SMSF Pros & Cons

Key Considerations Before Establishing Your SMSF

Establishing a Self-Managed Superannuation Fund (SMSF) can be a rewarding financial decision for many Australians, offering greater control over investment choices and potentially higher returns. However, it’s vital to weigh up the pros and cons carefully before deciding to set up self managed superannuation. Before we get into SMSF advantages and disadvantages, here are five questions to ask yourself:

Understand the responsibilities of being a trustee

Are you willing to invest time and effort into understanding your legal and fiduciary duties?

Compliance with legal and regulatory requirements

Are you open to receiving professional advice? There are strict compliance obligations set by the Australian Taxation Office (ATO), so it is important to hire a professionals such as Rise Accountants for assistance.

Investment knowledge, time & expertise

Are you comfortable making investment decisions, or do you have access to expert advice?

Size of your super balance

There’s no official minimum amount, but we recommend at least $200,000 in superannuation assets to keep maintenance costs more manageable.

Future plans and retirement goals

What type of lifestyle do you envision in retirement? When do you plan to retire and how much income do you need to achieve your goals? Are you planning to pass on your wealth to future generations?

In summary

There are many things to consider before choosing an SMSF. We investigate the advantages and disadvantages of self managed super funds in more detail below, which you can read and digest at your leisure.

Or contact us to save time. There's nothing better than personalised service from SMSF accountants who can provide expert advice. Book a no obligation, complimentary 15 minute Discovery Call with Rise Accountants today.

BOOK A DISCOVERY CALL

"Ash, Tyler and Korey have been fantastic in helping us both with our personal and SMSF accounting. Love everything being via digital service - but if you have a question, they're more than happy to jump on the phone to have a chat. Cannot recommend them highly enough! Thanks team."

Alicia

SMSF Benefits

The primary advantages of SMSF are listed below.

1. Greater Control & Transparency

Investment Choice & Personalisation

You and your trustees will have the autonomy to choose where to invest your money, whether it be in traditional assets like managed funds, stocks and bonds, or alternative assets like real estate and even art. This allows you to select investments according to personal interest, risk profile and to maximise earnings. For example, business owners may use their SMSF to purchase commercial property that can be leased at market value to a fund member or related parties of a fund member.

You can invest in anything, as long as it is allowed by the investment strategy written by the trustees, and meets the ATO’s sole purpose test - this decrees that assets must be held only to provide for members in their retirement. You cannot access or use them prior. Significant penalties and criminal proceedings can apply if the sole purpose test is not followed.

Control of Cash Flow

You have complete freedom over the timing of contributions or investments. For example, you may decide to make contributions as part of your tax planning, or purchase property when market conditions are favourable.

Rental or Dividend Income Management

SMSFs can own assets like property or shares that generate rental or dividend income. You and the members have control over how that income is managed within the fund. Traditional superannuation funds would invest this income for all their funds in broadly the same way, but you can make nuanced decisions based on real-time investment performance.

Self-Management Of Fund Expenses

Trustees of an SMSF can decide how expenses are paid, which adds another layer of cash flow management. For instance, if the SMSF holds property, trustees may decide to use rental income within the fund to cover property expenses. This keeps cash flow positive and reduces the need for out-of-pocket expenses.

Strategic Divestments & Withdrawals

SMSF members can choose which assets to liquidate or retain if they need to free up cash within the fund. This allows for strategic decision-making around capital gains tax and investment performance.

Withdrawals can also be managed by yourself and the members during retirement. This flexibility allows you to align your SMSF with your personal needs, cashflow and any seasonal income fluctuations.

For example, you may decide to withdraw more money early on in your retirement for a holiday or home renovations, or you might decide to leave more in the fund during high growth years to maximise your returns.

By having direct cash flow control, SMSF members can better coordinate their superannuation with other assets, income streams, or expenses. This flexibility is valuable for people who see superannuation as an integrated part of their long-term wealth-building strategy, not just a retirement fund.

Greater Transparency

SMSF members have access to detailed information about every asset held, including performance, risks, and costs. This contrasts with traditional super funds, where members often have limited visibility into the specific investments made on their behalf.

Australian Self Managed Super Funds are required to have a qualified SMSF auditor examine the validity and accuracy of an SMSF’s financial records annually, providing additional visibility and governance.

2. Flexibility

Strategic Diversification and Risk Management

One of the most compelling advantages of an SMSF is the flexibility it offers in terms of investment choices. Unlike traditional superannuation funds, which may have limited investment options and visibility, SMSF trustees can explore a wider array of assets which can reduce risk and enhance returns.

SMSFs can invest in a diverse range of assets, including:

Property - Residential and Commercial
Shares - Australian and international listed shares, unlisted shares (public or private companies), exchange traded funds (EFTs), derivatives (options and futures)
Cash and term deposits - high interest savings accounts and fixed term deposits
Fixed Income Products - corporate and government bonds
Physical Commodities - energy (oil, gas etc), metals and minerals (gold, silver etc), agricultural products and other
Managed Funds
Collectibles and Other Assets: Members can also invest in art, antiques, jewellery, cars, coins, memorabilia, wine and other collectibles, provided they meet the ATO’s sole purpose test.

Alternative Assets

SMSFs allow trustees to invest in alternative asset classes often not available through retail super funds. This includes collectibles like artwork, classic cars, and rare coins. Such investments, when managed carefully, can provide significant financial returns and add an interesting dimension to the investment portfolio.

Strategic Leverage

SMSFs can also utilise borrowing to invest, a practice known as ‘limited recourse borrowing.’ This means that the fund can take out a loan to purchase an asset, which can amplify investment returns when the asset appreciates. However, it does come with additional responsibilities and risks, so thorough consideration and planning are essential.

Flexibility with Estate Planning

SMSFs provide greater flexibility in estate planning, enabling members to set specific rules around how their super will be distributed to beneficiaries. This can be particularly helpful for people with complex family structures.

Tax Savings & Cost Benefits

3. Tax Savings & Cost Benefits

One of the most compelling reasons to establish a Self-Managed Super Fund (SMSF) are the significant tax advantages it offers compared to other superannuation options. Understanding these benefits can be pivotal in enhancing your long-term wealth accumulation.

Lower Tax Rates on Earnings

Australian SMSFs enjoy a concessional tax rate of 15% on investment income, which is lower than the marginal tax rates for individuals.

Because capital gains are treated as regular income, and an SMSF’s income is taxed at the concessional rate of 15%, then capital gains are also subject to a 15% tax.

However if an asset has been held for more than 12 months before it is sold, its capital gain may be eligible for a tax discount of 33%. In this case, only two-thirds of the capital gain will be taxed, and at a 10% rate, providing additional tax benefits.

Additionally, if the capital gain is used to fund an income stream (i.e. a member’s pension) then zero tax will be applied to the proportion of capital gain funding the pension payout.

The tax rules of SMSFs are complex and there are penalties if you are non-compliant, so please contact us for SMSF taxation advice.

Cost Efficiency For Larger Balances

Traditional super fund fees are typically charged as a percentage of your total balance. As your balance increases, so do your fees. In contrast, with a self managed super fund, your costs remain the same, regardless of your superannuation balance.

Tax-Free Withdrawals in Retirement

Once members reach the age, the funds in an SMSF can be withdrawn tax-free, if taken as a pension.

Contribution Deductions

Contributions made to an SMSF may qualify for tax deductions. For instance, personal contributions up to a certain limit may be deducted from the individual's taxable income, effectively reducing your overall tax burden.

SMSF Challenges

SMSF Challenge

The key disadvantages of SMSF are listed below.

Complexity and Regulation

While SMSFs offer substantial benefits, they also require a solid understanding of superannuation laws and regulations. Given the regulatory framework governing SMSFs, trustees must invest time in compliance and proper fund management.

Costly For Smaller Balances

The cost of establishing and maintaining an SMSF can add up. There are initial setup fees, ongoing operational costs such as annual audit fees, accounting fees, and administrative expenses that can quickly erode returns if the balance isn’t substantial.

While SMSFs can be cost-effective for larger balances, they can be expensive for those with smaller super balances, so other superannuation options may be a better fit in the short-term.

Time Commitment

Managing an SMSF is not a passive activity. It can be time-consuming and complex, requiring regular review of investment performance, compliance obligations, and market changes. Trustees must be prepared to research investments, monitor performance, and keep up with regulatory changes. Many choose to hire professionals to assist, but this adds to the fund’s costs.

Compliance and Regulatory Responsibility

SMSFs are subject to strict regulations overseen by the Australian Tax Office (ATO), and trustees are legally responsible for compliance. Penalties for non-compliance can be significant, so SMSF trustees must be diligent in record-keeping, reporting, and ensuring that all investments are within the rules.

Investment Risk

With control over investments comes the risk of losses, especially if you lack experience or make some bad investment decisions. Market downturns can also reduce your retirement savings. Unlike industry or retail funds who have a wide range of people and expertise to fall back on, the responsibility falls solely on the SMSF members or the professionals they hire.

Limited Access to Compensation Schemes

Unlike retail or industry funds, SMSFs are not eligible for compensation if they suffer a financial loss due to fraudulent conduct or theft.

Making The Decision

SMSFs can be a powerful tool for retirement planning and building a nest egg. They offer a unique opportunity for hands-on management and flexibility, but they also come with responsibilities.

If you're considering setting up a self managed super fund in Australia, or want guidance on whether it’s the right decision for you, Rise Accountants offer a free 15-minute Discovery Call to help answer your questions and explore the benefits and responsibilities involved.

Book Your Free Discovery Call

Are you looking for a team of expert advisors and strategists to help you rise to reach your Financial, Mind & Time freedom? Our team have what it takes to make a real difference through actionable insights and exceptional support. Book your free 15 minute discovery session to find out how we can help support you and your finances.

BOOK A DISCOVERY CALL

Demystifying Self Managed Super Funds

SMSF Pros & Cons

Key Considerations Before Establishing Your SMSF

Understand the responsibilities of being a trustee