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1. A Self Managed Super Fund Can Borrow to Invest in Property
One of the significant advantages of a Self Managed Super Fund (SMSF) is the ability to borrow money to invest in property. This feature allows SMSF members to purchase large single assets, such as commercial properties, which might otherwise be beyond their financial reach. For instance, a couple with a combined SMSF balance of $200,000 can use a limited recourse loan to buy an investment property worth $400,000. Typically, these loans can cover up to 60%-70% of the property’s purchase price, excluding additional costs like legal fees and stamp duty.
However, there are important rules to consider. Residential investment properties bought through an SMSF cannot be occupied by the trustees or their relatives. Additionally, borrowed funds can only be used for property maintenance, not improvements. This means you cannot purchase a “renovator’s dream” or an empty block of land with plans to build later. The same restriction applies to development sites or properties intended for knock-down rebuilds. Understanding these rules is crucial to making informed investment decisions within your SMSF.
2. Tax Minimisation
A Self Managed Super Fund offers unparalleled flexibility in managing contributions, the timing of these contributions, and allocating earnings to specific members. This flexibility allows trustees and their advisors to strategically minimize the overall tax paid within the fund. By tailoring contributions and distributions to the unique circumstances of SMSF members, significant tax savings can be achieved. This level of customization is not possible in public offer or pooled superannuation funds, where individual circumstances are not considered.
In a large superannuation fund, decisions made by the trustee can negatively impact your tax position, and you have no control over these decisions. In contrast, an SMSF allows for personalized tax planning strategies that align with your financial goals. This can include making the most of concessional and non-concessional contributions, utilizing reserves, and timing pension payments to optimize tax outcomes. By leveraging the flexibility of an SMSF, you can ensure that your retirement savings are managed in the most tax-efficient manner possible.
3. Tax Control
With a Self Managed Super Fund, you have greater control over your tax liabilities. This control extends to timing pensions and structuring investments to take advantage of concessional tax treatments, such as targeting franking credits. For many retirees, this can result in tax refunds from the ATO for any excess credits. The ability to manage taxable liabilities within the fund is a significant advantage, especially when the fund includes members in different tax environments.
For example, if your SMSF has members who are retired and paying 0% tax, you can allocate earnings from members who are still working and in a 15% tax environment. This strategic allocation can reduce the overall tax burden on the fund. Additionally, having a single tax return for the fund, despite multiple members and pension accounts, simplifies tax management and enhances the ability to implement effective tax strategies. This level of tax control is a powerful benefit of managing your retirement savings through an SMSF.
4. Pay for Your Life Insurance Through Your SMSF
Another significant benefit of a Self Managed Super Fund is the ability to pay for personal insurance cover through the fund. This includes life insurance, total and permanent disability (TPD) insurance, and income protection insurance. While many industry or retail super funds offer group insurance, these policies are often not tailored to individual needs and can be reduced or canceled without your consent. In contrast, personal insurance policies obtained through an SMSF are “guaranteed renewable,” meaning the insurer must continue coverage as long as premiums are paid.
Your insurance needs are highly personal and should be based on factors such as age, family structure, income, cash flow requirements, debt levels, and assets. A qualified financial planner can assess your insurance requirements and recommend the appropriate cover levels, premium structures, and policy options. By paying for your insurance through your SMSF, you can ensure that your coverage is tailored to your specific needs and provides adequate protection for you and your family. This personalized approach to insurance is another compelling reason to consider managing your retirement savings through an SMSF.
Read more on self managed super funds from the ATO.
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