There are more than 600,000 self-managed super funds (SMSFs) in Australia controlling more than $700 billion – so on average each fund holds more than $1.2 million - and many people who set up an SMSF do so to have greater control over their investments and operating costs.
And it makes sense given that so many have become sick and tired of leaving their retirement dreams in the hands of faceless money managers.
And although this is a powerful driver, this single focus often limits the strategic possibilities of the Fund and misses the whole point of these powerful vehicles.
There are many other reasons why an SMSF is a good idea.
Here I’ve listed the 10 key benefits of an SMSF.
Please note that this information is general advice only and must not be acted upon.
Before endeavouring into any investment, especially with an SMSF course you must seek and receive specific advice tailored to your circumstances.
The major reason for establishing an SMSF is to ensure that the SMSF holder has a secure and stable income when they stop working.
This is called a pension and is a very popular strategy for SMSF members once they retire.
The major benefit here is that once the SMSF member is over age 60, the pension income if triggered is also tax-free.
Not only would you gain a tax-free income but you would also avoid having to lodge a personal tax income every year (if this is the only source of income).
And there’s more.
The Trustee of the SMSF paying the pension will also not pay tax on income or capital gains earned on pension assets in the Fund.
As a parent, I take the responsibility I have for my children very seriously, particularly when it comes to finances.
It’s very important to me that not only my family be well looked after in the event that something happens to me, but also that they are protected from financial predators.
So I have a Family SMSF Estate Plan which transforms from my Family SMSF in the event that I pass away.
That’s because SMSFs provide their members with an opportunity to lay down the foundations needed to provide any ATO-approved family member with a comfortable retirement income stream.
On top of the existing arrangement options, new Super Reform proposals where an SMSF member can leave their entire superannuation benefits in the fund until their death further supports members’ families left behind.
Health is one of those things that can never be taken for granted - and the COVID-19 pandemic has shown us how quickly and without warning our health can change.
But when a personal health crisis hits, it’s comforting for SMSF members to know that they can use the financial help of their SMSF AND health insurance at the same time.
It’s a financial blessing at a time when it’s needed most.
After all, if or when an individual’s health declines, he or she needs to have access to a safe, secure income that takes the financial worry out of becoming seriously ill or even incapacitated.
SMSFs allow members access to a range of benefit options in times of sickness and ill health.
Permanent disability is a time of great change and superannuation benefits are able to be accessed in these times of trouble.
But the same benefits apply even if the health deterioration is temporary.
BUT… warning… there is one health condition that can change the way your SMSF looks.
If one of the Trustees is diagnosed with dementia or other incapacities, they have to bow out of the running of the Fund and the person with their Enduring Power of Attorney may take their place as Trustee of the Fund – even though they may not be a member of the Fund.
So make sure you have an Enduring Power of Attorney in place - this is a vital cog in a well-structured SMSF.
The large majority of people or families who find their way into SMSFs want to have some say as to how they invest their money — including their superannuation.
The power of choosing investments for the Fund resides with the Trustee of the SMSF so long as the Trustee meets the relevant superannuation laws and SMSF Strategy around investment choice.
These laws include the need to draft and successfully implement an investment strategy as well as ensure that, within confined limits, no asset of the Fund is used by a member of the Fund, their relatives, or any entity related or closely associated with them or their family.
The good news is that the choice of investments is broad – an SMSF can invest in residential property, commercial property, shares, government bonds, gold, overseas investments, start-ups, Early Stage Investment companies, syndicates, and many others.
Taxation in Australia is significant, but the government has chosen to save on future welfare payments by providing tax incentives for its people to become self-funded retirees.
And particularly given that employees are forced to transfer over 10% of their salary into their choice of superannuation – self-funded retirement is a goal for most employees.
Members of SMSFs have the best opportunity to simply reduce the tax burden in their retirement lives.
For example, the tax-free nature of private pension and lump sum arrangements for a member of an SMSF post-age 60 in the pension phase is one of the key benefits to a secure lifestyle retirement income.
BUT... Don’t expect the low-tax ride to last forever.
A member in a $3 million SMSF who is living on tax-free retirement income receives a huge amount of actual tax benefits compared to someone with $3 million outside of super, let alone a person with $100,000 in a retail super fund.
The government changed the pension limits in 2017 to claw back some tax from wealthy SMSF members and there is more expected in the pipeline.
So make sure that you are up to date and in front of any changes and not left behind asking “What happened?”
The SMSF is by far the most flexible, most targeted, and most tax-effective vehicle to provide lump sums or income streams to a member’s spouse, minor children, or grandchildren when the member dies — and it lets the member control the process without fear of legal challenge.
Importantly where a member puts in place a strategic SMSF estate planning strategy, it sits separate from the SMSF member’s will.
Many SMSF members and Trustees don’t realise this and forget to put an SMSF estate plan in place, thereby missing out on highly valued taxation concessions and also opening the deceased member’s benefits to the lawyers and in some cases the Public Trustee.
The aged pension is available for persons over age pension age - currently, age 65 - subject to an income and assets test with new age restrictions applying if borne from 1 July 1955.
Changes to the assets test have seen a drastic reduction in the assets test limit, but many SMSF members with less than $880,000 (combined couple) who have a family home (which is exempt from the assets test), may still be entitled to an age pension.
They may also be entitled to other important benefits - it is worth speaking to your financial planner for advice.
In most cases, and for most people, this is never used.
But, where a person gets into serious financial difficulty, the government has provided rules in the bankruptcy laws that broadly protect a member’s SMSF benefits from creditors, with the exception of contributions into super specifically made to protect the funds against litigation.
The biggest bugbear for most people when it comes to compulsory superannuation is not having access to their super until they retire.
But there are a number of exceptions such as temporary and permanent incapacity, certain compassionate grounds, and financial hardship, such as the TRIS.
The TRIS was introduced in 2005 enabling a working member of a super fund who has reached their preservation age (more about this below), to access their superannuation as an income stream.
The TRIS requires the member to withdraw at least 4% of their TRIS account balance each year and no more than 10%.
So, what is a Member’s Preservation Age?
A member’s preservation age can be found in the Superannuation Industry Supervision Regulations 1994 (SISR) 6.01and is as follows:
“From a tax perspective if the TRIS is received when a member is under age 60, the TRIS income will form part of the member’s assessable income - however it will attract a 15% tax offset.
From age 60 any TRIS income from a member of a SMSF will be tax free.
So while working, an employee, small business owner, professional or other person with a SMSF may access pension income - much like salary - that is extremely tax effective.
At the same time, they may contribute their pre-tax salary or business profits into their SMSF (subject to certain limits).
This means that if they can set in place a “transition to retirement” pension as their key source of living expenses while contributing salary into a SMSF, a reduction in overall personal taxation may arise.
- Also read:10 BIG Benefits of setting up an SMSF or a Family SMSF
- Also read:How Many Billionaires Are There in Australia?
- Also read:What You Think About Most Is What You Get: Unleash Your Mind’s Power to Shape Your Reality
- Also read:Visualizing the World’s Growing Millionaire Population (2012-2022)
- Also read:Financial stability amidst the high cost of living
As will be seen later in the Guru’s Guide, generally income and capital gains earned on assets held for pension purposes is tax free but this excludes a TRIS which is also not counted in the $1.6 million limit."
Under the laws, it is possible for a member of a superannuation fund to split their benefits with their spouse, including a de facto spouse, under the superannuation laws.
The advantages of this are that both spouse members of the Fund are between the ages of 55-60 and using the transition to retirement strategy, then the benefits of the 15% tax rebate are maximised.
Also, if one member is older than the other and will thus reach the tax-free pension and/or lump sum status before the other, then it makes strategic sense to split any contributions for the younger spouse to the older spouse.
However, it is only the employer or deductible superannuation contributions that can be split and then to a maximum of 85%.
One more benefit of a properly structured SMSF and Estate Plan is that on the death of a member in the accumulation phase the member's SMSF fund balance (subject to transfer caps) can remain in the fund for the spouse.
The spouse would receive any income or capital gains from the deceased member's balance tax-free.
Now we know the benefits of an SMSF let's discuss what type of SMSF you might want.
After all, there is no ‘one-size-fits-all’ approach.
Having worked in the SMSF industry for over 15 years, I have found that there is a wide range of SMSF clients - those that want to do everything themselves (the DIY'ers), the SMSF’ers, and those that are happy.
Here are three different types of SMSF.
1. The DIY super fund
This is a super Fund where there is a strong hand focus by the Trustees of the Fund - it’s a true ‘Bunnings DIY ‘style of Fund.
The Trustee generally does the accounts of the Fund using an accounting program such as MYOB.
All bank reconciliations, income receipts, and expenses are accounted for and the management of the investments are undertaken by the Trustee.
Due to the complexity of the superannuation and taxation laws, the Trustee will need an accountant to compile the tax return and must have an independent audit under the SIS Act 1993.
As you can imagine, unless the Trustee is only investing in simple investments, there is a lot of work that has to be done to manage the fund – for a Trustee trading shares it is a full-time job.
Of course, once the Fund goes into pension mode with, ideally, the Trustee running a simple but strong SMSF strategy of a retirement accumulation account running alongside any surplus superannuation benefits the DIY Fund gets left behind.
The use of reserves, multi-generational reversionary pensions, and other important but simple SMSF strategies, are a rarity, and not knowing or using common tax strategies can end up costing thousands in the long run.
2. Self Managed Super Fund
This is the next level above the DIY superannuation Fund and one that the majority of SMSFs run.
Again the focus is on investments but the Trustees of an SMSF generally have the advantage of tax and superannuation advice from their accountants and financial planners.
Strategy in an SMSF may be around pensions, estate planning, and maybe some insurance and taxation strategies.
The strategic input will depend on the SMSF skills of the advising professional and the willingness of the Trustee to learn and enquire about what is possible within their Fund.
3. A Family SMSF
This SMSF is the same tax structure as a DIY super Fund and an SMSF but the key focus is on the family.
Surprisingly, of all the SMSFs in Australia that have the opportunity of bringing up to six members (up from four) of a family into the Fund, less than 10% have chosen to do so.
20% of SMSFs have only one member and the remaining 70% have only two members.
This is a great loss of opportunity – can anyone imagine what it would be like to establish a family trust with only one or two beneficiaries.
No accountant in their right mind would recommend this course of action.
To see the difference between the Family Super Fund and the DIY or SMSF Fund, here are four scenarios to consider and how a family fund can help:
- An adult child member in the Fund has an accident and spends six months off work. The Trustees of the Family Super Fund can begin to pay out salary continuance benefits to the incapacitated member to ensure that their salary and wages are kept to the level they were, before the accident.
- The retiree members of the Fund use some of their superannuation benefits to Fund a deposit on a property that is acquired with a loan from a bank. However, the younger members of the Fund pay off the loan with ongoing salary sacrifice contributions made by their employers. When the property is ultimately sold any capital gain is split between the members relevant to their capital investments.
- Mum is the sole remaining parent member of the Fund and has been diagnosed with dementia. The adult child members are in the Fund guiding her superannuation benefits towards the best in health and psychological care for their mother.
- The retiree pension members of the Fund invest in Australian shares with imputation credits. These credits are used by the Trustee of the Fund to reduce any of the Fund's tax liabilities including any contributions tax liability of the younger members of the Fund that salary sacrifice.
In short, these unique super Funds have a very special place in Australia, and for that matter the world.
If designed and used properly - they allow the aggregation and investment of a family's superannuation benefits, and they provide a pool of monies and assets to look after family members.
This includes children and grandchildren at the time of an accident, sickness, permanent disability, death, pre-retirement, and retirement.
It’s clear to me that in order to make the most of your SMSF, you should turn it into a Family SMSF.
The big benefits of a Family SMSF come from understanding the superannuation law and how to apply it and for that, I wish to thank and acknowledge the assistance I have received over the past 15 years from my friends at I Love SMSF.
Q: I have an SMSF – can this be turned into a Family Super Fund or do I have to get some more documentation or a different trust deed?
A: Provided you are using a trust deed, which has in-built Family SMSF strategies and options, there is nothing preventing you and your family from using your SMSF as a Family SMSF.
An SMSF trust deed can in many situations be upgraded.
I have authored a number of trust deeds to ensure they meet the strict guidelines of a Family SMSF.
Q: I don’t want to bring my children into the Fund and then they take control when I get older.
A: This is a key benefit of the Family SMSF trust deeds I have written.
When a child, brother, sister, or grandchild becomes a member of the Fund, they must become a Trustee of the Fund or director of the Fund’s corporate Trustee, if the Fund has one.
For child members under the age of 18, one of their parents can act as a Trustee or director on their behalf.
A corporate Trustee is where a company acts as a Trustee of the SMSF rather than individual members.
But as a Trustee, each member must be involved in the decision-making process which means each member must be a director – except if the member is a child.
As an aside, the Commissioner of Taxation recommends the use of a company acting as a Trustee of an SMSF.
Under section 17A of the Superannuation Industry Supervision Act (SISA), this means that each member must be a director.
Where there is a child member then the Corporations Act 2001 (CA) will not allow the appointment of a child director.
In these circumstances, one of the parents of the child, who is already a director of the SMSF corporate Trustee will act on the child’s behalf.
Under a smart Family SMSF trust deed, each Trustee is given the same number of votes for each $1 sitting in the account balance of the member they represent.
This means that, although an adult child may be a member, their voting power when it comes to investments and major decisions of the Fund is limited.
For example, if they have $10,000 in their superannuation account then that will be 10,000 votes.
But if the main member of the Fund has $900,000 then they will have 900,000 votes.
Q: I have five children. How do I get all of them into the Fund?
A: The limitation of these small superannuation structures is that only six members can reside in the Fund at any one time.
This means that the controllers of a Family SMSF - generally the parents - need to choose who is best to occupy the Fund at that point in time.