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September 11, 2023

Unlocking the 8 Benefits of A SMSF in Australia

Katya Richardson

Written by Katya Richardson

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Unlocking the 8 Benefits of A SMSF in Australia

Self-Managed Super Funds (SMSFs) hold a significant place in the realm of Australian financial investments, especially for those who want a hands-on approach to their retirement savings. The primary distinction between SMSFs and fund-managed superannuation accounts lies in how your money is handled.

In fund-managed superannuation accounts, investment decisions are made by professionals on your behalf, with your influence over these choices being limited. With SMSFs, the reins are in your hands. You have the freedom to determine how and where your superannuation is invested, whether it’s in property, shares, or other assets. This proactive approach distinguishes SMSFs and appeals to individuals who prefer a personalized approach to securing their retirement savings.

An increasing number of Australians are embracing this opportunity to take control and actively participate in their superannuation. Why the shift? SMSFs offer numerous advantages, inspiring people to enhance their retirement savings for a more comfortable retirement. These benefits extend to increased confidence in their investment and lifestyle decisions.

Here is the list of the variety of advantages that SMSFs offer, making retirement planning strong and personal:

1. Purchase Other Unique Asset Classes

With an SMSF, people can invest in various assets as long as they follow the rules set by the ATO. This freedom of investment choice sets SMSFs apart from other superannuation funds, which typically offer limited investment options. These rules aim to maintain the integrity and sustainability of the superannuation system while safeguarding the retirement savings of individuals.

SMSF investing requires trustees to create and follow an investment strategy. The plan should consider members’ risk tolerance, investment goals, and financial needs. Additionally, it should clarify the allocation of investments to minimise risk and maximise returns. It should also explain how to divide investments to reduce risk and increase profits.

SMSFs can invest in a variety of asset classes, including but not limited to:

  •  Cash and Term Deposits: Trustees can hold cash in bank accounts or invest in term deposits to generate interest income. This provides stability and liquidity to the fund.
  • Australian and International Shares: SMSFs can invest in listed shares on both the Australian Securities Exchange (ASX) and international stock exchanges. This allows trustees to participate in the growth potential of individual companies and diversify their portfolios across different markets.
  • Property: SMSFs can invest in residential, commercial, or industrial properties. Trustees can own property directly or invest in property trusts for exposure to a diverse portfolio of properties.
  • Managed Funds: Trustees can invest in professionally managed funds, such as mutual funds or exchange-traded funds (ETFs). These funds combine money from many investors to invest in different assets, giving access to different investment strategies and sectors.
  • Bonds and Fixed Income: SMSFs can invest in government bonds, corporate bonds, and other fixed-income securities. These investments offer regular income streams and can provide stability to the fund’s overall portfolio.
  • Cryptocurrencies: While not explicitly prohibited, investing in cryptocurrencies within an SMSF requires careful consideration and compliance with ATO regulations. Trustees must ensure that the investment aligns with the fund’s investment strategy and complies with all relevant laws.

2. Purchase An Investment Property

One advantage of an SMSF is the ability to have control over investments and choose from a wider range of options. These options include real estate, collectibles, term deposits, direct shares and crypto mining. However, this level of control is not available in industry and retail superannuation funds. You may have access to derivatives to offer downside protection or hedge your portfolio risk.

Property investments, particularly in well-selected areas, have the potential for long-term capital growth. Over time, the value of the property may increase, contributing to the growth of your SMSF’s assets.

Investment properties can also provide a consistent source of rental income. This income can be used to fund SMSF expenses, repay loans, or reinvest in other assets within the fund.

3. Purchase An Commercial Property For Your Business

Now members of SMSF can buy assets like commercial property thanks to borrowing rules, which were previously inaccessible to them. By using your SMSF to acquire a commercial property for your business, you can diversify your retirement savings. Rather than having all your superannuation funds tied up in your business, you can hold a tangible asset that contributes to a more diversified SMSF portfolio.

Information to note:

  • You cannot live in residential investment properties bought through an SMSF, nor can any other trustee or their relatives.
  • Don’t buy a “renovator’s dream”. You can use borrowed funds for property maintenance, but you cannot use them to improve a property. You can’t buy an empty piece of land with the intention of building a property on it later, nor can you buy land to develop later or buy an old house to rebuild.

SMSF property borrowing risks include:

  • Higher costs than a normal home loan SMSF property loans are more expensive than other property loans. On average, you can expect to pay an interest rate that is approximately 2% higher than a standard investment property loan.
  • Cash flow – You must use your SMSF to pay off debts, so you need to always have enough money in your fund to cover the loan payments. Many SMSF investors prefer high cash flow commercial properties as the rent collected is often more than the loan repayments. 
  • Hard to exit – Unwinding the arrangement or selling the property may cause substantial costs to the SMSF. Investors should see buying a property through a SMSF as a long-term investment – at least 10 years if not more. Any less and the transaction costs will eat away any potential benefits.
  • Reduction in negative gearing benefits – You cannot offset any tax and depreciation losses from the property against your taxable income outside of the SMSF.
  • No alterations to the property – You can only modify a property’s character once you have completely paid off the loan for the SMSF property. 

4. Ability To Pool Superannuation Balances

Currently, you can have up to four people in a self-managed superannuation fund. However, lawmakers are considering a new law that would allow up to six members. This would let you pool your money with family and friends to buy bigger assets that you couldn’t afford alone. This collaborative approach to investing or acquiring assets offers several advantages and opportunities.

Firstly, pooling money with family and friends provides a way to overcome financial limitations. By pooling resources, people can access more money to buy things they couldn’t afford on their own. You can buy a bigger house or invest in a business property.

5. Ability To Borrow Inside Superannuation

Another benefit of a self-managed super fund is the capacity to take a loan from it. This lending feature enables people to utilise their superannuation funds to invest in substantial assets like real estate. By leveraging borrowed money, individuals can amplify their buying power and potentially yield higher returns on their investments.

Borrowing money from your retirement savings can help you grow your wealth and invest in different things. Real estate is a viable option for deploying superannuation funds as it can appreciate over time and yield rental income.

When borrowing money from a superannuation fund, people can use a limited recourse borrowing arrangement (LRBA). This involves creating a separate trust called a self-managed superannuation fund (SMSF) to own the property. The SMSF then gets a loan from a lender, usually a bank, to buy the property.

However, it’s crucial to remember that taking a loan within superannuation also carries risks and considerations. You must repay the borrowed money or you risk losing your property and incurring financial penalties. Furthermore, there are strict rules and compliance obligations that one must adhere to when obtaining a loan within superannuation.

6. Capital Gains Tax (CGT) Flexibility

A Self-Managed Super Fund (SMSF) enables a seamless transition from accumulating savings to accessing retirement income without the necessity of selling assets. This means you can retire without having to pay capital gains tax or other fees. You do not need to sell your assets, such as shares, which would incur various taxes and fees in the process. You just retain your investments and begin to draw down on your SMSF balance as an income.

When you are transitioning from working to retirement, you may need to sell and buy new assets in your super fund. This is especially true if you have industry or retail funds.  Whenever individuals sell or purchase assets, they incur transaction costs such as brokerage fees, buy/sell costs, and Capital Gains Tax. An SMSF can help reduce these costs.

7. Deferral Of Contributions Tax

This approach means giving investment profits in these funds the chance to grow until they’re ready to be claimed. 

Unlike other funds, this one doesn’t snatch taxes from a member’s account the moment they contribute. Here, members have the freedom to contribute the full amount they want without immediate tax deductions.

What’s even better is that there are no tax deductions when you contribute. This gives members greater flexibility and control over their finances. They can decide how to use their funds, whether it’s for other investments, daily expenses, or savings.

This flexibility is particularly beneficial during uncertain financial times or when individuals have specific financial goals in mind. It’s all about putting you in the driver’s seat of your financial journey.

8. Cost Control

Since you’re in charge of the SMSF, you can choose the platforms and services that you choose. This gives you some control over the costs of running it.

However, it is important to note that SMSFs may not be beneficial for individuals with small fund balances. This is due to the presence of fixed costs such as accounting and order fees. Therefore, although there are potential advantages, it is crucial to also consider the drawbacks. So, while there are many potential benefits, there are also drawbacks that we need to consider.

The cost advantages of an SMSF over other superannuation funds will change depending on the fund’s specific circumstances. In comparison to larger funds, a SMSF with a smaller balance may generally be less cost-effective. But there will be a point where the cost of running the SMSF is much lower than a bigger fund.

Monitor the costs of big funds and SMSFs. Wait for the right time if cost matters more to you than flexibility and control.

In conclusion, exploring the world of SMSFs reveals a treasure trove of major advantages. From cost control, buying assets and to investment flexibility, these self-managed super funds offer a unique path to financial empowerment. Whether you’re planning for retirement or seeking greater control over your financial future, SMSFs can be a valuable tool on your journey towards financial success.

The information presented on this website is general information only. It should not be taken as constituting professional advice from the website owner – Hiddup PTY LTD (Hiddup). Any information regarding past performance and returns contained on this website should not be construed or interpreted as a prediction or opinion as to future performance and returns. Hiddup is not a financial adviser. All views and observations expressed by Hiddup on this website are for information purposes only, are general in nature and should not be treated as investment or financial advice of any kind.