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Each type of superannuation fund has its own features but setting up an SMSF provides some unique advantages worth considering.

An SMSF gives the trustee options around tax efficiencies, investment flexibility and cost advantages once the fund has grown to a tipping point. Perhaps the biggest advantage of an SMSF is having active control over the investment decisions for your retirement.

Here are six features of SMSFs:

1. Business property leasing and deductions

An SMSF gives the trustee some unique options to make investments that are currently not available to funds of five or more members. For instance, an SMSF can buy business property from members and other related parties, with tax advantages when the property is then leased at market rates to a related party as it continues to build wealth within the fund.

If the related party in the SMSF is also running a business from the property, the rent would usually be tax deductible and help build further wealth for the member above the normal tax-deductible contributions that are being made to the fund.

2. Buying and selling investments

Many SMSF trustees use their fund to make direct investments in unit trusts, term deposits, listed and unlisted shares and property. Having control over your investment decisions means you have the flexibility in an SMSF to buy and sell when you decide.

Market timing is critical for making investment and sale decisions. SMSF trustees are uniquely placed to take advantage of income and taxable capital gains for investments that have moved to a retirement phase and could then provide tax-exempt or partially exempt income to the fund.

This would not be possible in other funds by selling an asset when the member’s benefit is in the accumulation phase.

3. Control the timing of investments for tax advantages

Control over the timing of buying or selling fund investments is critical in providing tax advantages.

For tax purposes an SMSF is treated in virtually the same way as the larger funds, but with greater flexibility in using the various tax rules for direct efficiencies. For example, the ability to defer the purchase or sale of an investment may provide a reduction in taxable income of the fund.

4. Potential cost savings

The cost advantages of an SMSF compared to other superannuation funds will vary according to the circumstances of the fund.

Generally, an SMSF with a low balance may be relatively cost inefficient compared with larger funds. However, there will be a break-even point for a member’s balance where the cost of running the SMSF will be relatively cheaper than a larger fund.

If cost is a priority over the flexibility and control, keep a watchful eye over the relative costs in both larger funds and SMSFs and wait until the best moment for your circumstances.

5. Estate planning alternatives

An SMSF provides an effective vehicle for estate planning. As many SMSFs have members either retired or nearing retirement, estate planning becomes a priority to ensure that any benefits accumulating for members are paid to the right beneficiaries. This is often done using binding death benefit nominations or reversionary pensions.

Intergenerational transfer of SMSF fund assets can also happen where other members of the family also belong to the fund, which will become increasingly important if the current proposal to increase the maximum number of SMSF members from 4 to 6 becomes law.

6. Asset protection from creditors

Creditor protection is an important and little-known benefit of an SMSF. Assets of an SMSF are protected from creditors if a member or their business should run into trouble. It’s more of a backstop rather than a primary reason to get into an SMSF, but it’s an added assurance that valuable assets designated for retirement are adequately protected when needed.

The satisfaction of running an SMSF

The main attribute in a word is control. The satisfaction of an SMSF is in your ability to control and direct the fund’s investments and fortunes. You are empowered to make decisions which are directed to the benefit of you and your family, which provides the greatest pleasure plus the confidence to own your future. SMSFs are not for everyone, especially those with insufficient time or knowledge to act as a trustee, but worth considering for many.

 

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