As self-managed super funds continue to grow in popularity, so too does the information available — whether it is online or in print.
However, some of the interpretations that I see are codswallop. One recently painted a gloomy picture for trustees of SMSFs and made the inference that most people were too dumb to DIY and consumers should stay with retail funds.
It is true there are some new changes that trustees need to take into account. From July 1, the Australian Taxation Office has new powers to bolster the sector’s standards.
Among those to be most closely scrutinised are the 53,900 members of the 27,800 new SMSFs established last year. They will be in line for fines worth up to $10,200 per trustee.
However, in all my years dealing with SMSFs and trustees, 99.9% are doing—and want to do—the right thing.
The ATO’s own figures show that only 2% of SMSFs are reported by their auditor and I would suspect that the majority of these would be for minor infringements.
Even if half of them (1%) are really doing the wrong thing, the risk of the new penalty regime potentially only applies to a small percentage of trustees. In any case, the vast majority of the 1,006,975 SMSF trustees running 528,701 SMSFs (ATO’s March 2014 estimates) have two members – usually mum and dad – and it is their money anyway!
For the vast majority of SMSF trustees who are doing the right thing, nothing will change. In my three decades in public practice I have not seen any SMSF trustees fined. Even where there have been compliance issues, the ATO will work with the trustees to find a solution.
There is no doubting consumers are voting with their feet when it comes to SMSFs, which are on the rise and are the largest growing sector of the superannuation industry.
The ATO says that the average SMSF balance is $1,035,000. Most have two trustees. Just under one-third of all money invested in super is now in a SMSF – approaching $550 billion.
The age of those setting up their own SMSF is getting younger. Of all fund trustees 25.9% are over 65 and 82% over 45. But if we look at the SMSF trustees who established funds during the March 2014 quarter, 57% are over 45 and nearly one-third are aged between 35 and 44.
Retail funds still manage the vast majority of superannuation funds – but for how much longer?
If retail fund managers were doing such a good job of managing people’s money why would consumers switch? There is a lot of publicity about what fund managers charge to manage an individual’s superannuation and there is definitely a perception that fund managers are no better at getting a reasonable return than the individual themselves.
The key long-term investment strategy is to buy and hold quality growth investments.
A further tip is to maximise the size of your share portfolio in super. Even if the member is in accumulation mode (as in still contributing to the fund), the tax rate is 15%. Receiving franked dividends from a public company you invest in means that you get a credit for the 30% tax paid by the company on your dividends. This more than covers the 15% tax rate paid by your fund and the additional 15% comes back to the fund as a tax refund or can be offset against any other income tax the fund may have.
As an example, an SMSF with $500,000 invested in a broad portfolio of blue chip stocks could expect a dividend yield of around 4% or around $20,000 annually. The franking credits on this are about $10,000 which is potentially available as a tax refund.
It gets even better once the member turns 60 and the earnings of the fund are tax-free and 100% of the franking credits will be available as a refund.
For business owners, another huge opportunity is to acquire their business premises via their SMSF. This is growing in popularity now that super funds can borrow, so you don’t have to wait until you have all of the necessary funds saved in your SMSF.
Better still, you can effectively get a tax deduction for the loan repayments, which are funded via tax-deductible super contributions.
But wait, there’s more!
Your business pays rent to your SMSF. If you’re in a company structure you get a 30% tax deduction and you pay 15% tax on the rental income in your SMSF, so you’re a net 15% better off. If you’re in a trust structure your tax rate may be even higher than 30% and therefore the tax savings are even greater. If it’s a million dollar property with, say, a 10% yield, the tax saving is $15,000 each and every year.
Again, it gets even better if you are over 60. In that case, you get a tax deduction for the rent paid by the company at 30% and the super fund pays no tax, so the tax saving increases to $30,000 a year.
Finally, after holding the property for a period of time if you decide to exit the business and sell the property, any capital gain on the property is tax-free if you’re over 60. If your business premises are already held outside of super there may be benefits in selling it to your super fund. Apart from the asset protection benefits offered, there are stamp duty and capital gains tax considerations.
Grant Field is chairman of MGI Australasia and has operated an accountancy practice in Brisbane for nearly 30 years specialising in family businesses.