If you’re not familiar with the concept of SMSF, we recommend you take a look at the following text, in which we’ll try to explain what it is and what benefits it can provide to its trustees. More and more people are opting to invest in SMSFs, which means that there are some advantages to it that those trustees have recognized. So, why wouldn’t you use an opportunity to invest in something that makes a lot of sense? Here are some important information and benefits you can enjoy.
What is a SMSF?
Let’s start by defining the term. A self-managed super fund (SMSF) is a superannuation trust structure that provides benefits to its members upon retirement. What sets SMSFs apart from other super funds is that SMSF members are also the trustees of the fund. SMSFs can have between one and four members, and one of the main advantages is the level of control that trustees have when it comes to tailoring the fund to meet their individual needs.
How does it work?
The only purpose of an SMSF is to provide financial benefits to members in retirement and their beneficiaries on death. It has its own Tax File Number (TFN), Australian Business Number (ABN) and transactional bank account, which allows it to receive contributions and rollovers, make investments and pay out lump sums and pensions. All SMSF investments are made in the name of the fund and are controlled by the trustees.
What are the responsibilities of an SMSF trustee?
An SMSF trustee is responsible for making investment decisions and ensuring implementation of an investment strategy for the fund. SMSFs also need to maintain records, provide financial statements, complete a tax return and organize an independent audit. That’s why many trustees engage SMSF specialists to help them with SMSF setup and administration, their accounting, auditing and tax reporting, as well as provide financial and investment advice. However, they always remain completely responsible for the decisions and administration of their fund.
All types of superannuation funds have unique features, regardless of their size or whether they are individually managed or administered by a professional manager. SMSFs provide efficiencies around the tax benefits of super, unparalleled investment flexibility and cost advantages which depend on their size. However, the greatest advantage is the active control people have over building wealth for their retirement.
The trustees of an SMSF can use their fund to invest in a wide range of opportunities such as unit trusts, term deposits, listed and unlisted shares, and property. They have some unique options and can make investments not available currently to the larger funds. For example, they can buy business property from members and other related parties. This creates tax advantages, since the property can be leased at market rates to related parties, which builds wealth within the fund through any rent received and capital gains. If the party leasing it is using the property to run a business, the rent paid to the SMSF may be tax deductible to the business, in addition to any tax-deductible contributions made to the fund.
Buying and selling investments
The control over the SMSF’s investment decisions provides flexibility to buy and sell without depending on the opinion of others. With market timing being crucial, SMSF trustees can take advantage of income and capital gains, which could provide tax-exempt or partially exempt income to the fund. Buying and selling investments whenever the trustees decide the time is right is typically not possible in other funds.
The cost advantages of an SMSF depend on its size, complexity and whether it is in retirement or pension phase. Generally, an SMSF with a low balance may be relatively cost inefficient compared to larger funds. On the other hand, there is a break-even point for a member’s balance where the cost of running the SMSF will be relatively cheaper than larger funds.
Asset protection from creditors
Another benefit that is important, especially to those who own a small business, is creditor protection. Namely, assets of an SMSF are protected from creditors if a member or their business should run into trouble. While this is more of a backstop rather than a primary reason to get into an SMSF, it’s still an additional benefit.
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It goes without saying that the main benefit of an SMSF for trustees and members is the ability to control and manage the fund’s investments in order to build retirement wealth. An SMSF allows members to make decisions for themselves and their family, which means they have complete control over their future. Needless to say, this concept is not for everyone, especially those who don’t have enough time or knowledge to act as trustees. However, those with sufficient knowledge and enough time can really reap some great benefits.
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