SMSF

SMSFs Are On The Rise – But Why?

Compulsory superannuation for employers was introduced in 1991.  Since then, the pool of funds in Super has been growing steadily bigger and of June 2022 there was $3.3 trillion invested in Super.

Of this pool, the Self Managed Super Fund sector makes up a significant portion.  As at June 2022, there were 601,432 SMSFs in Australia with a total of 1.1 million members. This represents less than 5% of the population, but they have $869 billion in assets, or about 26% of the total invested in Super.

We had seen inquiries about Self Managed Super drop over the past decade due to increased regulation and potential legal and investing complexities. However, there has been renewed interest in the last couple of years from an increasingly younger demographic.

This is highlighted by recent ATO data which shows about 44 per cent of savers starting an SMSF are aged under 45 years, with about one-third of new members aged between 35 and 45 years.  With the growth in their super balances, this younger cohort are starting to realise there is real money involved and they want to have greater control.

Compulsory super contributions of at least 11 per cent are contributing to sizeable balances after about a decade of work and increasing awareness of retirement wealth and investing compared to earlier generations.

This group is growing much richer than earlier generations as they become middle-aged, particularly for couples who pool their investment savings.  They are looking to use a self-managed superannuation fund for their retirement savings while adding to a separate portfolio of assets outside of super when investment opportunities arise.

We think SMSFs are great investment vehicles with their significant tax advantages.  There are strict rules in place for running them and they are not for everyone.

Here are some pros and cons:

PROS

  • Better flexibility and control with an SMSF
  • Reduced costs for larger SMSF funds
  • Greater access to investment options
  • The tax benefits of SMSFs
  • You can share a SMSF fund with family members
  • Flexible estate planning

CONS

  • Duties & responsibilities of being a trustee
  • Can be time consuming
  • Financial & legal risk in SMSF decision making
  • SMSFs aren’t eligible for government compensation schemes
  • Additional expenses in low value funds
  • Living overseas can affect your SMSF

If you like to know more about SMSFs and what they can offer, give us a call.  We cannot advise on whether they are right or wrong for your personal situation, but we can give you the low down so you can make an informed decision.

Super-death-tax

Super Problems After Death

It’s vital to think about what happens to your super when you die.  Few Australians realise the government will come for their superannuation savings when they die. The recently bereaved find themselves holding a massive surprise bill to the government because their parents or partners didn’t know they needed to plan for death to avoid tax.

The first thing to realise is that Superannuation is treated differently in law from the rest of a person’s assets, and you need to think about it separately.

Contrary to popular belief, your Will does not determine who is to receive your superannuation in the event you were to pass away.

Unless you provide your superfund with a binding death benefit nomination, the trustee of your super fund will decide who receives your super in the event of your death, which will be based on your relationships and eligible superannuation dependents at the time of your death.

A binding death benefit nomination for your Superannuation dictates to the Trustee who you would like your super to be paid to if you pass away.   The binding nature of this type of nomination leaves your super fund with no discretion. That is, they must pay your remaining super balance exactly as stated in your nomination.

A couple of things to watch out for:

  1. Make sure you sign a binding, as opposed to non-binding nomination, because that way the fund trustees will have to comply with it.
  2. Think about signing a non-lapsing binding nomination as it will last until you change it. The lapsing variety expires after three years. 

Who Can My Super Be Paid to?

If you die, your superannuation can only be paid to a limited number of people. These types of people are defined as dependants under superannuation legislation.

Specifically, a superannuation dependant includes:

  • Your spouse or de facto spouse
  • Your child of any age
  • A person who was in an interdependency relationship with you at the time of your death

An interdependency relationship is defined as a close personal relationship between two people who live together, where one or both of you provide financial, domestic or personal support to the other.

If you do not have any superannuation dependants, or would like your superannuation to be paid to someone who is not a superannuation dependant, you will need to nominate for your super to be paid to your Legal Personal Representative / Estate. This way, your superannuation is then combined with all of your personal assets and distributed in accordance with your Will. 

Super death payments and tax

Super money left directly to dependents via a nomination or a decision by trustees is not taxed.

Dependents, according to the Australian Taxation Office, include children under 18, current and ex spouses and de factos, and others you have been financially supporting.

Children under 25 who are students or dependents are also not taxed on super death payments.

Grandchildren are not considered dependents unless there is some special circumstance like disability.

As a generalisation, for anyone who is not a dependent (this includes adult children), the ATO will take 15 per cent of the payout plus the Medicare levy, effectively making it 17 per cent.

There are extra complications here.

There are taxable and tax-free components to superannuation. Taxable components relate to concessional super contributions entering the fund.  That means any money put in the fund through super guarantee payments made by your boss, salary sacrifice or personal concessional taxable contributions that were only taxed at 15 per cent on the way in.

Those taxable contributions and the earnings on those contributions will be taxed at 17 per cent when paid to a non-dependent.

If the deceased was a public sector employee, then potentially the contributions could be taxed at 32%.

What avoids the tax?

Non-taxable contributions include any payments you made to your fund that did not have a tax deduction attached. These include non-concessional one-off payments including downsizer contributions made on the sale of the family home.

These are not taxed on the way out of super because the ATO considers you must have paid tax on the money before you put it in.

If your super is made up of concessional and non-concessional payments your fund will have a record of how much of your balance is in both categories so look at your annual statement for details.

Earnings in the fund are allocated to concessional and non-concessional payments, according to the ratio of both balance types.

Re-contribution strategy

If you are approaching retirement, you can look at a withdrawal and re-contribution strategy.  The fund member withdraws the maximum yearly amount and immediately deposits it again as a contribution. By consistently withdrawing funds from both components and re-depositing them, retirees can slowly alter the ratio of their super fund and leave less of a tax obligation for any nominated beneficiary.

I know all this can be very confusing, so don’t hesitate to reach out to us if you wish to know more.