Self-managed superannuation funds, otherwise known as an SMSF, can be a great way to have control over your retirement by taking matters into your hands. Unlike industry or retail super funds which have a fund manager, an SMSF puts you in the driver’s seat. Being self-managed, you essentially take responsibility for all investments, insurances and management decisions. As you are essentially taking matters into your own hands, SMSFs are regulated by the Australian Taxation Office (ATO). In recent years, SMSFs have come under the microscope and pundits have questioned their usefulness or legitimacy.
Here are three myths about SMSFs you need to know about when considering whether an SMSF is right for you:
While this figure is commonly referenced when talking about an SMSF, it’s somewhat of an urban myth. According to the Australian Securities and Investments Commission (ASIC), there’s no mandatory minimum balance needed to open a self-managed fund. In saying that, it is recommended you have a large opening balance; a figure of around $200,000. It’s worth mentioning this guide exists for a reason as there are administration and compliance fees involved in managing an SMSF. For funds with low balances, it may not be worth it.
ATO data for the 2014-15 financial year showed nearly 25% of SMSF funds had a balance between $200,000 and $500,000. So think of it more as a guide than a minimum amount; there’s no blanket rule for whether an SMSF will work for you. Before jumping to conclusions, talk to an SMSF adviser to see what makes sense for you.
Where retail and industry superannuation funds have fund managers who generally make investment decisions on behalf of the fund, self-managed super funds are managed by their trustees. With the responsibility sitting on your shoulders, there’s an element of risk when making complex financial decisions. Much like other investments, balancing risk and reward comes down to getting the right advice and making smart choices.
As a trustee of an SMSF, you’ll need to have the skills and understanding to manage your investments and your fund. The ATO heavily regulates SMSFs, and failing to comply can leave you with a range of penalties and fines. To reduce your risk, always seek professional advice and make sure you regularly review your investment strategy to factor in diversification, liquidity, solvency and insurance requirements of the fund.
While trustees of an SMSF can choose to purchase an investment property as part of their portfolio, it’s not as simple as it sounds. Acquiring property through a self-managed super fund is more challenging to manage and regulate than an independent property investment. As our recent article outlines, property purchased through an SMSF can’t be lived in or rented by you, any other trustee of your SMSF or anyone related to the trustees – even your fourth cousin. Further to this, you can’t contribute existing property into an SMSF, even if its purchased at market value.
When it comes to SMSF and residential property, the bottom line is any related parties cannot benefit from the property in any way.
Whist it is permissible to obtain finance to purchase a property in an SMSF, it is commercially becoming more difficult to do so as the big four banks along with some second-tier lenders no longer lend money to self managed super funds.
While SMSFs are great for some, they’re not suited to others. If you’re considering opening an SMSF, the first step is solid advice and a sensible plan. For more information, talk to an H&R Block SMSF expert by calling 1300 611 320 today.
Disclaimer: The information provided is general in nature, and as such it should not be relied upon for making decisions without seeking expert opinion or personal advice. H&R Block disclaims all and any guarantees, undertakings and warranties, expressed or implied, and shall not be liable, for any loss or damage whatsoever (including human or computer error, negligent or otherwise, by one or more of the authorities, or incidental or consequential loss or damage) arising out of or in connection with any use or reliance on the information or advice provided. The user must accept sole responsibility associated with the use of the material in this article, irrespective of the purpose for which such use or results are implied. The information applies the law as stated at the time of writing, and is no substitute for financial advice.
Our H&R Block accountants are now working online. Book an appointment with an expert.