The Amazing Growth of the SMSF

SMSF Growth

Back in 1995, Self Managed Super Funds (SMSFs) made up less than 8% of superannuation industry assets. But a swag of appealing characteristics has sent their market share soaring.

The growth in self-managed super funds has been spectacular over the past 19 years. In all important areas – assets under management, membership growth, number of funds and average account balance – SMSFs are thrashing the professionals.

In 1994, there were about 80,000 SMSFs in Australia, with about $11 billion in assets. ATO data shows that in September 2012, there were 478,000 SMSFs, with 913,550 members and a total of $439 billion in assets. That’s almost one-third of the $1.4 trillion Australians have socked away for retirement.

The remarkable growth of SMSFs shows no sign of slowing. Australians are now pouring $26.5 billion into SMSFs every year – that’s just over $500 million into SMSFs every week.

What is driving the growth of the self-managed super fund sector now? With SMSFs typically set up by people approaching retirement, Australia’s large baby boomer generation is having an obvious impact. However, Tax Office figures also point to a noticeable increase in people under 45 joining small funds.

As the following list makes clear, there’s not one simple explanation for the growth of self-managed super funds.

But for both young and old Australians, the appeal of having their retirement fate in their own hands is undeniable.

1. Control

An SMSF gives investors the ability to apply the same principles to their retirement assets as they apply to their own home.

2. Avoiding larger organisations’ performance problems

When super fund investment returns are poor over an extended period, many people decide they can run their own fund and achieve returns that will either be much better or just as good as the professionals. Poor service delivery, inaccurate record keeping and a range of other issues also cause reputational damage to large organisations.

3. Solving transactional problems throughout a financial year

Large super funds must record and reconcile all transactions daily. SMSFs don’t have this requirement, giving them a level of flexibility that large funds will never match.

4. Speaking directly to the administrator

SMSFs are predominantly administered by small accounting practices, which means it’s often easier to contact the person with an appropriate level of authority to solve the issues at hand. Moreover, problems can often be solved immediately.

5. Data security

From time to time, concerns are expressed about the data security of larger organisations, especially if administration functions are performed in foreign jurisdictions.

6. Transactional tax and structural benefits

Most states and territories offer some stamp duty concessions involving SMSFs (NSW offers the most potent and easiest to access concessions). These concessions provide an avenue to readjust their personal and business balance sheets using all or a combination of these duty concessions, CGT small business concessions and their specific contribution caps and limited recourse borrowing arrangements.

7. Desire to fund retirement using specific assets

Some SMSF investors want to fund their retirement using assets that aren’t available in large funds. These include specific residential properties, collectibles, derivatives and limited recourse borrowing arrangements.

8. Property development opportunities

Property developers and spruikers increasingly suggest an investor finds a property they’d like to live in during their retirement, pay SMSF money as a deposit and complete the transaction with a limited recourse borrowing arrangement. Upon retirement, they commence a pension in their SMSF, sell their current family home and purchase the property in their SMSF. The sale of the SMSF-held property is CGT free because the super fund is in the pension phase, and the process releases cash for retirement.

9. Estate planning

SMSFs typically provide a better estate planning vehicle than large super funds. Good examples include the ability to provide pensions for minors and quicker turnaround in benefit payments (the claim-staking process is often simpler).

10. Tax transparency

The transactions that take place in an SMSF are highly transparent. It’s possible to directly see the impact of franking credits, CGT and other tax impacts.

11. Tax management

Some SMSF investors are attracted by the incorrect perception that only their own fund will allow them to benefit from franking credits. But others see a real advantage in the state-based property tax concessions available to SMSFs.

12. Limited recourse borrowing arrangements

An increasing number of investors are attracted to SMSFs because limited recourse borrowing arrangements allow an investor to have more money invested in super. The borrowing arrangements can sometimes effectively allow an investor to work around the contribution caps.

13. Pension transaction transparency

All large super funds use unitised investments to provide pensions. This creates a large number of problems that don’t arise in SMSFs, because SMSFs must value assets at market value each balance date (that is, once per year); nearly all SMSFs aren’t unitised; and SMSFs can pay their pension members the actual income earned on their investments.
Article provided courtesy of Institute of Public Accountants.

Contact A Grade Tax Accountants Penrith on (02) 4731-1405 for taxation advice regarding Self Managed Super Funds.

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