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SMSF market hits $539 billion

SMSF market hits $539 billion

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.

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When you lodge your income tax returns, you must include in the documentation all your sources of income, including bank interest. Your bank will report any interest you earn on the funds in your savings account to the Australian Tax Office (ATO). When the ATO then compares this information with your tax returns,  you also need to have mentioned the interest earned. If there is any discrepancy, you’ll receive a letter from the ATO. 

Avoid this situation by ensuring you receive your bank statement with interest noted. Then declare the interest in your tax returns and pay the tax that’s applicable based on the income tax rate.

You only need to claim your share of the interest earned for joint accounts. If you manage an account for your child and receive or spend money via this account, you will also need to report any interest earned from said account.

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The type of interest savings accounts accrues is called compound interest. Compound interest is interest paid on the initial deposit amount, as well as the accumulated interest on money you have. This is different from simple interest where interest is paid at the end of a specified term. Compound interest allows you to earn interest on interest at a higher frequency. 

Example: John deposits $10,000 into a savings account with an interest rate of 5 per cent that he leaves untouched for 10 years. At the end of the first year he will have $10,512 in savings. After ten years, he will have saved $16,470.

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When you apply to open a new savings account, some providers may conduct a credit check, meaning that they will ask a credit bureau for your credit history. This isn’t always the case on savings accounts though and depends on the provider, as you aren’t borrowing money. 

As you are opening a savings account and not borrowing funds, this credit check is considered a soft inquiry and should not affect your credit score. If the bank has run the credit check, you can often still open a savings account even if you have a poor score, provided you meet other requirements. 

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If you have trouble saving money, a Commbank locked savings account could be a potential solution. A locked savings account won’t let you make withdrawals and as such, it can help you grow your savings balance if you keep topping it up. 

The Commonwealth locked savings account advertises high-interest rates and minimal maintenance fees, along with a host of other incentives that will encourage you not to touch the money. 

The account offers a higher interest rate for each month that you make limited or no withdrawals, as well as regular deposits. 

To qualify for a Commonwealth locked savings account with the advertised features, you will need to fulfil specific criteria such as:

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