The 5 Reasons You Should Set Up a Self-Managed Superannuation Fund (SMSF)
Setting up an SMSF comes with a range of benefits. Find out below the best reasons for having one.
Over the past decade, the number of Australians who set up SMSFs each year has gone down quite a bit. And as you can see on the graph below, it reached a record low in March of 2019:
The main reason is that more and more people consider SMSFs to be too complex and time-consuming to manage. Furthermore, they don’t know of a strong-enough reason to go through the trouble of setting up an SMSF.
However, rest assured that there is a good reason to do so. In fact, there are multiple.
You shouldn’t let these negative numbers alarm you, especially given the fact that the best investors usually don’t do what everyone else is doing. Let’s look at the top reasons for setting up an SMSF.
1. You Gain Control of Your Investments
One of the main benefits of an SMSF is having access to many investment assets, coupled with a high degree of control.
With an SMSF, you can invest in:
- Commercial and residential property
- Terms deposits
- Direct shares
In addition, you can also use an SMSF to invest in derivatives. Even if you’re not looking to profit off derivative contracts, they are perfect for hedging against other investment assets in your portfolio, with shares in particular.
Business owners can benefit even more from an SMSF. They can buy a business property under their SMSF and lease it back to the business. In doing so, a business owner can regularly contribute to the SMSF via the rent and potentially free up business capital.
2. You Can Use an SMSF to Invest in Property (Including Getting a Home Loan)
With an SMSF, you can invest in expensive assets that you may not otherwise be able to access. Of course, these include commercial and residential properties. You can also apply for a limited recourse loan to borrow money through your SMSF.
In most cases, the security for a limited recourse loan is 60-70%. But this doesn’t include expenses like legal or stamp duty costs.
If you decide to buy a property through your SMSF, remember that the rules prohibit you from living in it. This also applies to those who are related to any of the SMSF trustees.
Also, it’s not a good idea to buy a property for renovation purposes. You can use the funds that you borrow for maintenance but not for improvements. This also means that buying an empty lot or a development site for the purposes of building on it isn’t possible.
3. You Can Control and Minimise Your Taxes
As mentioned, SMSFs give you more control over your assets. This also means that you can manage your taxes more effectively.
Currently, the tax rate on SMSF earnings is 15%. However, when you’re retired and you’re using the assets in your SMSF to generate your pension, you don’t have to worry about paying any tax on the income.
An SMSF can have up to four members and multiple pension accounts. If one or more members retires, you can reallocate the funds to gain a tax advantage.
4. SMSFs Offer Asset Protection
Investors and business owners need asset protection. And an SMSF is great at protecting all its members in this regard. In the event of a bankruptcy or litigation, an SMSF can be of great value.
This is because the creditors are likely to protect the benefits of your SMSF. If your business venture fails, you’ll end up with your SMSF balance because this would be your only asset.
However, keep in mind that you can’t use your SMSF to revive a business venture. This is because it’s a retirement fund by purpose.
The asset protection comes to the forefront when buying a property through an SMSF. Since you’re not buying under your personal name, your personal creditors or those who hold your personal liabilities can’t go after your SMSF properties.
5. You Can Minimise Transaction Costs
With an SMSF, you’ll go through two stages: accumulation and retirement. During the accumulation phase, you’ll be working and accumulating your funds. At a suitable time, you’d transition to the retirement phase and get your pension through your SMSF.
Now, most industrial and retail funds would require you to sell your assets at the end of the accumulation phase. After that, you can repurchase them when you’ve retired.
But not with an SMSF. Rather, you get to retain all your assets and start drawing income from your SMSF.
The act of selling and repurchasing a mutual fund comes with a number of costs. These may include the CGT and brokerage fees. But with an SMSF, you can forego these costs.
More Control, More Savings
As you can see, there are perfectly good reasons to set up an SMSF. It can help you to gain control over your investment assets and manage them to the best of your ability. Plus, you’ll be able to save money on more than one occasion.
Hopefully, you now understand that going through the process of setting up an SMSF is worth it. Properly managed and contributed, your SMSF can provide for your retirement. And comfortably too, compared to government pension.
If you decide to set up an SMSF, bear in mind that the regulations governing them are very exacting. You must have a good understanding of what you’re able to do with your fund and what’s not possible. Failing to comply can have grave consequences.
Still, the benefits of an SMSF can far outweigh these risks, especially since you can get external help in setting up and managing the fund.
Contact us today and we’ll be glad to be of help.