Self Managed Super Funds (SMSFs) continue to grow in popularity. What is the large appeal that prompts so many people to go their own way despite all of the obligations and responsibilities of being a trustee – and being regulated by the Tax Office? The answer is not simple because self-managing your super appeals in various ways to many different types of people. Here we discuss some of the many attractions of taking control of your own super.
Allocated pensions and capital gains tax
Super funds in the accumulation stage are taxed at a maximum of 15% on assessable income and are effectively taxed at a maximum of 10% on capital gains. In a SMSF, you as trustee decide when to buy and sell assets and therefore you have control over your tax liability, particularly capital gains.
Allocated pensions have become very popular in the last decade because the investment returns from assets backing the pension are tax-free and the pension income is concessionally taxed. In addition, you can make lump sum drawdowns and always retain control of your money.
In a SMSF you can switch from accumulation stage to retirement income stage relatively easily. There may be no need to liquidate assets to make the change unlike the arrangement required in many public offer funds. If you sell assets in the pension stage any capital gains are tax-free.
Consider Frank and Rosemary – they have a beachfront property in their SMSF. It was bought for $300,000 and is now valued at $500,000. If they sold it in the accumulation stage the capital gain would be taxable – a potential liability of $20,000 (10% x $200,000 gain). If they retain it until they are in the pension stage there will be no tax liability.
Income tax considerations
For those aged over 60, regular income payments and lump sum withdrawals are tax-free. For those under 60 allocated pension payments are taxed at normal income tax rates however a 15% tax rebate is generally available.
Some public offer and employer super funds are becoming more flexible but SMSFs provide the ultimate in flexibility and control ensuring the rewards come to you. But as with anything to do with managing your finances, always seek professional advice before you make a final decision.
Australian Tax Office website: www.ato.gov.au