There are many benefits that will make self-managed superannuation a very attractive option for many people as opposed to traditional industry or retail super funds.

7 Benefits of Setting Up a Self-Managed Superannuation Fund (SMSF)

If you want to gain control and be more involved in your retirement, setting up a self-managed superannuation fund may be appropriate for you. An SMSF allows you to manage your retirement investments during your working life, giving you control of creating your retirement nest egg.

However, it is essential to note that it is not for everyone – SMSFs are heavily regulated and failure to invest appropriately can be disastrous.

In its simplest form, a self-managed superannuation fund is a superannuation fund in which you are in control of acquiring and managing your investments and savings. Most Australians have their superannuation managed by a fund regulated by the Australian Prudential Regulation Authority (APRA), which makes investments and manages them with little input from the individual.

SMSFs can have at most six members who run the fund collectively. Members are generally from the same household, although not always. Unlike other larger funds, an SMSF member cannot be an employee of another member unless they have familial connections.

An SMSF is a type of specialised trust. And just like any trust, it may or may not be the right one for you. Part of determining whether you should set up an SMSF is looking at what you can gain from it. Here are the top 7 reasons why an SMSF may be beneficial for you:


1. You Have Control Over Your Investments

Gaining control over your assets is the main reason many Australians set up an SMSF. It allows you to have a variety of investment choices, including term deposits, collectibles, and residential/commercial property. Aside from that, you can access derivatives to hedge your portfolio risk or get downside protection.

If you’re confident you can outperform the APRA-regulated funds, or just want to be in control of your destiny, an SMSF allows you to do so.


2. You Can Use Your Self-managed Superannuation Fund to Enter the Property Market

SMSFs are allowed to acquire any asset that generates passive income and is acquired for the sole purpose of enabling the members’ retirement.

This can include property, both residential and commercial. Even if your member’s balance is not enough for an outright purchase, there are many ways you can acquire a portion or part of a property – such as syndication with other unrelated parties, or via a limited recourse borrowing arrangement (LRBA).

When acquiring any asset for an SMSF, it is important to understand the restrictions placed upon it. Talk to your advisor before making any investment to ensure you don’t run into problems with regulators.

If you’re a business owner, you may choose to utilise the commercial property acquired by your SMSF as business premises at a commercial rate. Using your SMSF to acquire real business property can provide you with a guaranteed tenant and a swathe of tax and asset protective benefits.


3. Superannuation is a Protected Asset

Superannuation is considered a protected asset class and is largely protected from bankruptcy or litigation proceedings. Funds placed into superannuation, whether an APRA fund or an SMSF, will stay with you no matter what life throws at you (except maybe divorce!).

Even if you do become bankrupt and are no longer allowed to manage and control a company, your SMSF balance will revert to an APRA-regulated fund in most instances without significant loss.


4. SMSFs Can Help You Minimise Your Taxes

SMSFs benefit from an income tax rate of 15% (or 10% for capital gains), which is significantly lower than the corporate tax rates of 25/30% and the marginal tax rates of up to 47%. In addition to the lower tax rate, individuals are allowed to make tax-deductible contributions to their fund up to the concessional contributions threshold (currently $27,500).

This can allow you significant tax arbitrage if you are in a high-income tax bracket and is a common part of tax planning.

In addition to the yearly concessional contributions, you may also contribute up to five financial years of missed contributions in prior financial years, or put in the full contribution for the following financial year, giving you control of when you allocate funds to your SMSF and receive the relevant tax deductions.

The tax savings get even better when you retire. Once you hit preservation age (retirement age for most of us), you may convert your superannuation to a pension and withdraw tax-free income from your SMSF.

After your retirement, you can use your SMSF assets to continue to generate a pension without worrying about taxes on your income.

In the right hands, a self-managed superannuation fund (SMSF) can be a beneficial way to build wealth for retirement.


5. It Can Be Used to Lower Transaction Costs

Having an SMSF means that you will go through two stages:

  • The first one is the accumulation phase, where you will work, garner, and save your funds.
  • The next is the retirement phase, where you get your pension through SMSF at a time you deem suitable.

You may be aware that several retail and industrial funds still need you to sell your assets during the first stage. When you retire, you can repurchase those particular assets. This is not the case with an SMSF. Instead, you can opt to retain your assets and draw your income during retirement. One more benefit here is that you forego costs, such as CGT and brokerage fees, which are typically associated with selling and repurchasing mutual funds.


6. SMSFs Can Be Used to Pay for Life Insurance

An SMSF can cover personal insurance, including life insurance and total permanent disability insurance.

It is usually better to have income protection insurance tied to your person, rather than via SMSF.

Setting up an SMSF is beneficial for you, especially if you have insurance coverage through the industry you’re currently in. Known as “group insurance,” this particular cover may not be tailored for you.

Additionally, an APRA-regulated superannuation fund can cancel or reduce at any time without needing your consent.

On the other hand, if you have a “guaranteed renewable” type of insurance, it is not only customised according to your needs but also obligates the insurer to provide continued coverage. The only requirement is that you pay your premiums diligently.

Insurance needs are personal and can therefore vary from person to person. You can determine your level of coverage by assessing factors such as:

  • Age
  • Income
  • Debt
  • Family structure
  • Assets
  • Liabilities
  • Cash flow

Make sure you seek advice from a professional accountant, consultant, or financial planner. That way, you get expert advice on your insurance requirements.


7. SMSFs Offer More Benefits When It Comes to Estate Planning

Transferring your wealth to the next generation is easier said than done. So many people fail in this task because they generally run it with their emotions. You can take estate planning one step further with SMSF.

Typically, public offer superannuation funds require updating of binding death benefit nominations every three years. This is not the case with SMSF, where those nominations do not lapse. Be sure to check your trust deed to determine if this feature applies to you. In some instances, SMSF members are allowed to specify how death benefits will be paid.

Superannuation distributed to family members upon death generally retains the same characteristics it had in your SMSF – you can make strategic withdrawals and non-concessional contributions to gradually turn your make your superannuation fully tax-free for your next of kin upon your death.


Where To From Here?

The above are excellent reasons for you to consider an SMSF. You gain control over your investments whilst enjoying the probability of a comfortable retirement. You can also save money through tax deductions and other occasions.

Despite the benefits, SMSFs also have disadvantages. There are strict rules governing them. They are costly to manage. They must be audited every year. Like other funds, you should have a good understanding of what you can and cannot do. Failure to comply can result in grave consequences.

Partnering with a professional can help the benefits to outweigh the risks. Our business consultants can explain all the complexities of SMSF and its specialist nature. Let us help you gain control over your superannuation and investment decisions as you maximise your tax effectiveness. Give our experts a call today!

Anthony Dyson
Anthony excels in establishing and restructuring businesses and SMEs' tax and accounting compliance, as well as self-managed super funds. He carries out numerous daily responsibilities with ease and confidence. Anthony is not only naturally gifted, dedicated, and persevering, but also an expert in tax and accounting. Learn more about Anthony