Self Managed Super Boom

The facts about self managed superannuation

The amazing growth we are seeing in Self-Managed Superannuation Funds (SMSFs) in Australia is unlikely to falter any time soon according to the latest figures released by the Government.

As at 30 June 2010, statistics issued by the Government indicate that there are now over 425,300 SMSFs operating with 810,450 members and an average fund balance of $835,580.

Although the establishment rate of new funds in 2010-2011 is unlikely to match that of 2006-2007, where almost 45,000 new SMSFs were established as a result of the revamp of the super regime, in the five years to 30 June 2010, the SMSF sector grew by an annualised rate of 16.9%.

The SMSF sector now holds the largest proportion of superannuation assets – approximately $420 billion of a market now worth over $1.23 trillion. According to the Australian Prudential Regulation Authority (APRA), this gives it a bigger market share than retail, industry, public sector and corporate funds. 

Why are we seeing such large growth in the SMSF sector?

This phenomenal growth is being driven by one of the most severe stock market declines in history and is synonymous with economic downturns.

Whenever share markets take a severe beating and most of the big super funds report record losses resulting in negative returns for investors, people conclude, rightly or wrongly, that they can do a better job themselves with their own DIY super fund.

Bear markets always result in a sharp increase in the number of new SMSFs being set up because most people become disillusioned with the “buy and hold” policy of most large super funds and are attracted to the flexibility and control that a SMSF can offer them.

Expectations are that the SMSF sector’s share of super assets will continue to expand rapidly because people are becoming increasingly disturbed by the negative returns some super funds, particularly retail funds, are reporting.   

More and more people are now taking a strong interest in their superannuation for the first time and are deciding to actively manage their own retirement savings rather than leaving the responsibility to a financial adviser or fund manager.

An increasing number of people also want to hold unlisted shares and real estate assets directly through their SMSF, something that cannot be done through large super funds. And with the sharp falls in share and property values, now is an opportune time to transfer such assets from their own names or their businesses’ names into the concessionally taxed environment that a SMSF has to offer. 

The great advantages of self managed super

The appropriate set-up and good management of a SMSF can lead to many advantages. Some of these benefits are:

Control over the assets of a super fund

Unlike public offer or retail super fund membership, SMSF trustees enjoy complete control over the assets inside their super fund. Subject to certain legislative restrictions and the fund's trust deed, SMSF trustees are able to make their own investment decisions and include a diverse range of investments in their super fund ranging from direct property to shares and managed funds. SMSF trustees can also bring their own management style to the administration of their SMSF. 

Cost effectiveness

SMSFs can be extremely cost effective when compared to public offer superanuation funds. As a general rule, SMSFs with superannuation balances above $200,000 are more cost effective to run than alternative super fund providers because costs are limited to actual running costs rather than a percentage of funds under management.

Flexibility

One of the great advantages of operating a SMSF is that the SMSF trustees can change the balance of investments in their investment portfolio in a timely and effective manner based on economic or market conditions. SMSFs allow trustees to be proactive rather than reactive with their investment decisions and the management of their investment portfolio. Rather than wait for an appointed fund manager to make changes to the composition of a superannuation fund's investment portfolio, SMSF trustees can act quickly and decisively to conditions and time their investment choices.

Tax effectiveness

Superannuation remains one of the most tax effective investment and wealth creation vehicles for individuals in Australia today. This is because income and capital returns inside a complying superannuation fund are taxed at no more than 15%, with the possibilty of reducing this even further by utilising franking credits from investments in listed Australian shares that pay franked dividends. Property trusts can also provide deferred income advantages through depreciation write-off costs. 

One of the great benefits of having a SMSF is that once the SMSF converts from the accumulation phase of building up superannuation assets to the pension phase of utilising superannuation benefits, any income generating assets that support the payment of the pension become income tax exempt. This means that the unrealised capital gains of these assets are no longer subject to capital gains tax after the trustees of the fund declare that a member's balance is in the pension phase. As such, when any assets that support the pension are sold down, the potential capital gains tax liability is effectively eliminated.

Asset protection

Assets held in superannuation funds are generally protected in the event a member becomes bankrupt. In relation to a SMSF, this means that the assets would be protected from the administrators and could not be liquidated to meet the settlement of debts to creditors.

Estate planning

SMSF death benefits do not ordinarily form part of a member's deceased estate upon their death. However, a member can nominate who will be entitled to receive their superannuation death benefits upon their death through the use of binding death nominations. Binding death nominations allow for the payment of superannation death benefits in accordance with the deceased member's wishes and does not allow the trustee of the super fund any discretion as to who should receive the deceased member's death benefit payments.

Portability

SMSFs are portable and can continue indefinitely for future generations. 

Proceed with caution: Beware of the pitfalls of running a SMSF

Managing your own super can be an exciting and rewarding experience, but it does come with big responsibilities. You need to ensure you understand what you are getting yourself into because there are strict rules that govern how you can use a SMSF to manage your retirement savings and what you can and cannot invest in.

Contravening superannuation and investment laws can be serious and may result in heavy fines or your SMSF losing its complying status, and with it, generous tax concessions. Most trustees new to the SMSF business will engage a superannuation provider to handle the compliance and reporting responsibility on their behalf and pay a fee for such a service. A large number of trustees will also utilise the services of an investment adviser to help make investment decisions.

However, engaging a superannuation professional or investment adviser doesn’t mean that you are automatically immune from some of the pitfalls that come with managing your own super fund. Regardless of whether or not you seek help from the outside, as a trustee of your own super fund you are ultimately responsible for its administration and liable for any contraventions of superannuation and investment laws.

The most common contraventions of superannuation and investment laws by new trustees during the 2007-2008 income year, as reported to the ATO by SMSF auditors, were:

• Making loans to members (19 per cent of reported contraventions). Loans to related parties are prohibited.
• Borrowing by a fund for investment purposes (14 per cent of reported contraventions).
• Failing to separate the ownership of fund and personal assets (10 per cent of reported contraventions).
• Breaching the in-house asset limit (6 per cent of reported contraventions). Trustees must not invest more than 5 per cent of fund assets in what are known as in-house assets. These include investments and leases involving related parties or trusts. Certain assets are exempt however.
• Breaching the sole-purpose test (5 per cent of reported contraventions). Examples include using holiday houses and art works owned by a fund for the members’ own enjoyment before retirement.

The ATO is stepping up its SMSF compliance activities and has released a series of new publications to help SMSF trustees with the management of their SMSF. These can be found at the ATO website: www.ato.gov.au.

But remember, whatever road you decide to travel down, knowledge is the key to successfully managing your retirement savings and building wealth inside your SMSF. The more knowledge and information you have at your fingertips the more likely you will make informed decisions about your financial future and the less likely you will come under the scrutiny of the SMSF regulator.