Self Managed Superannuation Funds (SMSF)
There are two types of small superannuation funds, that is to say funds with four or fewer members - self managed superannuation funds (SMSF) and small APRA funds (SAF).
The main difference between the two funds is that SAF's are regulated by APRA, and SMSF's by the ATO - a SAF must also effectively use a professional trustee company, while a SMSF trustee doesn't require a special license. The members of an SMSF are typically also the trustees of the fund, although this is not always the case - in fact, as at June 2017, 57% of SMSF's had corporate rather than individual trustees.
From 1 July 2021, the maximum number of members in an SMSF increased from four to six members. In practice, we don't think this will have much of an impact, since more than 90% of current SMSF's have only one or two members, but it will allow larger funds and that should be more cost effective.We continue to be of the view that many individuals and families in SMSF's would often be better placed in simpler structures, particularly given that there is now significantly more investment flexibility available in non-SMSF structures, although SMSF's and SAF's remain necessary for direct property investments.
SMSF's have proven extraordinarily popular in Australia, and "small funds" - the overwhelming proportion of which are SMSFs - accounted for 25% of the $3 trillion in total super assets as at March 2021 (source: ASFA) - having just been overtaken by Industry funds (29%) which have grown their market share very strongly since the Financial Services Commission ("Hayne") Report, largely at the expense of retail super funds.
Generally, the assets per member in SMSF's are very much higher than any other form of superannuation fund, as illustrated in the table below (ATO Self -Managed Fund Quarterly Statistical Report - March 2021). Note, however, the considerable difference between the average and median size of funds - suggesting that there a small number of funds of considerable size impacting the figures. These are probably "artefact funds" - impossible under current legislation and holding funds well in excess of retirement requirements.
|Self Managed Superannuation Funds||
2018 - 2019
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|Median assets per member||
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Whether establishing an SMSF is the right decision in your situation is a serious decision which requires professional advice, but also requires forethought on your behalf to ensure that any decision specifically suits your requirements.
Consider the following Factors
Most surveys suggest that many individuals and families prefer to make their own decisions when it comes to investing their superannuation and that exercising "control" is the single major reason why SMSF's are established. An SMSF allows up to four family members to pool their assets and decide where they should invest. The Government has previously sought to increase the maximum number of members to six; but this has not yet come to fruition.
But, managing a SMSF also involves considerable complexity and responsibility, and running an SMSF means that you:
- Carry out the role of trustee or director, which imposes important legal duties on you
- Establish and follow an investment strategy that ensures the fund will meet your retirement needs
- Invest funds only to provide retirement benefits, and
- Maintain comprehensive records and arrange an annual audit by an approved SMSF auditor.
Whilst many of the support activities associated with running an SMSF are now widely marketed (audit, tax, accounting and other services) you cannot contract out of your trustee responsibilities. You must be prepared to be personally involved in the fund and comply with all tax and legislative requirements, and sign a declaration that you understand your duties as a trustee.
Within the limits of the rules governing superannuation investments, an SMSF has the greatest degree of flexibility of investments, allowing the members to hold a wide range of direct assets through their fund, including residential and business real property - as well as the ability to make and receive ‘in specie‘ contributions and payments. However, you need to be aware of the "sole purpose" test; investments must be made with the intention of providing for your retirement - not for providing a benefit prior to retirement, for example in the form of holiday homes.
Additionally, although an SMSF can hold a wide variety of assets, apart from property - and can be more flexible than SAFs, where the Corporate Trustees will not manage more exotic investments - evidence actually suggests that they have a much less diverse asset allocation than found in Industry or other regulated funds, whose size can provide access to investments unavailable to SMSFs. Given that, "asset allocation is the largest determinant of net returns", consider the difference between SMSFs and Regulated Super Funds in the chart below (Productivity Commission, 2018).
Succession and Tax Planning
Succession and tax planning matters are issues that are often complicated and will require specific advice, but in many situations SMSF's will offer the best platform to accommodate succession planning within a family environment and offer tax planning advantages. Even in complex situations advisors should nonetheless strive to fully and clearly explain why creating an SMSF is advantageous.
Cost Competitiveness: Size Matters
Many of the costs associated with a SMSF are fixed in nature, so whether the costs of a fund are competitive are very dependent on the size of the fund, and considerable criticism has been focused on the existence of smaller funds. There is no legislated minimum fund size but we would expect that you, or your advisor, should have a very good reason for supporting the establishment of a fund comprising assets valued at less than $300,000.
Remember that you and other family members may be able to consolidate multiple super accounts to create a larger pooled balance – and because it’s consolidated into an SMSF you will only pay one set of fees. A very stark illustration of how the economics of running a SMSF are dependent on the total fund size is the chart below which shows the average return on assets by SMSF's by fund size over the period 2011 to 2015. Note the very strong correlation between fund size and performance.
Unfortunately, many Australians only hold life and TPD insurance cover as a consequence of it (sometimes) being a standard aspect of membership in some super funds. Cover is often priced on a very competitive basis, but you do need to understand the limits of your current cover. Switching entirely to a SMSF can leave you without insurance cover and you need to make arrangements for the fund Trustee to arrange cover for members (which may be at less competitive rates).
There have clearly been situations where individuals and families have been advised to establish SMSF's simply to participate in property schemes - in situations where the adviser has a disclosed or undisclosed relationship with either a developer or real estate agent. There is a clear danger that biased, unbalanced advice will be provided in these circumstances and these should be avoided. Significant evidence already exists that advisers are often providing non-compliant SMSF advice and you are advised to seek experienced, independent advice - and seek evidence from any adviser to that effect.
Advice should also extend to the cost of winding up an SMSF. Unlike other forms of superannuation where "rolling over" your super to a new fund can be relatively simple - and the administration associated with closing a super account relatively trivial - there can be substantial costs and complexity associated with the closing or "winding up" of an SMSF.
If you would like to arrange professional advice in relation to the above matters, please complete the Inquiry form below providing details and you will be contacted accordingly. You will receive a fee quotation in advance of any advice or services being provided.