees of that fund.
Here are some of the key features of an SMSF:
- The options for investment are unlimited and may include private company shares, small cap shares and unlisted managed funds.
- All members of the SMSF must be trustees. This means that each member has to take on the responsibilities of a trustee.
- The fund must be regulated by the ATO.
If you’re going to run an SMSF, you’ll need:
- A large amount of money – preferably over $200,000 – to set up the fund and pay for the cost of running the account
- To budget for expenses that might occur on a regular basis such as the services of an accountant or tax and legal professionals.
- Enough time to do research on what investments you would like to choose. You will also need to consider the time it takes to manage your super fund.
- Experience in the financial sector if you want to successfully run an SMSF
The contributions you make to your super will ultimately be the factor that sets you up for a good retirement. With SMSFs, there are contributions that you can accept and they depend on:
- Whether you have the member’s tax file number (TFN). If you don’t, you can’t accept that member’s contribution.
- The age of the member. For example you can’t accept non-mandated contributions for member aged 75 and over. Non-mandated contributions include personal, eligible spouse and member contributions.
- Whether the contribution exceeds the member’s fund-capped contributions limit
- The type of contribution. Mandated contributions from a member’s employer are acceptable at any time.
Having a wide range of investments to choose from is one of the main incentives for starting an SMSF. You can invest in shares, term deposits, managed funds and property.
Although you can choose the shares you want to invest in, you’ll need a significant amount of money so you can diversify your investments.
Before you dive in, here are some tips for a strategy on investing:
- Ability of the fund to pay benefits and other associated costs.
- The individual profile and needs of the member. Factors such as their age and retirement needs will impact on your strategy for example, a person who is settled in their career and is looking to retire in 5 years time will provide different challenges to someone who is a new graduate.
- Diversify your investment assets. By investing in a range of different assets, you minimise the risk of any losses associated with one type of asset or asset class.
- Choose liquid assets. The liquidity of your assets will determine how complicated or easy it is to convert them to cash.
Compare SMSF term deposits for a low-risk investment alternative
Why choose an SMSF over other funds?
Your retirement income options can be tailored to meet the individual needs of the members. Members also have the ability to control the realisation of capital gains tax (CGT).
The small APRA funds (SAF)
An SAF provides all the freedom and flexibility of an SMSF, but without the risk of compliance breaches and the responsibility associated with being a trustee. SAFs have independent trustees and are useful for:
- Anyone who wants greater control of their super investments but without trustee responsibility
- Families who provide for a relative with an intellectual disability
- Blended families.
- A disqualified person (who can be a member of an SAF but not an SMSF)
- Those moving or living overseas who can no longer be a member of an SMSF
Here are some of the key features of an SAF:
- Trustee duties and responsibilities are provided by an approved trustee such as Australian Executor Trustees (AET)
- The fund is regulated by the Australian Prudential Regulation Authority (APRA)
- The trustee must be licensed and authorised by APRA
- The options for investment under an SAF are also unlimited. The may include private company shares, small cap shares and property.
If SMSFs and SAFs are both small super funds, what’s the difference?
There are several distinguishing factors. Take a look at the infographic for a closer examination.
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Why would I choose an SAF over an SMSF?
There are three main reasons why you would choose an SAF over an SMSF.
- Old age. If you get to an age where you would rather spend more time relaxing than worrying about your money, an SAF could be for you. If you don’t want to manage the responsibility any longer, handing off your fund to a licensed professional could be a good idea.
- Non residents. If you become a non-resident for income tax purposes, you run the risk of your super fund also being made a non-resident super fund. When this occurs, the tax penalties are very high and this can be avoided by changing an SMSF to a SAF before leaving Australia.
- Lack of time. Many people don’t have time to run an SMSF. They might want a small super fund, and the only way to satisfy that desire is a SAF.