When is a good time to start an SMSF?

Your friends and family members are in one, and you may be thinking you should be in one. The popularity of Self-Managed Super Funds (SMSFs) is growing compared to the last ten to twenty years. This is due to several factors. An interesting one is the rise in younger Australians opting to manage their super, with around 35% of new SMSF members under 45.

There is also a heightened level of financial literacy within the population, who have the confidence to do a better job than their retail or industry super funds. Another significant contributor to the popularity of SMSFs is their flexibility, enabling members and trustees to invest in alternative asset classes. While this all sounds enticing, becoming a trustee of SMSFs requires advanced fiscal knowledge, experienced investment proficiency, administrative skills, professional oversight, sufficient funds for entry, and time.

You’re reading this article because you are interested in or willing to start an SMSF. Under the right circumstances, SMSFs have the potential to be a highly valuable asset to your retirement. However, willingness must relate to readiness to ensure an SMSF fits your circumstances correctly. For most Australians, our superannuation is our most significant financial asset, next to our home, and decisions affecting your super should not be taken lightly.

Consider it like you would if considering a significant home renovation or extension. Decisions are not based on a whim. You need to have the money in the first place, you need a solid plan, you need to research return on investment, lifestyle, time, choose the right architect and builder, permits, council approvals, fittings, fixtures, and contingencies if things go wrong. The list is long.

The same applies to your SMSF.

• Who will manage it?
• Do you have the upfront money to set it up?
• Do you have sufficient funds now to invest?
• Do you know what you want to invest in and why?
• Do you have the time?
• What are your contingency plans?
• Do you know enough about compliance?
• Are you aware of the ongoing costs?
• What are your long-term goals?
• What about your risk tolerance?

The team at Step Up Financial, now Australian Financial Planning Group, is committed to answering these questions to ensure that an SMSF is the right option for your circumstances.

Let’s examine the positives first

Control
You have greater control over what you invest in. This is the primary reason people become members or trustees of an SMSF. You have the flexibility to invest in a range of asset classes; however, there is a strict set of criteria and rules that I will explain later in this article. Here is what an SMSF can invest in:

• ASX-listed shares, EFTs, LICs
• Residential and commercial property
• Bank savings and term deposits
• Australian Government bonds, corporate bonds, and debentures
• Collectibles, including artworks, antiques, and cars
• Cryptocurrency

An LRBA is advantageous for risk-positive business owners with an SMSF. An LRBA enables the SMSF to borrow money to acquire a single asset, such as a commercial property. The SMSF can lease the property to a related party, a member or members of the SMSF, so long as the rent payable is at market value. The rent goes back to the SMSF.

The capital gain benefits the fund if the property value appreciates over time. Secondly, rental income received on the property is taxed at the concessional rate, and capital gains on the asset held for longer than 12 months are taxed at an effective rate of 10% or 0% if in the pension phase.

Thirdly, the loan’s liability is limited. If the fund defaults, the lender’s rights are limited to the asset under the LRBA—it cannot access other assets held by the fund.

An LRBA has other complexities, but this gives you an example of how it works to accelerate wealth building. Our SMSF specialist can provide a more in-depth understanding when required.

Estate planning and tax strategies benefit SMSF members offering greater flexibility, control, and strategic advantages; however, they are highly complex. The primary benefit is wealth retention across generations and tailoring the beneficiary arrangements to minimise tax.

Elevator benefits include:

• Personalised death benefits nominations
• Distribution of death benefits for tax effective advantage
• Greater control over the timing and form of death benefits
• Generational wealth transfer
• Testamentary trusts and SMSF proceeds trusts

In a later article, we will unpack the nuances of estate planning for members of SMSFs in greater detail. In short, it requires professional structuring and ongoing guidance to fully maxmise the benefit.

Referring back to the introduction, while SMSFs offer many advantages, they are not without their challenges and are not always the best option depending on your circumstances. Seeking professional advice is essential, and working with a financial professional during the setup and with ongoing maintenance and administration is required.

The team has summarised what you should know before entering an SMSF.

Responsibilities
Trustees are responsible for the SMSF’s legal and regulatory compliance. This includes compliance with superannuation and tax laws, including the Superannuation Industry (Supervision) Act 1993. Even if the trustee has relied on professional advice, non-compliance can result in disqualification, fines, and loss of any tax concessions. The rules are strict and enforced.

Time and administration
Many first-time SMSF trustees are overwhelmed by the time and level of administration required to manage an SMSF. The trustee is required to submit an annual audit and lodge the annual SMSF return. Record keeping and fund performance management are also involved. Dispute management and resolution may also be necessary when an SMSF has multiple members and burdensome compliance responsibilities. As part of the record keeping requirements, SMSFs must retain financial statements and audit reports for 5 years plus minutes, trustee declarations and investment strategies for 10 years.

Risk, knowledge, and skill
Having control over how the fund invests its money is enticing, and developing its investment strategy is the trustee’s responsibility. It is easy to come unstuck by not ensuring satisfactory diversification and liquidity. This can expose the fund to market volatility or create an overconcentration in risky assets. A trustee must have a level of financial literacy that enables them to analysis and interpret the fund’s performance across all the asset classes. They must know and comply with taxation and superannuation rules to make informed investment decisions and be able to work with financial advisors for effective outcomes. This can be a step learning curve for inexperienced members.

Having sufficient funds to make it cost effective
Return is crucial when implementing an SMSF, and as the ATO suggests, an SMSF with a low balance (under AUD$200K) may struggle to break even. New members must consider the set-up costs and ongoing audit, tax, and accounting fees. The SMSF may also incur wind-up fees and legal and actuarial services fees.

SMSFs have many positive aspects; however, they are not for everyone. When considering an SMSF for your circumstances, you must seek professional advice from your financial advisor or accountant.

At Step Up Financial, now Australian Financial Planning Group, our role is to provide clients with the most appropriate advice for their financial goals. If you are considering an SMSF, speak to our team of experts first and make the right decision the first time.

Step Up Financial Group, now AFPG, is a team of qualified financial specialists. We help hundreds of Australians create financial stability and resilience every year while building toward a confident retirement.

Contact us today for experienced, compassionate, and professional financial planning advice.