Christine St. Anne: Self-managed superannuation funds or SMSFs, continue to achieve spectacular growth in Australia. To give an idea about what are the pros and cons behind these funds, Iï¿½m joined by Westpacï¿½s, David Simon.
David Simon: Thank you, Christine. Good to be here.
St. Anne: David to begin with, can you give us some idea about this growth?
Simon: Yes, sure. Look, self-managed superannuation, the growth has been nothing short of spectacular. In fact, in 1998, about 12% of Australians owned a self-managed super fund. Yet today around 33% percent of Australian own a self-managed super fund. So by far itï¿½s a growth - the fastest growing sector and we believe that some of that growth has been ï¿½ catalyst being the global financial crisis.
So people that have had a bad experience with their previous fund have become almost despondent and looked at other areas, where they can effectively manage the money better themselves and are hence being attracted to that sector.
St. Anne: So what are the reasons behind the growth?
Simon: There is a whole array of advantages that have attracted people to owning a self-managed superannuation fund and control and choice is the primary one. So having a self-managed super fund allows people to access various assets that would otherwise not be offered through a public fund. So having access to assets such as direct property, indeed art and collectibles, direct shares, term deposits and manage funds, amongst many others, allows people that choice and that freedom around choosing their assets.
Indeed aspects such as asset transfer is also a really attractive part of a self-managed fund. So indeed that people that own assets in their own names will be paying tax at their own marginal tax rate, but being able to especially transfer these into a self-managed fund means that they are able to enjoy, the lower taxation rates that are available with superannuation and indeed quite often weï¿½ve seen people that run their own businesses, and have a commercial property or business rule property, weï¿½ve even seen people like that move those properties into their self-managed fund to free up the cash flow of their business and obviously, weï¿½ve seen many people transfer assets like shares and managed funds from their own name into a self-managed.
We also find that other areas such as being able to pool - you are managing a self-managed fund, so typically your self-managed fund can have about up to four members. So having four members combine all of their money into one fund, that typically have the signed objectives and characteristics, really gives them scale. So it allows them to access opportunities they otherwise wouldnï¿½t be able to access as an individual and indeed really keep the fees down by having that ability to pool the money.
St. Anne: What about tax advantages?
Simon: In a self-managed super fund, if there is an asset thatï¿½s grown and accumulated value through the accumulation phase. If they were to liquidate that asset and realize a capital gain they would need to pay tax. Now, if they are in a self-managed fund, that can effectively migrate that fund into a pension phase and then sell the assets that accrued to capital gain and not pay any capital gains tax at all. So there certainly are some significant advantages that have attracted people to that sector and indeed thatï¿½s being represented in those growth rates.
St. Anne: You mentioned a number of advantages, what are the key things that investors need to consider before entering into an SMSF
Simon: So, some of the aspects and some of the considerations that people need to consider are really serious. The first one is the responsibility of running a self-managed fund. Now the trustee of the fund and indeed the corporate director of a corporate trustee are obliged to be able to manage that fund in a compliant manner, and indeed, if the fund is deemed to have breached their compliance and becomes incompliant, then the penalties are rife. One of the penalties is the asset being taxed at the marginal tax rate, so not the actual income of the assets, but the assets that are contained in the fund itself can attract the highest marginal tax rate. I am aware of stories where trustees of self-managed funds have had to pay out hundreds of thousands of dollars in tax because the fund is being deemed incompliant.
There are even other aspects such as fines and even jail terms for extreme beaches of superannuation fund compliance. Another area is expertise. People may open a self-managed fund and roll over their money into cash and then say where do I invest it? So one of the disadvantages and what people often over look is the requirement of the investment expertise in accessing a self-managed fund to ensure that they are managing in a very smart way but also in a strategic fashion. So it's really important that they have the skills and the expertise to do so.
One other thing is time. I mean time is a precious commodity in this day and age, and it takes a lot of time to manage the ongoing concern of a self-managed fund. In fact, there was a recent study where the average trustee needs to spend about five hours every week in managing a self-managed fund. It is not too different to managing a private company, so that certainly one thing that's particularly overlooked as well.
St. Anne: The amount of responsibilities you mentioned David, can investors outsource these?
Simon: Yeah, sure. The whole aspect around time and expertise and indeed the compliance function can all be outsourced, but that would probably beg a question, say, if you're outsourcing all of those, is it a do-it-yourself or is it a self-managed super fund?
St. Anne: Do investors need a minimum balance to start up an SMSF?
Simon: Yeah, certainly Christine. There is a lot of controversy around what would be the reasonable amount that is required before you set up self-managed fund. Look, thereï¿½s no hard and fast rule when everybody has their own opinion, but certainly depending on the complexity, the purpose and the structure of a self-managed fund, whether it's a corporate trustee or public trustee or indeed if the purpose of the self-managed fund is to acquire direct property through - borrowing through an instalment loan, the set up cost can become quite material and expensive, and indeed if a fund is typically worth less than $250,000, the additional accounting, audit and legal fees, generally make it more expensive than a public offer fund. So, as a general rule of thumb, about $250,000.
St. Anne: David, thanks so much for your insights today.
Simon: My pleasure, thank you.