Australia’s booming self-managed super fund (SMSF) sector shows no signs of slowing – it’s the fastest growing sector of the Australian super industry, and in dollar value equates to three times that of New Zealand’s gross domestic product.
There are currently over 500,000 SMSFs holding a staggering $539 billion in assets, according to the latest Australian Taxation Office (ATO) figures. This makes SMSFs a significant investment player - making up a weighty portion of the $1.6 trillion currently sitting in superannuation.
The latest ATO figures show Australians are now, more than ever, choosing to manage their own personal investments through SMSFs.
James Austin, CFO of market-leading Australian financial services provider Firstmac Limited, said, “Many people appreciate the flexibility and control SMSFs offer for investing directly into residential or commercial property and the opportunities for gearing.”
“This was particularly evident during historic periods of stock market volatility when super fund balances were in decline and investors sought greater control over decision-making.”
What’s the attraction?
“SMSFs provide a way to invest differently than is generally available through a larger, managed fund. They can achieve lower costs than many large super funds and offer the ability to effectively manage or eliminate Capital Gains Tax (CGT),” Austin said.
“Through a SMSF, people can often purchase assets they could not afford otherwise. Up to four people, commonly family members, can pool their resources. It also allows for greater flexibility in estate planning.”
Austin said the government incentives and tax breaks are also attractive, in particular for small and medium enterprises (SME).
“SMSFs hold particular appeal among SME owners as a way to hold their business premises for tax advantage, asset protection, succession planning in family enterprises, and security of tenancy. Self-management also allows for rapid sale or purchase of assets and the ability to change asset allocation of portfolios,” he said.
The government currently offers a number of SMSFs incentives including a 15 percent tax rate for accumulating assets, no tax on the earnings of assets generating a pension and in most Australian states they also offer stamp duty concessions.
But Austin warned despite the advantages, SMSFs aren’t without their disadvantages or risks.
“They can be time consuming and require a level of investment knowledge that cover at least the basics of sound financial management including the mechanics of the stock and property markets, and economic influencers,” he advised.
“There are penalties for non-compliance so people establishing a SMSF also need to familiarise themselves with their legal obligations.
“There is also a risk of poor diversity as, commonly, SMSFs are established with the aim of purchasing a single valuable asset, such as commercial real estate. This could leave the fund exposed should this market sector experience a sharp decline. Also, SMSFs with a small balance can attract more expensive fees than those of larger managed funds.”
Arian Neiron, Managing Director of Market Vectors Australia, also points out that SMSFs should take action to avoid poor real returns on cash investment which represent almost 30 percent of all SMSF assets.
"SMSFs should consider diversifying their investments with ETFs (exchange traded funds) to build their wealth over time, rather than seeing the value of their cash eroded by tax and inflation," he said.
If you are considering managing your own investments through superannuation you should consult an industry expert for advice, as well as conduct your own research to see if it’s the right investment option for you.