With Valentine’s Day on our minds, there’s one romance we should acknowledge – our love affair with Self-Managed Super Funds (SMSFs).
There are now around 600,000 SMSFs in Australia with an average of two persons per fund. With a workforce of around 12 million people that means nearly 10 per cent have their super in a SMSF.
When most people think of SMSFs, they invariably have visions of a grey-haired older couple looking forward to their retirement. Rarely do we imagine younger people in their forties, thirties and dare I say it – twenties. However, that perception is no longer the reality if recent ATO statistics on SMSFs are any indication.
In the latest ATO quarterly report, it states that over the past five years the number of SMSFs has grown 31 per cent. In fact, SMSFs now account for close to 30 per cent of all of Australia’s $2.1 trillion in superannuation assets.
Although the bulk of SMSF members (80 per cent) are still aged 45 and over, there is a growing trend of new funds being established by those aged 25 to 45. In addition, the average age is dropping each year with the ATO revealing the average and median age of members of newly established funds over the five years declined from approximately 54 years to 49 years.
This begs the natural question – why?
Firstly, it is clear that in prior years the financial planning industry has not covered itself in glory, with a series of collapses, debacles, perceived high fees, and complaints of vested interest. In a nutshell, the industry lost the trust of a large part of the population, including those with super – no matter what age.
Secondly, there is a perception that “DIY’ers” can invest their funds just as well as fund managers. This perception may not be the reality, but it is likely driving some of the decision making. In my dealings with younger generations, there is also a mindset of being “bullet proof” and “even if I lose my money, I still have time to re-build it before I retire.”
A further reason for the increase could be that we now live in a digital age, a world in which Gen Xs and Ys have grown up in. As such, the ability to go it alone is much easier now than it was for baby boomers. However, while information is more readily available, information is not the same as wisdom. Baby boomers tended to rely on the wisdom of their traditional trusted adviser.
What are the factors influencing this shift?
There may be any one of a number of reasons why people wish to establish their own SMSF.
The desire to buy a property through an SMSF is one potential reason by rolling over their super from their existing industry or retail fund into their own SMSF. However, it is important to bear in mind that there are strict rules governing what you can do with your SMSF. For example, you can’t buy a beach house or ski chalet and then use it for private purposes.
Another reason someone might look to establish their own SMSF could be to develop a share portfolio. Most publicly listed companies pay dividends and these will generally be franked dividends, meaning tax has been paid by the company at the rate of 30 per cent. Super funds are only taxed at 15 per cent, so the balance of the franking credits are available as a tax refund to the fund or can be used to offset other tax payable by the fund.
However, there are potential traps to be aware of for those setting up their own fund. Important restrictions to be aware of include:
- Limits on amounts that can be contributed to the fund
- Restrictions on investments in related parties (called in-house assets)
- Restrictions on acquiring assets from members or associates
- Restrictions on borrowings of the fund
With significant penalties for breaching the super laws, it’s worth seeking professional advice before setting up your own SMSF.
Grant Field, Director, MGI South QLD and Executive Chairman, MGI Australasia
