The last decade has seen a massive growth in Australian individuals and families opting to manage their own Superannuation retirement savings.
The self-management and growth of retirement savings is in the form of a Self-Managed Superannuation Fund (SMSF). APRA reported that SMSF assets at the end of March 2016, was $589.9 billion. This is almost 30% of the total superannuation asset pool of $2032.4 billion. At the end of 2015 there was close to 600,000 SMSF’s established with thousands more being created every quarter. The average SMSF balance is now more than $1 million.
This blog explores the rapidly growing business structure of Superannuation Funds in the areas of; tax, asset protection, control and succession, set-up and ongoing costs, and flexibility.
Taxation for an SMSF overall is very favourable. The tax rate is only 15%. Where the fund is paying income which is derived from assets supporting pensions, the tax rate can be 0%. Capital gains is also enticing. There is a 33% discount for some assets that are held for over 12 months, equating to only 10% tax. When a fund is paying a pension and it sells an asset, tax is 0%. A superannuation fund is limited in gearing and cannot own a main residence or personal use assets. Land tax considerations vary from state to state and are generally very favourable for this structure.
In the situation where the Superannuation Fund trustee is a company, asset protection is strong. Borrowing is available and the lender only has recourse against the asset not the fund. In most cases a beneficiary’s account is also protected from creditors of the beneficiary however this means, that to secure borrowings, an SMSF should expect lenders to insist on beneficiaries providing personal guarantees.
Control and Succession
There is a high level of control over Superannuation Fund investment decisions including the types of investments, as per the Superannuation Industry (Supervision) SIS Act. It is important to note that a superannuation fund must be wound up upon the death of the last surviving spouse or beneficiary of the fund.
Set-up and Running Costs
Superannuation funds are highly regulated consequently set-up and running costs are not cheap. Trust deeds are required at set-up. Ongoing costs are financial accounts and yearly taxation obligations which includes a formal audits.
There is very little flexibility due to superannuation funds being so highly regulated.