Thinking about setting up an SMSF? For many people, SMSFs are a great option for building retirement savings, but they may not be suitable for everyone. Before setting up an SMSF, it’s essential to be fully informed about the pros and cons of an SMSF structure.
While public offer funds are managed by professional licensed trustees, the management responsibility for SMSFs lies with the members. Every SMSF member must be a trustee of the fund (or, if the trustee is a company, a director of that company). This is an advantage for those who want full control over their superannuation but it also means the members are responsible for complying with all superannuation laws – and administrative penalties can apply for non-compliance. If you intend to move overseas for some time (eg for a job posting), an SMSF could be problematic because it may be hit with significant tax penalties if the “central management and control” moves outside Australia. On the other hand, members of public offer funds can move overseas without risking these penalties because their fund continues to be managed by a professional Australian trustee.
Costs are a key factor for anyone considering their super options. Fees charged by public offer funds vary, but are generally charged as a percentage of the member’s account balance. However, SMSF costs tend to be more fixed. As well as establishment costs and an annual supervisory levy payable to the ATO, SMSFs must hire an independent auditor annually and most SMSF trustees rely on some form of other professional assistance. For members with modest balances, an SMSF will often be more expensive than a public offer fund, but this needs to be weighed up against the other benefits of an SMSF.
A major benefit of an SMSF is that the member-trustees have full control over their investment choices. This means they can invest in specific assets, including direct property, that would not be possible in a public offer fund. SMSF members can also transfer their business premises into superannuation and take advantage of gearing strategies by borrowing to buy property or even shares through a special “limited recourse” borrowing arrangement. However, with control comes responsibility. SMSF trustees must create and regularly update an “investment strategy” that specifically addresses things like risk, liquidity and diversification. Being an SMSF trustee therefore means you need to be prepared to seek the right professional advice.
It’s possible to hold various types of insurance through your superannuation fund, including death, total and permanent disablement (TPD), and temporary incapacity. For many, using superannuation benefits to pay insurance premiums makes insurance more accessible and convenient. While you can purchase insurance within an SMSF, large funds can generally offer cheaper premiums because of the group discounts these funds can access. Also, members of large funds are automatically accepted for a certain level of coverage without needing a medical examination or detailed personal information, which is more likely to be required for an SMSF-held policy. For these reasons, some SMSF members choose to keep a separate account in a public offer fund just to access the insurance.
If you’re an SMSF trustee, you’re in charge, so there are a few things to keep in mind:
- As part of your SMSF’s investment strategy, you’re required to consider (and regularly review) whether the fund should hold insurance cover for its members.
- Not all types of insurance, eg trauma policies, can be held in superannuation.
- Be aware of the tax consequences of holding insurance in the fund, including the deductibility of premiums and how life insurance proceeds might affect the taxation of your death benefits.
If you’re a member of a public offer fund, it’s important to check on what you’re signed up for, and if you’re paying for duplicate policies across multiple accounts.
What happens when you’re not happy with the trustee of your fund? Members of public offer funds can complain to the Australian Financial Complaints Authority (AFCA), a free dispute resolution service that has the power to make binding decisions to resolve your matter. However, SMSF trustees may only complain to AFCA about financial services problems with third parties (eg an insurance company), not about the decision or conduct of other SMSF trustees. In these cases, the parties would need to go through the legal system to resolve the matter. It’s possible to set up the SMSF’s governing rules with dispute resolution procedures in advance.
Weighing up your super options? We can help you decide whether an SMSF can achieve your retirement goals.