22 January 2013

Is it time for Do It Yourself Super?

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If controlling where your retirement savings are invested is important to you then running your own self managed superannuation fund (SMSF) may have its advantages.

 

There are many benefits in managing your own super, the most important of which is that you have more control over how your money and assets are invested to grow wealth for your retirement.

 

More than 900,000 Australians are now managing so-called Do It Yourself (DIY) funds that control $439 billion or 40 per cent of all superannuation assets held in the country1.

 

Less tax, more control

A recent survey of the DIY super sector by fund manager, Vanguard Investments, found that the main drivers of the SMSF boom were investors wanting to gain control of their portfolio and to reduce costs2. SMSFs can reduce the amount of tax you pay on income derived from privately-owned assets and business property.  By transferring ownership of personal assets such as fine art and rented apartments to the super fund, the income generated by these assets attracts a concessional tax rate of 15 per cent.  The concessional rate also applies to the income of business owners who transfer the ownership of a shop, investment property or farm to the SMSF.

The tax benefits of holding these assets in the fund may be augmented if they are sold. Instead of paying a personal income tax rate on

the capital gain of a business asset that is sold by the super fund, the effective tax rate may be kept to as low as 10 per cent.

 

Offsetting franking credits against any capital losses may also lower tax. DIY investors can cut the cost of managing their portfolio by taking a more active role in asset allocation and administration of the fund. Operating a DIY fund doesn’t mean that you are always on your own. The amount of time you commit to managing the fund is up to you.

 

Your financial adviser can help you transfer assets to the fund and select investments. There is much debate on how much you need

in superannuation to make an SMSF cost effective but the general rule of thumb is at least $250,000.

 

Key activities

People who run their own funds may opt to become trustees and take on the role of collecting and investing their contributions and distribute their own benefits in retirement. A SMSF can have up to four trustees who have ultimate responsibility for running the fund.

The key activities of running a fund are:

 

• setting the investment strategy

• selecting investments

• administering the fund

• legal compliance and accounting.

 

It is common for an accountant to help set up a fund and for members to then seek further help from a financial adviser. Investors need to establish clear investment objectives and to understand their tolerance to risk. Investing heavily in equities will be very stressful if the volatility of the sharemarket is going to keep you awake at night.

 

Similarly, investing in the relatively safe haven of cash and term deposits may not generate the returns you need to fund a comfortable retirement.

 

Compliance

The Australian Tax Office oversees the SMSF sector. It requires that all funds are independently audited every 12 months and that trustees maintain all records relating to their operation. All funds operate within the parameters of a trust deed. This document lays out what types of investments can be made and whether the fund can borrow money to invest. Trustees need to make sure that all of the

fund’s assets, including the bank account, are separate to a member’s personal assets and that no money is accessed by the member or any related parties until they have reached retirement age. All SMSF investments need to meet what is known as the sole purpose test. This means that any assets purchased are done so with the ultimate goal of providing retirement income and not for personal use. So, while a fund can buy property, the trustees of the fund or their relatives are not allowed to use it unless it is a business property.

Similarly any artwork bought by the fund cannot be hung on the walls of the SMSF member’s house.

 

Right advice

While many people are attracted to the idea of taking direct responsibility for their superannuation, some are daunted by the many rules that govern the operation of SMSFs. Not all people who set up a fund have to be trustees. They can appoint a third party, such as a lawyer or an accountant to act as a corporate trustee. Under such an arrangement the investor maintains control over the investment decisions of the fund, leaving much of the paper work to their appointed trustee. Your adviser can take you through the options for setting up a DIY fund that meets your needs.

 

1 ‘Self managed super funds statistical report’, June 2012, Australian Government, <http://www.ato.gov.au/superfunds/content.aspx?menuid=49150&doc=/content/00332225.htm&page=8&H8>

2 R. Bowerman, ‘The things you can control’, July 2012,

Vanguard < https://www.vanguardinvestments.com.au/retail/ret/news-and-commentary/helm/helm_2012_jul/helm_2012_jul.jsp>, p. 2

The author is an employee of Verante Financial Planning in Castle Hill, Corporate Authorised Representative of Magnitude Group Limited, Licence No 221557, Magnitude Group Limited ABN 54 086 266 202.

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