For many people, SMSFs are a great option for building retirement savings, but they may not be suitable for everyone. The following sets out some of the important differences between SMSFs and other types of funds.
While public offer funds are managed by professional licensed trustees, SMSFs are considerably different because management responsibility lies with the members. Every SMSF member must be a trustee of the fund (or, if the trustee is a company, a director of that company).
This is an advantage for those who want full control over how their superannuation is invested and managed. However, it also means the members are responsible for complying with all superannuation laws and regulations – and administrative penalties can apply for non-compliance. Being an SMSF trustee therefore means you need to be prepared to seek the right professional advice when required.
If you intend to move overseas for some time (eg for a job posting), an SMSF could be problematic because it may be hit with significant tax penalties if the "central management and control" moves outside Australia.
On the other hand, members of public offer funds can move overseas without risking these penalties because their fund continues to be managed by a professional Australian trustee.
Costs are a key factor for anyone considering their super options. Fees charged by public offer funds vary, but are generally charged as a percentage of the member's account balance. Therefore, the higher your balance, the more fees you'll pay. This is an important point to remember when weighing up a public offer fund against an SMSF.
SMSF costs tend to be more fixed. As well as establishment costs and an annual supervisory levy payable to the ATO, SMSFs must hire an independent auditor annually. Additionally, most SMSF trustees rely on some form of professional assistance, which may include accounting/taxation services, financial advice, administration services, actuarial certificates (in relation to pensions) and asset valuations.
These costs may be a more critical factor for those with modestly sized SMSFs. This year, a Productivity Commission inquiry found that larger SMSFs have consistently delivered higher net returns compared with smaller SMSFs, and that SMSFs with under $500,000 in assets have relatively high expense ratios (on average). The Commission's report has attracted some criticism that it has overstated the true costs of running an SMSF, but in any case, anyone considering an SMSF needs to think carefully about the running costs involved and make an informed decision about whether an SMSF is right for them. For members with modest balances, an SMSF will often be more expensive than a public offer fund, but this needs to be weighed up against the other benefits of an SMSF.
A major benefit of an SMSF is that the member-trustees have full control over their investment choices. This means they can invest in specific assets, including direct property, that would not be possible in a public offer fund. For example, a business owner wishing to transfer their business premises into superannuation would need an SMSF to achieve this. SMSFs can also take advantage of gearing strategies by borrowing to buy property or even shares through a special "limited recourse" borrowing arrangement.
However, with control comes responsibility. SMSF trustees must create and regularly update an "investment strategy" that specifically addresses things like risk, liquidity and diversification. And of course, the SMSF's investments must comply with all superannuation laws. In particular, transactions involving related parties (eg leases and acquisitions) can give rise to numerous compliance traps, so SMSF trustees must be prepared to seek advice when required.
It's possible to hold various types of insurance through your superannuation fund, including death, total and permanent disablement (TPD) and temporary incapacity.
For many Australians, using superannuation benefits to pay insurance premiums makes insurance more accessible and convenient.
While you can purchase insurance within an SMSF, large funds can generally offer cheaper premiums because of the group discounts these funds can access. Another possible advantage of large funds is that members are automatically accepted for a certain level of coverage without needing a medical exam or detailed personal information, which is more likely to be required for an SMSF-held policy. For these reasons, some SMSF members choose to keep a separate account in a public offer fund just to access the insurance.
If you're an SMSF trustee, you're in charge, so there are a few things to keep in mind in relation to insurance:
- As part of your SMSF's investment strategy, you're required to consider (and regularly review) whether the fund should hold insurance cover for its members.
- Not every type of insurance can be held in superannuation. For example, trauma policies aren't allowed, and there are restrictions on some types of TPD policies. Seek professional advice before choosing your policies.
- You should also seek advice about the tax consequences of holding insurance in the fund, including deductibility of premiums and how life insurance proceeds might affect the taxation of your death benefits.
If you're a member of a public offer fund, it's important to check what insurance you're signed up to and assess whether you're getting value for money. Many members are signed up for insurance on a default (opt-out) basis, and may be unaware they're paying for duplicate policies across multiple accounts or unnecessary coverage as part of a bundled arrangement.
What happens when you're not happy with the trustee of your fund? Perhaps your claim for benefits has been mishandled, or the trustee has made an error? Members of public offer funds can complain to the Australian Financial Complaints Authority (AFCA), a free dispute resolution service that has the power to make binding decisions in order to resolve your matter.
However, dispute resolution is an entirely different matter for SMSFs. SMSF trustees may complain to AFCA about financial services problems they encounter with third parties (eg an insurance company or bank), but AFCA cannot hear a complaint about the decision or conduct of an SMSF trustee. This means that SMSF members cannot complain to AFCA about decisions that the other trustees have made (and similarly, potential beneficiaries of a deceased member's death benefits cannot complain to AFCA about how the trustees have paid out the benefits).
In these cases, the parties would need to go through the legal system to resolve the matter. This could mean alternative dispute resolution, or even court, but it must be privately funded. The SMSF's governing rules may outline dispute resolution procedures that bind the trustees, so it's worth giving this some thought in advance to ensure the trustees are as prepared as possible for any disagreement.
SMSF status will change if annual returns are lodged late
The ATO has warned that from 1 October 2019, if an SMSF is more than two weeks overdue on any annual return lodgment due date, and hasn't requested a lodgment deferral, the ATO will change the SMSF's status on Super Fund Lookup (SFLU) to "Regulation details removed".
The ATO says it is taking this approach because non-lodgment of SMSF returns, combined with disengagement, indicates that retirement savings may be at risk. This status will remain until any overdue lodgments have been brought up to date.
The ATO also noted that having a status of "Regulation details removed" means APRA funds won't roll over any member benefits to the SMSF. In addition, employers won't make any super guarantee (SG) contribution payments to that SMSF.
Source: www.pc.gov.au/inquiries/completed/superannuation/assessment/report; www.ato.gov.au/Super/Self-managed-super-funds/Thinking-about-self-managed-super/; www.moneysmart.gov.au/superannuation-and-retirement/self-managed-super-fund-smsf.