Do-it-yourself superannuation, in one form or another, has been around for about 30 years. But it has only been over the last few years that SMSFs have made an indelible mark on Australia's retirement savings landscape.
The SMSF sector now claims a bigger slice of the super pie than it ever has, in terms of asset values and number of funds. Around 600,000 SMSFs in the country have an average balance that is generally in excess of $1 million. With more than $594 billion of superannuation assets, SMSFs represent roughly a third of Australia's total.
By asset value, SMSFs have now surpassed retail and industry super funds. The regulator of superannuation, the Australian Prudential Regulation Authority (APRA), says retail funds account for around 29% of total superannuation assets, industry funds about 24%, but that SMSFs accounted for the biggest slice – more than 32%.
Right choice for you?
But is an SMSF for you? Basically, a self-managed superannuation fund is a trust that is established for one to four members, who are also the trustees (or directors of a corporate trustee), and so control the fund. Therefore it is the members themselves who decide how the fund will operate, and where it will invest (within the boundaries of the superannuation law and the fund's own trust deed).
Wanting greater control is often cited as one of the chief reasons that people want their own SMSF, followed closely by the desire to have greater flexibility over investment choice.
So given the fact that an SMSF is more hands-on, they are a type of super fund that will need a commitment to run, as managing your own super takes knowledge, time and skill. Members may be fine about investment control, but there are also regulatory responsibilities to shoulder and manage. So while an SMSF will be suited to a lot of people, they are not for everyone.
One more thing that running a self-managed super fund takes is money. An interesting item to come from a government review conducted in recent years was that SMSF members in the peak earnings age range (from 35 to 60) had an average taxable annual income of $106,000. Other types of super fund members earned an average annual income of $55,000. Compared to other types of super, SMSF members are on average older, the report says, earn more money, and have larger balances. The average account balance per SMSF member is about $553,000.
Operating expenses must be taken into consideration as well, but the average running costs (based on paying third-party professionals) vary significantly depending upon the size of the fund, the nature of the assets and value of transactions. An average operating expense ratio, which gives a percentage figure based on the fund’s size, naturally varies greatly according the assets held. According to ATO data, the estimated average operating expense ratio of recent times hovers between 1% and 1.5%, which works out to a dollar value of between around $10,000 and $11,000 based on the average fund balance. Naturally this ratio decreases as a fund’s balance increases.
Operating expenses are unavoidable however, as it is compulsory under the legislation (the Superannuation Industry (Supervision) Act, or SIS) to have all accounts audited by approved auditors every year. The ATO says there are around 12,000 approved auditors operating across the SMSF sector, and that the average auditor fee is more than $700, with a median fee of around $550. SMSFs also need to pay a $259 supervisory levy every year to the ATO (which increases to $518 for newly registered funds) which is included in the SMSF annual return.
SMSFs are taxed, like most super funds, at a concessional 15% rate on the income of the fund, including contributions for which the member (or their employer) has claimed a tax deduction. Realised capital gains on investments held for more than 12 months are taxed at an effective rate of 10%, and the usual tax-lowering tools of franking credits and offsetting capital losses against capital gains are still available.
How do you start your own SMSF? The first step is to organise for a trust deed to be written, which spells out the rules, rights and obligations for members of the fund. In fact, there are a few main steps to setting up your own SMSF:
- get a trust deed
- appoint trustees
- register with the ATO
- open a bank account.
The trust deed is a legal document that sets out the rules for operating the SMSF and the powers, duties and responsibilities of the trustees/members. It also sets out under what circumstances contributions may be received, how benefits are paid, appointing professionals and so on (such as auditors) and other details. You will need the help of a lawyer and a tax professional to get this going.
Appointing trustees is simple (all members have to be trustees or directors of corporate trustees, and vice versa) but they need to sign a declaration, which states that the trustees accept their appointments and understand their duties and responsibilities. After that the SMSF must register with the ATO, which will see the fund get a tax file number and an Australian business number as well as “elect to be regulated”. The SMSF will need to register for goods and services tax if annual turnover (for GST purposes) is more than $75,000, such as where there is a substantial rental income producing real property element to the investment portfolio.