SMSF – Advantages & Disadvantages

 An SMSF can become a powerful vehicle for your retirement. We include some advantages and disadvantages of an SMSF in order to help you  to get a better understanding of an SMSF  before making a final call whether it is right for you or not. You may also need to discuss the issues with other potential member(s) in your SMSF.

Advantages

• Many business owners hold their business premises in their SMSFs, simply for  asset-protection, succession planning (for the members/beneficiaries), minimising tax and security of tenancy. If your SMSF is the landlord of your business premise, your business would have to pay a rent  at the market value to your SMSF. In return, the net rental income (after deducting allowable deductions) received by your fund would only be taxed at concessional rate, 15%, and typically benefit from many of the usual tax breaks available to landlords – including tax deductions for interest on a property loan (applicable to complying funds, non-complying fund will be taxed at top marginal tax rate – which is currently at 45%).

• With an SMSF – you and other member – are very much in control in making investment decision as well as making sure no mistakes are made in running your fund. Unlike large super funds where sometime it is frustrating to wait the correction of your fund balance or rolling-over to another fund.

• SMSF populate funds from members and these collective funds have more buying power than a single person can afford to buy an investment asset, such as a property. SMSF can also apply for a loan for investment purchases (strict conditions applied) where larger super funds are usually not allowable to gear their investment(s).

• SMSF members have the ability to change their investments portfolio quicker, compare to large super funds as sometimes there is a lag between when investment changes requested and when those changes executed.

• SMSF enables members to invest in a way that is generally not available in most large super funds. For example, an  SMSF can hold direct property, unlisted shares, artwork and other exotic or not-so-common investments, or even investing in selection of investment fund managers and direct shares – which they can or cannot do with a large fund, depending on its investment portfolio.

•  Potential to reduce the admin cost associated in running the fund. Say for example an SMSF with larger fund balances (say, $200,000 or more) may pay lower fees compare with  large super funds which usually charge based on a percentage of their fund balance.

• Ability to manage or eliminate Capital Gain Tax (CGT) event. You can eliminate the CGT liability by deferring the disposal of an asset until the asset is backing the payment of a pension.

• Subject to anti-avoidance provisions in the Bankruptcy Act, fund-held business premises are generally inaccessible to trustees in bankruptcy should a member get into future financial troubles.

• Flexible estate planning, a member aged 60 or over can withdraw benefits tax-free before death to avoid potential death benefits tax which may be payable to beneficiaries.

Disadvantages

• Operating an SMSF is quite time-consuming even when using professional SMSF administration services. Members have to manage the day-to-day operation of their funds. By contrast, a large fund takes over all of the administration and many of the day-to-day investment decisions of all the members’ funds, including yours. 

• The sole purpose of providing retirement benefits to the members, this follows with stringent restrictions on their investments (such as no personal usage pre-retirement, no loans to members and their relatives, and related parties investment must be below 5% of the fund’s value).

• Ideally, SMSF members should really understand the basics of sound investment practices, for instance, how an appropriately diversified investment portfolio can spread their risks and the potential for returns, as well as associated investment costs and tax implication.

• Poor risk diversity (such as holding a single asset) may intensifies the risk when a sole asset is geared.

• ATO have the power remove a fund’s complying status to non-complying fund which is taxed at the highest marginal rate (currently 45%), plus trustees can face civil and criminal sanctions for serious breaches.

• High costs for SMSFs that have small balances to bear the overhead costs associated in running the SMSF.

• Apart from signing documents presented to them by dominant member(s) of an SMSF, passive member(s) typically have no involvement with the fund. And unfortunately, passive members usually do little to safeguard their superannuation interests.

• Risk of losing interest when the members unable to boost the balance as planned, and become too frail as they’re getting older.

Like many other investment decision, planning and discussion with related members would be an essential part before deciding to step into an SMSF decision.

We will put some more articles about SMSF to broaden your knowledge. Please feel free to contact our office if you have any inquiry. Thank you.