This article by Michael Read was published in the AFR on 8th October 2021

For some, starting a self-managed super fund (SMSF) could be one of the
best financial decisions they ever make.

SMSFs can be a cost-effective way to gain control over your retirement
savings, purchase real estate and manage family wealth.

It is why about 1.1 million Australians manage their nest egg through an
SMSF, according to data from the Australian Taxation Office.

Switching to an SMSF makes the most sense for people with large balances
since the costs are fixed, say experts. Simon Letch

But an SMSF is a long-term commitment, and many of the arguments in
favour of starting one could equally be a reason to avoid going solo. Taking
your investments out of the hands of experienced portfolio managers raises
the risk you could make poor investment decisions.

“You need to be doing something different with your super to warrant
taking on the duties and responsibilities of running your own SMSF,” says
Colin Lewis, Fitzpatricks Private Wealth head of strategic advice.

“That is, if you are investing only in shares, managed funds, fixed term
deposits and cash – investments made by all funds regulated by the
Australian Prudential Regulation Authority (APRA) – then why take on the
added burden and risk?”

Smart Investor spoke to seven SMSF specialists and financial advisers
about when it makes sense to shift your superannuation into a selfmanaged
fund.

Cost-effective
Switching to an SMSF makes the most sense for people with large balances
since the costs are fixed, says Financial Framework director Dan Hewitt.

“Consider for example a husband and wife who each have $1.5 million in super. A typical
super fund will charge 0.3 per cent to administer each fund, which in this case would equate
to $4500 each fund or $9000 in total.

“Compare this to the annual audit and accounting fee to run a joint SMSF which would be
more like $3000-$4000 in total. The reason for this is that SMSFs tend to have a fixed fee
irrespective of size while industry and retail super funds are [charged as a] percentage of
funds under management with no cap.”

Modelling by Rice Warner, prepared for the SMSF Association, found SMSFs were
generally more cost-effective than retail and industry funds when balances exceeded
$250,000, though this depended on the fund’s complexity and the administrative burden the
individual was willing to take on (see table).

For example, for a person with a low-complexity superannuation portfolio willing to take on
some of the administrative burden of running a self-managed fund, SMSFs are more costeffective
than retail and industry funds when balances exceed $200,000, according to the
modelling.

But if someone wants to outsource the full administration of the fund, including investment
administration and reporting, then a higher balance of $250,000 would be needed to justify
starting an SMSF.

However, BFG Financial Services managing director Suzanne Haddan warns that starting an
SMSF to save on costs is the wrong angle to approach the decision.

“SMSFs often engage a range of professionals to assist them with strategies, investments and
complying with their obligations – including accountants, financial advisers, lawyers or
an SMSF administration service – and the applicable fees can be significant,” she adds.

“There are also potential costs if something goes wrong as unlike members of conventional
funds, members of SMSFs are not eligible for compensation under superannuation laws
should the SMSF suffer a loss as a result of theft or fraud in the investment assets.

“Nor do members have access to free external dispute resolution schemes to assist with
resolving disputes. The courts or mediation is generally where members head and this is at
their own expense and can be very costly.”

Financial Framework’s Hewitt says there are “real benefits” in using an SMSF to purchase
property.

“First, unlike other super funds where debt is not permitted, with SMSFs you can use
leverage to help the fund purchase a property through a limited recourse borrowing
arrangement structure.

“This increases the purchasing power of the super fund. For instance, you could potentially
purchase a $1.2 million investment property with $500,000 in super and $700,000 in debt,
gearing it 58 per cent,” he says.

The downside, says CreationWealth senior financial adviser Andrew Zbik, is that direct
property is a low-yielding asset class that could lessen the diversification of your portfolio.

“Being overweight to one asset may be detrimental to the fund if the property does not
perform to expectations,” he adds. He also recommends having a plan in place to pay down
the debt before retirement.

Fitzpatricks Private Wealth’s Lewis says investing in residential property could justify
starting an SMSF.

“Be aware, however, if you invest in residential property, you cannot use it while it is in
super,” he adds, since in-house asset rules prevent SMSF members from using the property
for their own benefit.

Buying commercial real estate
The one exception to this rule, says Lewis, is purchasing a commercial property used by your
business.

“You effectively pay rent to yourself in a tax-effective manner, and it may help in qualifying
for the small business CGT [capital gains tax] concessions when it comes time to sell your
business as super does not count towards the $6 million maximum net asset value test – so, if
you’re nearing this limit, sheltering the business premises in super may be useful,” he adds.
Owning your business premises in an SMSF would also provide protection against creditors
in the event of bankruptcy, says Lewis.

Story Wealth Management chief executive Anne Graham says while purchasing business
property is an attractive option for many small business owners, she urges them to seek
advice first.

“Cash flow is important and if you need to borrow to purchase the property, speak to a broker
first as the rules for borrowing in super are more complex (and expensive) than borrowing in
your own name,” she adds.

Teaming up with friends and family
While purchasing a property can be prohibitively expensive for an individual, it is possible
for friends or family to “team up” through a multi-member SMSF, says Financial
Framework’s Hewitt.

“The benefit here is again you get some economy of scale and are better able to fund property
purchases. The downside is that old saying that sometimes too many cooks spoil the broth,”
he adds.

SMSFs can now have up to six members, following changes that came into effect on July 1.
But multi-member SMSFs can be used for more than just purchasing real estate, says
Townsend Law associate Jeff Song.

“This enables large families to consolidate family wealth for retirement in a single SMSF,
save costs, allow younger family members to leverage into more substantial investments and
achieve economy of scale,” he adds, noting he does not have an Australian financial services
licence and is therefore not recommending starting an SMSF.

“While there are some drawbacks associated with unpredictable family dynamics and
transparency of super balances to all members, the benefits of multi-member family SMSF
may outweigh the disadvantages in certain circumstances,” he says.

Estate Planning

Song says SMSFs give individuals flexibility with their estate planning since it is not
mandatory to pay the benefits from super until the member passes away.

“Upon their passing, superannuation death benefits do not automatically form part of their
personal estate and members have the flexibility of designing their superannuation
succession planning.

“In certain circumstances, it is possible to retain the benefits in the same SMSF and pass
them on to beneficiaries free of probate and possibly of access by creditors,” says Song.
“One of the beauties of SMSFs is that members have a choice to be flexible with their
directions in their binding death benefit nomination (BDBNs).

“Due to the conditions and limitations in the superannuation legislation which only apply to
APRA funds but not SMSFs, BDBNs used in relation to APRA funds are not afforded the
same level of flexibility and the member’s decision in most cases would only extend to
completing a designated form naming who will receive what proportion of their death
benefits.”

Keeping assets in the family
Fitzpatricks Private Wealth’s Lewis says assets can be held in an SMSF for generations.
Advertisement “Provided an SMSF has the resources and liquidity to pay benefits as they fall due –
including death benefits – then an asset can be held in an SMSF for a very long time,” he
explains.

“For example, a property out of which a family business is operated could remain in super for
different generations of family members as they join the business and the SMSF.”
Invest in collectibles

While uncommon, it is possible to use an SMSF to invest in collectible items like antiques,
art and wine.

But this does not mean you can purchase an antique to display in your home, says Lewis,
since it is against the law to derive personal benefit from the investment.

“Be aware that there are very strict rules and regulations when investing in collectibles – such
as valuations, insurance and storage. Also, you cannot use it (just like residential property) so
you cannot hang the painting on the wall at home or in your office,” he adds.

Platform for life
Meg Heffron, managing director at SMSF specialist firm Heffron, says sticking with an
SMSF throughout your working life and into retirement could save you the costs of
switching between funds.

“Moving funds can be a big deal. It might mean triggering capital gains tax or other costs to
transfer. It might even mean selling assets at a loss – but if you move to a new fund, you can’t
take those losses with you and use them to reduce the tax you pay on capital gains in the
future.

“The great thing about an SMSF is that it’s possible to change pretty much everything else
without changing funds. You can change advisers, change accountants, completely change
the types of investments you hold but you don’t need to change fund.”

Heffron says SMSF members could elect not to sell a particular asset to avoid incurring a
large CGT bill, or hold on to previous capital losses to reduce future tax bills – choices that
are not possible in a retail or industry fund.

Quick response to law changes
Another advantage of SMSFs, says Heffron, is that trustees can make changes immediately
rather than waiting for their super fund to execute their request.

“This never sounds all that valuable until it is,” she says. “When members were able to
access $10,000 of their super during the early days of the COVID-19 pandemic, we had a
few clients that needed the money urgently. The great thing about having an SMSF in their
case was that it was totally in their control. The very second they had the approval from the
ATO, they could transfer the money from their SMSF into their own bank account.”

“Similarly, there are times when a quick decision needs to be made about doing things like
starting pensions, making benefit payments – and again, all these can be done immediately
and entirely within the member’s control with an SMSF.”

But BFG’s Haddan describes the ability to act quickly as “a double-edged sword” that could
lead trustees to inadvertently break the law.

“Some trustees (generally when not utilising professional administration services or other
professionals) neglect to monitor the rule changes and are less than timely when updating
trust deeds and other processes,” she explains.

“This puts the trustees and the SMSF at risk of inadvertently acting on outdated and incorrect
rules which risks audit violations and being on the wrong side of the ATO.”

Tax tweaks

Fitzpatricks Private Wealth’s Lewis says SMSFs are not required to pay tax until the fund’s
annual regulatory return is lodged, meaning your money works longer for you before tax is
paid.

“In a mainstream fund, 15 per cent contributions tax is deducted generally when the fund
receives a concessional (pre-tax) contribution or at the end of the month it is made – this
applies to Superannuation Guarantee and/or salary sacrifice contributions – or a notice of
intent to claim a tax deduction is lodged.

“But in an SMSF, any tax payable is after the fund’s annual regulatory return is lodged –
which may be up to two years after the contribution is made,” he adds.