Advantages

Members of a SMSF generally have greater control over how their superannuation death benefits will be distributed. Members can put in place a Binding Death Benefit Nomination directing the trustees of the fund as to how to pay the members death benefit. If no Binding Death Benefit Nomination exists for the member the trustees will be required to pay the death benefit in accordance with the rules in the fund’s trust deed.

This level of control assists members to ensure their death benefits are paid in accordance with their wishes. It also allows them to have their benefit to be paid in the most tax effective way.

SMSFs are highly personalised and flexible retirement vehicles. There is no need for members to have to complete application forms, wait for them to get lost, complete more forms, wait for a response and then wait for their money to arrive some time later. As members are the trustees of the SMSF they are able to write them selves the cheques for their pension entitlements, meaning they have easier access and more control over the payment of their retirement benefit.

SMSF can pay out lump sums and may also be able to pay a variety of different types of pensions, subject to the trust deed.

SMSFs can also be used to provide for future generations through the distribution of fund reserves and the payment of reversionary pensions.

A SMSFs assets and income are taxed at lower rates than if the assets or income where in your own name. Generally a 15% tax rate applies to the income of a SMSF and capital gains are generally tax at 10% provided the assets have been held for at least one year.

When a SMSF starts a pension there is no tax payable on the income or capital gains on those assets relating to the pension.

Depending on your personal situation, holding investments in your own name you can potentially mean you pay the top marginal tax rate of 48.5% on all income and capital gains. A SMSF now allows you to hold those assets in a tax effective structure.

There is no CGT payable when transferring assets from accumulation phase to pension phase within a SMSF as both the legal and beneficial ownership of the asset has not changed. The assets can then be subsequently sold in the pension phase and no CGT would be payable as a nil tax rate applies to segregated pension assets. This applies regardless of how long the fund held the asset in the accumulation phase.

Most wholesale, retail, employer and industry super funds charge one or a combination of the following fees:

• Management expense ratio (MER) – Charged as a percentage of your total funds.
• Annual Administration Fee – Charged as a fixed fee or as a percentage of your total funds.
• Annual Member Fee – Usual charged as a fixed fee for being a member of the fund.
• Entry or Contribution fee – Charged on rollovers and some or all contributions into the fund. The fee is usually set as a percentage.
• Exit fee – Charged when a member wants to exit the fund and can be charged as a fixed fee or a percentage of the total fund.
• Withdrawal fees – A fee may apply every time a member wishes to withdraw their money from the fund. The fee is usually a fixed dollar amount.
• Investment switching fee – Charged for switching your investments. The fee is usually a percentage of your total fund.

An example:

Fund value: $500,000
Annual Administration Fee: 2.05%
Management expense ratio: 2.5%

Entry fee: 4%

Cost to enter the fund: $20,000

Ongoing costs:

• Annual Administration Fee: 10,250
• Management expense ratio: 12,500

A self managed superannuation fund can be operated at a much more cost effective level. The fees charged above are for each individual fund; in a SMSF you can have up to four members in the one fund.

On average, the cost to maintain an SMSF with a balance of $500,000 per member is fixed at approximately $3300 in total. This offers great value in comparison to some general and industry super funds.

A SMSF is forever lasting meaning it does not just benefit those who establish the fund but will also benefit their children and future generations as it passes from generation to generation.

In the event of bankruptcy a member is not allowed to be a trustee and structural changes need to be actioned for the period the member is bankrupt.

With the introduction of Choice of Super legislation from 1 July 2005, all eligible employees can choose the super fund to which their superannuation guarantee contributions are paid. This means your SMSF can be taken with you from employer to employer as your nominated fund through out your working life, meaning you no longer have multiple funds costing you time and money.

One way to rapidly build your super is through “in specie” contributions. A SMSF is allowed to accept undeducted in specie contributions, allowing members to contribute shares, other listed securities and commercial real estate in lieu of cash. This means you can transfer certain income producing assets from a high tax environment (eg 48.5%) to a low tax bracket (15%), along with the other benefits of holding assets within your SMSF.

You can also use the equity held in the family home or other assets to lend against. This money can then potentially be contributed to your superannuation or used to jointly buy other assets with your self managed superannuation fund.

A life insurance policy can be tax effectively structured within a SMSF. The premium is treated as a deductible expense. It provides a tax effective, quick and convenient way of distributing assets to dependants without going through the administration process of the Estate.