Exposing the myths about SMSFs
Given their popularity in recent years, the extent of misinformation about SMSFs is staggering.
Following is a list of some of the misconceptions surrounding SMSFs:
1. They are a more economical alternative to “public offer” funds.
Given the requirement for the preparation of an annual set of financial accounts, an annual income tax return, audit certificate and, where applicable, actuarial certificates and asset valuations, the SMSF typically only becomes cheaper than the alternatives with a substantial account balance, and, even then, not always.
2. SMSF trustees must have extensive knowledge of investment markets.
While it is a requirement of SMSF regulations that trustees are ultimately responsible for all decisions they make with respect to their SMSF, there is no greater need for them to have a substantial "knowledge bank" than any other super fund member, inasmuch as the input of professional advisers can be sought just as readily in either circumstance. You don’t need to qualify as a mechanic to own a car!
3. An SMSF is an effective way to improve the performance of your super.
While it may be true that the performance of the "average" super fund is, generally, uninspiring, active management of the composition of your super fund assets is just as effective in the public offer space as with an SMSF. The amateur who expects to beat the professional is ambitious at best and delusional at worst. While nobody wants “average” performance, proper professional assistance in constructing and maintaining a superannuation portfolio will assure returns exceed the “average” by a comfortable margin.
4. You need an SMSF if you want to buy direct shares.
This is, perhaps, the most widely-held misconception regarding SMSFs. While this may have been true in years gone by, today many good super funds will allow members to choose from an extensive range of ASX-listed securities, some giving full ASX access. Admittedly, management of CGT implications and corporate actions become problematic under these structures. Nevertheless, it is questionable whether these advantages outweigh the additional costs of the SMSF structure.
5. You must have a minimum balance to justify the expense of establishing and maintaining an SMSF.
If the strategy you wish to undertake with your superannuation assets can only be achieved via an SMSF, then you must have an SMSF to adopt this strategy. Having made that decision, the only relevant consideration is whether you have sufficient capital to undertake the desired strategy. In and of itself, there is no "minimum balance" that predetermines the feasibility of an SMSF.
When an SMSF is appropriate:
In essence, the issues are relatively simple: if you wish to do something with your super that you can only do in an SMSF, then you simply must have one. If what you want to achieve can be done other than through an SMSF, why go through the hassle and expense of creating and maintaining one?
So, what things can you only do with an SMSF?
1. Sell an asset to a member;
2. Buy an asset from a member;
3. Invest in direct real estate;
4. Borrow money.
5. Share ownership of an asset with another super fund member.
Thus, if you wish to embark on any or all of the above strategies, you need to have a self-managed super fund to do so. In this case, the only way in which account balance becomes a relevant consideration is to determine if you have sufficient assets in superannuation to successfully undertake the desired strategy, as opposed to whether or not you have enough super to have an SMSF, an issue often raised by other commentators.
In reference to the myth that you need an SMSF to buy and sell shares, admittedly, doing so via a public offer fund limits your capacity to manage capital gains tax implications and control corporate actions. However, it is academic as to whether the value of these “benefits” justifies the expense and other obligations necessary for the maintenance of an SMSF.
In summary, if you think you want or need an SMSF to achieve your objectives with your superannuation, seek professional advice to determine if it is, in fact, necessary for those objectives.
Furthermore, if an SMSF is recommended to you, ask what it is about an SMSF that leads to the recommendation. In short, if you’re going to establish an SMSF, make sure you’re doing it for the right reasons.
Wayne Leggett is principal at Paramount Financial Services Group.