With the continued rise in popularity of Self-Managed Superannuation Funds (SMSFs) it is important to realise that having a SMSF is not the “golden ticket” to retirement riches.
A SMSF is an excellent option for many investors, however it does not suit everyone. Some significant questions need to be addressed before an investor makes the decision to establish an SMSF. These include:
Is the SMSF strictly for retirement benefits only?
It is essential that a SMSF is established to provide for an investors retirement. A SMSF should not be seen as a vehicle for accessing funds for short-term finance for your business when cash-flow is tight. It should also not be used for buying holidays homes or art investments for your personal enjoyment. The ATO will take action against Trustees who use their SMSF for the wrong reasons.
Do you have the time and skills to be a trustee?
Running a SMSF means that the Trustees are ultimately responsible for the running of the Fund. There are responsibilities to make investment decisions based on the Investment Strategy & objectives you have established and there are compliance obligations relating to record keeping, preparation of financial statements, arranging for the audit of the Fund and preparing and lodging the Fund income tax and regulatory return. Also will you be making your own investment decisions or will you need to engage the services of experts?
Are the benefits worth the costs?
Generally the greater the value of assets in a SMSF the more economical it is to run due to economies of scale. As a rule of thumb we believe a SMSF should only be established if there are assets of $200,000-$250,000 or more initially.
What are the consequences of rolling other superannuation accounts into your SMSF?
You need to be aware of potential loss of insurance benefits which exist in your current superannuation accounts. Please ensure you have replacement insurance in place prior to transferring the balance of any existing super. Also, there may be exit fees which you need to consider.
Another issue we are becoming aware of is clients looking at purchasing investment property through their existing SMSF or by establishing a new SMSF. As a general warning borrowing through a SMSF to buy property is allowable but it is EXTREMELY COMPLEX! You need to be certain that this strategy is appropriate for you.
There are significant COSTS and RESTRICTIONS in borrowing through a SMSF so if anyone is trying to sell you real estate and telling you to do it through your SMSF – this should instantly trigger the following questions:
- Is the property I am purchasing overpriced? Get a second opinion or independent valuation.
- What are the fees and charges to establish the borrowing vehicle through a SMSF?
- Would the property be better purchased in your own name(s) due to restrictions on accessing your superannuation until you reach a certain age? (Currently 55 but increasing to 60 for those born after 30 June 1964)
Asking these questions will help ensure you make the correct investment decision! If you find yourself asking any of these questions you need to speak with the SMSF Specialist Team at Green Taylor Partners.