SELF-MANAGED SUPER FUND GUIDE 2017
Synergy with investment and business strategies
Chapter 3 - Advantages of a SMSF
With more than 1 million Australians choosing self managed superannuation, there are clearly several advantages to this form of super. Let’s look at some of the main ones in turn.
The main benefit of a SMSF over another super product is control over all aspects of the fund. Members have 100% control of where their money is invested at any time.
A key feature of a SMSF is the ability to make direct investments. Direct Australian shares are a particularly good option as they will provide tax effective dividend income to the SMSF.
Members are also able to invest in direct property, either using the available cash in their fund or through limited recourse borrowing arrangements, which we discussed below. For example, with a geared residential property that is rented out, the rental income would cover the outgoings and the interest, with a bit of help from the contributions. With a view of an investment timeframe of 20 years, the drive of this strategy is the expected capital gain. This would not then be realised until the SMSF is in pension mode (i.e. after age 60), and so the bulk of the return will be capital gains tax free.
Other investment options include international shares, managed funds, listed unit trusts and investment companies, artwork, and other “exotic” investments (although we must admit to taking a very conservative line when it comes to’s in which an SMSF should invest).
The control clients have over their SMSF means that they can also act quickly to change their investment strategy, if their appetite to risk changes due to a change in their personal circumstances.
Related to this enhanced control, using an SMSF means you don’t have to wait for months after 30 June each year to find out how your investment is performing (or even what it is invested in). The information is always readily available. Most trustees can access information on virtually a daily basis. After all, they are the ones actually looking after the investments!
The rapid growth in internet trading is increasing the amount of information available on demand to SMSF trustees. Most e-traders provide free portfolio tracking software, which means clients get immediate reports on the state of their portfolios at any time. Cheap software packages, then make it even simpler for SMSF trustees to run their own investment portfolios with minimum effort and maximum satisfaction.
Synergy with other investment and business strategies
SMSFs can create synergies with the member’s other investment and business activities. The SMSF’s investment strategy should be prepared as part of an overall investment strategy reflecting the member’s attitudes and overall financial profile. The member’s will and estate planning should be considered as part of this strategy.
For example, it can make sense for an SMSF to minimise property investments if the member’s non-super assets are invested heavily in property. Overall, the investment portfolio is balanced, even if the SMSF invests solely in shares. Alternatively, a member with a large diversified personal shareholding in their own name may choose not to diversify within their self-managed superannuation fund in the hope that they can achieve above-average returns in that tax advantaged environment.
A managed fund, with thousands of members of all ages and from all walks of life and with vastly different financial profiles, will find it almost impossible to complement each of those members personal financial management as efficiently as an SMSF.
Another example is where it comes to death benefits paid after a member dies. In most cases eligible termination payments paid direct to a deceased member’s dependants are tax-free in the dependant’s hands. This applies to all super funds, not just SMSFs. But as SMSFs are usually controlled by the deceased member’s nearest relatives there is more tax planning potential and certainly more control.
Many, if not most, people who run SMSFs do so employee because they enjoy it. They like the control and they are genuinely interested in investing. They enjoy learning about investment opportunities.
SMSFs do not have to take up a great deal of time. Some people get by with just a few hours a year. They only buy quality blue chip shares or some other conservative investment, such as an index fund, and never sell. This strategy has worked well in recent years and has the added benefit of lower administration costs since there are fewer transactions to record and monitor. This strategy is common with younger people with smaller funds and/or larger work and family commitments.
Other people enjoy spending a few hours a week or in some cases even a few hours a day attending to their SMSF investments. They believe they can add to its performance by paying closer attention and investing. Older people who are retired from full time work are more inclined to do this. With the low cost of e-trading, and the huge amount of information available on the Internet, we are seeing a new class of investor who works his or her SMSF hard in the pursuit of extra profits.
In some cases, a member of a self-managed superannuation fund may choose to only hold investments they believe are ‘ethical.’ Trustees can structure the SMSFs’ investment strategy so that no unconscionable investments are held, or so that socially advanced investments are emphasised. Social responsibility is a big thing for many people, and if you’re interested you can read this very interesting article from the Guardian describing Australian doctor Bronwyn King and her response when she realised the managed superannuation into which her employer mandated contributions were being made owned shares in various tobacco companies:
Put simply, for many people spending a few hours on their investments beats playing bowls or crazy whist!
Life insurance premiums paid through a SMSF can be tax deductible. In some cases this can halve the cost of the cover and is the cheapest way to arrange life insurance. Often the tax benefit connected to deductible premiums more than covers the cost of running the SMSF.
Any insurance benefits paid will be included in the SMSF’s assessable income. Whether there is a tax charge or not will depend on the fund’s tax profile: the worst case is a tax charge of 15%, and the best case is a tax charge of 0%, which will apply if the SMSF is paying an allocated pension at the time of the member’s death.
Managed superannuation funds can also provide life insurance benefits, but the member is bound to use whichever insurer the trustees of the managed fund choose. In recent times, the attitude of some insurers to the provision of risk insurance to superannuation members has come under much deserved criticism for rejecting claims unreasonably:
As a result, people who wish to use superannuation to access life insurance often choose a self managed superannuation fund so that they can exercise discretion as the trustee and select the insurer.