The Ten BIG Benefits of a SMSF
We are going to look at the ten benefits of a SMSF but theory is theory. The only way to learn, grow and turbocharge your super is to put the ideas and strategies you find in the Guru’s Guide into practice for your benefit. But remember my goal is to make things simple but with thousands of pages of laws it is my recommendation that you find a great SMSF adviser to help you put your ideas and strategies, along with their input into practice.
Benefit One: A SMSF lets you look after your Family
For the majority of people, their family is the most important aspect in their lives. I don’t know about you but I love my kids and it is great to see them grow and blossom in this marvellous world we live in. Stressful yes but filled with opportunity. And as their Dad I take my responsibilities, particularly financial very seriously. I have made sure that if something happens to me they are well looked after but more importantly protected from financial predators – parents if you get my drift. Bloodline protection the whole way down the line. Now that is a real Family SMSF Estate Plan and erupts from my Family SMSF if I die.
Like I have done the SMSF provides members with an opportunity to lay down the foundations to provide a comfortable retirement income stream for their immediate family and possibly generations to come. This opportunity has been increased with the Super Reform proposals where a member of a SMSF can leave their superannuation benefits in the Fund until their death.
Benefit Two: Providing a Secure Income in Retirement
The major reason for establishing a SMSF is to ensure that, when an individual ceases work or business they will have a stable, secure alternative to keep the lifestyle that they are accustomed to. That income stream, if it comes from super is called a pension and is a very popular strategy for SMSF members once they retire. The big benefit is, if the member is over age 60 when receiving the pension then the pension income is tax free in the hands of the member. Moreover, if this is a member’s only source of income, being tax free they will not have to lodge a personal tax return. Can you imagine that? Being out of the Commissioner of Taxation’s clutches for the first time in your life. Plus, the Trustee of the SMSF paying the pension will not pay tax on income or capital gains earned on pension assets in the Fund.
Benefit Three: Offering a financial helping hand if your Health Deteriorates
Health is one of those things that can never be taken for granted. I know as 1016 was a bad year for my parents and also myself. Old age and dementia hit my Dad, stress my mum and myself and well it was good to put it behind us. But knowing that when the chips are down we can use the SMSF along with health insurance is a blessing.
So if an individual’s health declines, he or she needs to have access to a safe, secure income that takes the financial worry out of becoming seriously ill or even incapacitated. A SMSF allows members access to a range of benefit options in times of sickness and ill-health. This is the case even though the sickness is of a temporary nature. Permanent disability is a time of great change and superannuation benefits are able to be accessed if these times of trouble.
Warning – the Demented Trustee
As I have found out in my own family, once one of the Trustees has dementia they have to bow out of the running of the Fund and the person with their Enduring Power of Attorney may take their place as Trustee of the Fund – even though they may not be a member of the Fund. Do you have an Enduring Power of Attorney in place? This is a vital cog in a well-structured SMSF – if you haven’t my advice is do it now!
Benefit Four: Investment Choice
The large majority of people or families who find their way into SMSFs want to have some say as to how they invest their money — including their superannuation. As Trustee of a SMSF, the power of choosing investments for the Fund resides with the Trustee; however, great care needs to be taken to ensure that the Trustee meets the relevant superannuation laws in terms of investment choice. These laws include the need to draft and successfully implement an investment strategy as well as ensure that, within confined limits, no asset of the Fund is used by a member of the Fund, their relatives or any entity related or closely associated with them or their family. But the choice of investments is broad – residential property, commercial property, shares, government bonds, gold, overseas investments, start-ups, Early Stage Investment companies, syndicates and the list goes on.
Benefit Five: Low Taxation fully sanctioned by the government
Taxation in Australia is significant, but the government has chosen to save on future welfare payments by providing tax incentives for its people to become self-funded retirees. And particularly given that employees are forced to transfer over 9.5% of their salary into their choice of superannuation – self funded retirement is a goal for most employees. Members of SMSFs have the best opportunity to simply reduce the taxation burden in their retirement lives. For example, the tax-free nature of private pension and lump sum arrangements for a member of a SMSF post age 60 is one of the key benefits to a secure lifestyle retirement income.
Grant’s Note: Don’t expect the low tax ride to last forever. A member in a $3M SMSF who is living on tax free retirement income receives a huge amount of actual tax benefits to someone with $3M outside of super, let alone a person with $100,000 in a retail super fund. The government changed the pension limits in 2017 to claw back some tax from the wealthy SMSF members and this is just the start. So expect on going tinkering with tax in superannuation but make sure that you are up to date and in front of any changes not left behind asking “What happened?”
Benefit Six: Looking after your Family when you Die
The SMSF is by far the most flexible, most targeted and most tax-effective vehicle to provide lump sums or income streams to a member’s spouse, children or grandchildren when the member dies — and it lets the member control the process without fear of legal challenge. Importantly where a member puts in place a strategic SMSF estate planning strategy, it resides outside the member’s will. This is not known to many SMSF members and Trustees who forget to put in place a SMSF estate plan, thereby missing out on highly valued taxation concessions and also opening the deceased member’s benefits to the lawyers and in some case the Public Trustee.
Benefit Seven: Access to the Age Pension
The Aged Pension is available for persons over age pension age – currently age 65. However, it is subject to an Incomes and Assets test. A member’s benefits in a SMSF once a member reaches age pension age are included for Assets test purposes as is income withdrawn from the Fund. Changes to the Assets test have seen a drastic reduction in the Assets test limit, but for many SMSF members with less than $830,000 who have a family home (exempt from the Assets Test), they may be entitled to an age pension. In addition, they may be entitled to other important benefits including the Health Care Card but as this is a complex area, specialist financial planning advice should be sought.
Benefit Eight: Protection from Creditors
This is a sleeper and, for most people, is not used at all. However, where a person gets into serious financial difficulty, the government has provided rules in the bankruptcy laws that broadly protect a member’s benefits in the Fund from creditors with the exception of any retirement income. This can be a relief when unfortunate financial events occur.
Benefit Nine: Transition to Retirement Income (“TRIS”)
The biggest bug bear for most people when it comes to compulsory superannuation is not having access to their super until they retire. There are a number of exceptions such as temporary and permanent incapacity, certain compassionate grounds and financial hardship.
One important exception introduced in 2005 was the Transition to Retirement Income Stream. The TRIS enables a working member of a super fund, who has reached their preservation age to access their superannuation as an income stream. The TRIS requires the member to withdraw at least 4% of their TRIS account balance each year and no more than 10%.
- What is a Member’s Preservation Age?
A member’s preservation age can be found at the Superannuation Industry Supervision Regulations 1994 (“SISR”) 6.01and is as follows:
From a tax perspective if the TRIS is received when a member is under age 60, the TRIS income will form part of the member’s assessable income - however it will attract a 15% tax offset. From age 60 any TRIS income from a member of a SMSF will be tax free.
So while working, an employee, small business owner, professional or other person with a SMSF may access pension income - much like salary - that is extremely tax effective. At the same time, they may contribute their pre-tax salary or business profits into their SMSF (subject to certain limits). This means that if they can set in place a “transition to retirement” pension as their key source of living expenses while contributing salary into a SMSF, a reduction in overall personal taxation may arise. As will be seen later in the Guru’s Guide, generally income and capital gains earned on assets held for pension purposes is tax free but this excludes a TRIS which is also not counted in the $1.6M limit.
Benefit Ten: Superannuation Contributions Splitting
Under the laws it is possible for a member of a superannuation fund to split their benefits with their spouse. Spouse includes a de facto spouse under the superannuation laws. The advantages of this, is where both spouse members of the Fund are between the ages of 55-60 and using the transition to retirement strategy, then the benefits of the 15% tax rebate is maximised. Further where one member is older than the other and will thus reach the tax-free pension and/or lump sum status before the other, then it makes strategic sense to split any contributions for the younger spouse to the older spouse. However, it is only the employer or deductible superannuation contributions that can be split and then to a maximum of 85%.
1.2 Introducing the Family Super Fund – the SMSF with Smarts
There are more than 600,000 SMSFs in Australia controlling more than $700 Billion – so on average each Fund holds more than $1.2M. As we saw from the CoreData research, the majority of these Funds have been established for one reason only and that is to enable members of the Fund to control the investment of their superannuation monies. Many have become sick and tired of leaving their retirement dreams in the hands of faceless money managers. Although this is a powerful driver, this single focus often limits that strategic possibilities of the Fund and misses the whole point of these powerful vehicles.
- What type of SMSF do you have or want?
Having worked in the SMSF industry for over 24 years, I have found that there is a wide range of SMSF clients - those that want to do everything themselves (the DIY'ers), the SMSF’ers and those that are happy to build their Fund into a strong, strategic Family SMSF. Let’s have a look at each of these types of small four member superannuation Funds:
- The DIY superFund
This is a super Fund where there is a strong handsn focus by the Trustees of the Fund - the true Bunnings DIY style of Fund. The Trustee generally does the accounts of the Fund using an accounting program such as MYOB. All bank reconciliations, income receipts and expenses are accounted for and the management of the investments are undertaken by the Trustee. Due to the complexity of the superannuation and taxation laws, the Trustee will need an accountant to compile the tax return and must have an independent audit under the SIS Act 1993. As can be imagined, unless the Trustee is only investing in one or two simple property investments, there is a lot of work that must be done by the Trustee – for a Trustee trading shares it is a full-time job.
Of course, once the Fund goes into pension mode with, ideally, the Trustee running a simple but strong SMSF strategy of a retirement accumulation account running alongside for any surplus superannuation benefits the DIY Fund gets left behind. The use of reserves, multi-generational reversionary pensions and other important but simple SMSF strategies, are a rarity. Not knowing or using common tax strategies can end up costing thousands in the long run.
- Self Managed Super Fund
This is the next level above the DIY superannuation Fund and one that the majority of SMSFs run. Again the focus is on investments but the Trustees of a SMSF generally have the advantage of tax and superannuation advice from their accountants and financial planners. Strategy in a SMSF may be around pensions, estate planning, maybe some insurance and taxation strategies. The strategic input will depend on the SMSF skills of the advising professional and the willingness of the Trustee to learn and enquire what is possible within their Fund.
- The Family SMSF
This SMSF is the same tax structure as a DIY super Fund and a SMSF but the key focus is on the family. Surprisingly, of all the SMSFs in Australia that have the opportunity of bringing up to four members of a family into the Fund, only 10% have chosen to do so. 20% of SMSFs have only one member with 70% having only two members. This is a great loss of opportunity – can anyone imagine what it would be like to establish a family trust with only one or two beneficiaries. No accountant in their right mind would recommend this course of action.
To see the difference between the Family Super Fund and the DIY or SMSF Fund, consider some of the following Family Super Fund strategies:
- An adult child member in the Fund has an accident and spends six months off work. The Trustees of the Family Super Fund can begin to pay out salary continuance benefits to the incapacitated member to ensure that their salary and wages are kept to a level they were, before the accident.
- The retiree members of the Fund use some of their superannuation benefits to Fund a deposit on a property that is acquired with a loan from a bank. However, the younger members of the Fund pay off the loan with on-going salary sacrifice contributions made by their employer. When the property is ultimately sold any capital gain is split between the members relevant to their capital investments.
- Mum is the sole remaining parent member of the Fund and has been diagnosed with dementia. The adult child members are in the Fund guiding her superannuation benefits towards the best in health and psychological care for their mother.
- The retiree pension members of the Fund invest in Australian shares with imputation credits. These credits are used by the Trustee of the Fund to reduce any of the Fund's tax liabilities including any contributions tax liability of the younger members of the Fund that salary sacrifice.
In short, these unique super Funds have a very special place in Australia, and for that matter the world. If designed and used properly - they allow the aggregation and investment of a family's superannuation benefits, as well as providing a pool of monies and assets to look after family members including children and grandchildren at the time of an accident, sickness, permanent disability, death, pre-retirement and retirement. To make the most of your SMSF, turn it into a Family SMSF.
- Let’s look as some important Frequently Asked Questions regarding a Family Super Fund.
Q: I have a SMSF – can this be turned into a Family Super Fund or do I have to get some more documentation or a different trust deed?
Provided you are using a trust deed, which has in-built Family SMSF strategies and options, there is nothing preventing you and your family using your SMSF as a Family SMSF. I have authored a number of trust deeds to ensure they meet the strict guidelines of a Family SMSF. To see those I have authored go to www.Ilovesmsf.com
Q: I don’t want to bring my children into the Fund and then they take control when I get older.
This is a key benefit of the Family SMSF trust deeds I have written. When a child, brother, sister or grandchild becomes a member of the Fund, they must become a Trustee of the Fund or director of the Fund’s corporate Trustee, if the Fund has one. For child members under the age of 18, one of their parents can act as a Trustee or director on their behalf. A corporate Trustee is where a company acts as Trustee of the SMSF rather than individual members. But as a Trustee, each member must be involved in the decision-making process which means each member must be a director – except if the member is a child.
As an aside, the Commissioner of Taxation recommends the use of a company acting as Trustee of a SMSF. Under section 17A of the Superannuation Industry Supervision Act (SISA) this means that each member must be a director. Where there is a child member then the Corporations Act 2001 (CA) will not allow the appointment of a child director. In these circumstances, one of the parents of the child, who is already a director of the SMSF corporate Trustee will act on the child’s behalf.
Under a smart Family SMSF trust deed, each Trustee is given the same number of votes for each $1 sitting in the account balance of the member they represent. This means that, although an adult child may be a member, their voting power when it comes to investments and major decisions of the Fund is limited. For example if they have $10,000 in their superannuation account then that will be 10,000 votes. But if the main member of the Fund has $900,000 then they will have 900,000 votes.
Q: I have three children. How do I get all of them into the Fund?
The limitation of these small superannuation structures is that only four members can reside in the Fund at any one time. This means that the controllers of a Family SMSF - generally the parents - need to choose who is best to occupy the Fund at that point in time. As with children living at home, at some stage a child's benefits and personal family circumstances may see them commencing their own Family SMSF with their spouse and children - this may leave an opening in the parent's Fund which may be filled by another child. Alternatively, for sizable Funds it may be wise to consider two or more Family SMSF to cover the immediate and possibly the extended family.
 There is a Pension Transfer Balance Limit of $1.6M per member. This limits the amount of accumulated super monies that a member may use to acquire a pension. Any excess must be kept in the member’s accumulation account where the Trustee is taxed on income at a rate of 15%.