How do I know if an SMSF is right for me?
Self-managed superannuation funds (SMSFs) are popular, but are they always a good idea?
Self-managed super funds (SMSFs) have been on-trend for a while, but it’s important to understand the pros and cons before you make any decisions. While they can make certainly make sense for some people, and we assist many clients in this area, they are not suitable for everyone.
Firstly, you need to think about why you want to manage your own fund in the first place. Is it because you are simply unhappy with your current fund? Because you want to buy property and think this vehicle would be the best way to do it? Or because you have a considerable amount of funds and both the time and knowledge to direct your own investments successfully?
As you approach retirement, it’s always important to look at building a diversified range of assets. With an industry or institutional fund, you can do this by nominating some of the asset classes where you want your funds to be invested. To establish a workable SMSF you will need to have adequate funds available to be able to do this for yourself. While many Australians think establishing a SMSF would be the best strategy to buy property because there are tax advantages, this approach does not come without risks. Some people borrow money through their fund from a third party like a bank to purchase multiple rental properties to fund retirement plans. However, it is important to note that property does not always continue on an upward trend or generate high returns. If there is a downturn, you may be stuck with a mortgage and a depreciating asset that could be hard to sell. There could be other strategies more suited to your requirements, but with less risk.
You also need to ensure you have adequate insurance when you establish a SMSF. Unlike a regular fund, you are responsible for your own insurance cover. If anything goes wrong, like a cyber-crime event or if one of your assets is destroyed, you will not be automatically covered. Estate planning is also important, you will need to make allowances for who will manage your fund in the event of your death or incapacitation.
Many people also expect running their own fund will be cheaper than the fees charged by an existing super fund. This is sometimes the case. There are both set-up costs and annual fees to ensure the fund is compliant. Being a trustee of your own investment vehicle is a serious business and you need to follow the rules, or risk problems with the ATO.
Far from being a passive exercise, managing a SMSF yourself can be quite time consuming. There are strict compliance regulations, including independent audits, and you need to understand these before you consider this strategy. Chances are you will need both an accountant and an investment adviser to assist.
If you would like to discuss establishing a SMSF call Tania Tonkin at dmca to ensure the structures are well planned and that the choice of investments will support your retirement plans.
How do I close down my SMSF when I don’t want it anymore?
Closing a self-managed super fund is an important process regulated by the ATO. The exit strategy should be planned when the fund is set up at the outset, or it may cost your fund a lot of money when you want to shut it down.
There can be many reasons why you want to shut down a self-managed super fund. You may not have the time or money to manage it, one of the members may have died, a relationship may have broken down, or the fund may have paid all the members their retirement savings.
To close a fund you must notify the ATO within 28 days, deal with the assets in the fund so there are no assets left (but leave enough money to pay any outstanding tax obligations), arrange a final audit and complete your final report to the ATO. The process can be quite involved and may require significant planning, so call your dmca advisor if you have any questions or require assistance. More information on closing an SMSF is available here on the ATO website: https://www.ato.gov.au/Super/Self-managed-super-funds/Winding-up/
How can I plan better tax strategies to build up my superannuation savings? Are ‘carry forward contributions’ useful?
One of the best ways to build up your superannuation account is to make additional concessional (after tax) contributions into your fund during the year. This option is now open to everyone, not just those who are self-employed.
This could be particularly useful to offset some personal tax liabilities when you have a windfall: like an extra good year in business, or when you sell assets, or shares.
There are a few things to remember. Concessional limits apply with the maximum contribution being $25,000 per financial year. Obviously not all of us will have this amount of cash available to contribute each year, which is where carry forward contributions become helpful.
On July 1 in 2018, carry forward or catch-up contributions for superannuation were introduced. This allows unused concessional contributions to be carried forward over the next five years. To participate you must be eligible to contribute to a superannuation fund and your total superannuation balance (TSB) must be less than $500,000 as of the end of the financial year (in this case June 30, 2019). Carry forward contributions are calculated on a rolling basis, but any amounts not used after five years will expire.
The capacity to contribute $25,000 in personal contributions to super together with the new ‘carry-forward options’ provide people with more options to manage their tax obligations and to save more for retirement. It may be worth talking to your dmca advisor about long term plans for the future and how to make the most of both concessional (before tax) and non-concessional (after tax) caps.
If you intend to make personal contributions to your superannuation fund in 2019/2020 you must notify the fund of your intent in advance in order to claim a tax deduction, and you should check your eligibility in terms of calculating your total superannuation balance (TSB).
Contact us on 08 8272 5620 for more information on the super carry forward rules.
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