Do you want more control over your superannuation?
Well, the ability to control your investment decisions and costs has resulted in more Australians choosing to set up a Self-Managed Superannuation Fund (SMSF).
Another motivation is the ability to borrow in an SMSF for assets such as residential property, with the option of buying a commercial property for use by the member in their business also another motivating factor
What is an SMSF?
An SMSF is just a form of trust but with restrictions on the dollar value that can be contributed.
Another unique condition is the requirement to keep the funds in the SMSF until the member triggers a condition of release, typically but not limited to, retirement.
You see, once the fund is in full pension stage then the earnings, including capital gains, are taxed at zero.
Because there are no standard wordings for an SMSF, it’s imperative that it is set up by an SMSF specialist who understands the intricacies of the superannuation environment.
By using a professional, this allows the member to maximise the potential benefits of the SMSF as well as to avoid a lot of the pitfalls and errors that are commonly made.
What does an SMSF look like?
The costs to set up an SMSF vary greatly as do the costs to maintain one.
Each member of the SMSF must be a trustee but if there is only one member then the legislation requires two trustees, which for many people creates potential conflict with the second person.
A work around this provision is it’s far better to have a company as trustee and then the one member can act alone.
With multiple members, it’s also advisable to use a company as trustee with each member being a director because this structure has many advantages over individual trustees.
The Australian Taxation Office is tasked with the overall legislative and administration of SMSFs, which is unlike the industry or retail funds that are governed via the Australian Prudential Regulatory Authority.
Now while there are strict requirements by the trustees to understand their responsibilities, the use of a professional advisor can greatly reduce the burden as well as offering timely advice on investment decisions and compliance.
How much does it cost to set up an SMSF?
The cost to set up an SMSF with a company trustee is in the range of $1,800 to $2,500 depending on the assistance needed in the initial set-up.
These can include setting up a tax file number and bank accounts, etc., transferring balances from another fund, setting up or changing insurance needs, and creating an investment strategy to name just a few.
Going forward, the cost of ongoing compliance is determined more by the time to prepare financials and tax returns as opposed to a percentage of the value of the fund and, as such, can be very cost effective.
There is also a requirement to audit all superannuation accounts, including an SMSF, which adds to the compliance costs and together totals about $2,400 to $3,000 depending on the number and complexity of transactions.
It’s important to understand that these costs would also typically include some time with your advisor during the year as well as at year’s end.
This will help to ensure that you understand and comply with your responsibilities and to discuss any changes to your strategy depending on your circumstances.
Spending time with your advisor is particularly useful when legislative changes are made, when you are nearing retirement, and when there are changes to your life circumstances for example.
You could also need a SMSF deed upgrade to ensure it conforms with any changes to legislation that you wish to adopt, e.g. to borrow to invest in residential property.
Can you reduce SMSF costs?
While it might seem that SMSF costs can be excessive, there are many things a trustee can do to minimise administration and compliance costs which won’t compromise the integrity of the SMSF.
As a trustee, ways to keep costs down include keeping proper records and using cloud-based administrative software (if warranted) to capture transactions.
Any unusual or non-repetitive transactions, such as contributions, should also be similarly highlighted.
Any recurring items, such as life insurance premiums or pension payments, should be made as a periodic payment.
You should never use SMSF cash withdrawals as the trail is difficult to follow for both the auditor and the ATO in the unfortunate event of a review which they sometimes do.
The bottom line is…
It’s important to speak to an SMSF specialist so that you can determine whether an SMSF is right for you .
Then you need to ensure that it is properly set up and administered to help you achieve your financial dreams.
Because, as we always say, you should always start with your financial end goals in mind to give yourself the very best chance of success.
SUBSCRIBE & DON'T MISS A SINGLE EPISODE OF MICHAEL YARDNEY'S PODCAST
Hear Michael & a select panel of guest experts discuss property investment, success & money related topics. Subscribe now, whether you're on an Apple or Android handset.
PREFER TO SUBSCRIBE VIA EMAIL?
Join Michael Yardney's inner circle of daily subscribers and get into the head of Australia's best property investment advisor and a wide team of leading property researchers and commentators.