The most commonly advanced benefits of SMSFs are:

Control

For most Australians, their superannuation account balance is one of the largest assets they hold. This gives rise to a natural desire to control it. As a trustee of an SMSF, an individual has a significant degree of control over their own retirement savings. That means they decide, within the constraints of the superannuation law and the governing rules of the SMSF, who can join the SMSF, where it will invest, how and when benefits will be paid etc.

Investment choice

All superannuation funds, both SMSFs and non-SMSFs, must follow the investment rules laid down in the superannuation law, the fund’s governing rules and the fund’s investment strategy. In general terms, the investment rules within the superannuation law are the same for all funds. However, the investment choices actually offered to members of non-SMSFs tend to be far more restrictive than those offered by and utilised by SMSFs.

For example, SMSFs could invest in the following provided the SMSF’s governing rules and investment strategy allow such an investment:

• term deposits, bonds, mortgages

• residential and commercial property, either directly or jointly via other entities

• initial public offerings (IPOs)

• collectables such as artwork

• gold and silver bullion

• shares in unlisted or overseas companies

Even where non-SMSFs offer a very wide choice of investments, there will sometimes be restrictions on the amount an individual member can invest in a particular asset or a particular asset class. For example, many non-SMSFs will not allow a single asset to account for more than 10-20% of the member’s total account balance. Some cap the amount that can be invested in a particular asset type (eg by saying the member can’t invest more than 80% in Australian shares).

Refer to 4. Investment rules for further details on the investment options available to SMSFs.

Borrowing

Under superannuation law, all superannuation funds are able to borrow to invest providing the fund’s governing rules allows the fund to do so, but generally only SMSFs take advantage of this opportunity. The rules applicable to borrowing in this way are quite restrictive but may nonetheless provide a valuable opportunity for some people when it comes to investing the assets that support their superannuation account balance. Refer to 4. Investment Rules for further details on the rules involved in borrowing within an SMSF.

Cost

Most fees in non-SMSFs are calculated as a percentage of the individual’s superannuation account balance, so as their account balance grows so does the dollar amount of their fees. In contrast, many of the fees associated with setting up and running an SMSF are fixed (ie completely unrelated to the size of the account balances within the SMSF), particularly the annual operating costs (eg preparation of financial statements, audit fees, ATO lodgement levy). This means that as the account balances within an SMSF grow, its fees as a percentage of those account balances, fall.

For SMSFs with more than one member, the cost effectiveness of an SMSF is also helped by the fact that the SMSF’s members are effectively combining their account balances when it comes to investing. This is useful for minimising costs when some investments have asset-based fees that fall (in percentage terms) as the amount invested increases. 

Generally, the greater the account balances, the more cost effective an SMSF can be. This is why SMSF members tend to be people with larger amounts in their superannuation account balances. The point at which it becomes more cost effective to have an SMSF will ultimately depend on the complexity of the SMSF’s investments, the structure of the account balances within the SMSF, how involved the trustees wish to be in the administration of the fund, and the tax and estate planning strategies employed by the trustees.

Flexibility

While all superannuation funds are subject to the same tax and estate planning rules, there are some benefits that non-SMSFs choose not to take advantage of because it is not practical for them to administer, requires expensive system changes or disadvantages other members.

SMSFs are also generally more flexible to operate, making many strategies easier to implement. Such strategies could include:

• the ability to have account balances in both accumulation and retirement pension phase in the same fund

• the ability for members to have multiple retirement phase pension accounts in the same fund

• the ability to commence transition to retirement income streams, and the ability for members to have more than one in the same fund

• the ability to claim a tax deduction for a contribution in one year but count it for contribution cap purposes in a following year

• splitting contributions with a spouse

• controlling the precise timing of contribution allocations, benefit payments and asset sales to optimise the tax position of the members and the SMSF

• controlling the allocation of reserves

• the ability to transfer assets in, and out of the fund, in-specie rather than selling the assets and making a cash transfer

• making death benefit nominations which are binding on the trustee and do not lapse with the passing of time or even making death benefit nominations that incorporate particular features that non-SMSFs choose not to offer

Longevity

An individual’s needs when it comes to saving for their retirement change over time – if for no other reason than their account balance grows and they start to take more interest in their superannuation.

An SMSF can change with its members.

A non-SMSF or large fund, however, has to make compromises and will usually be designed to suit the majority of members rather than every individual. For example, some funds are very deliberately designed to provide excellent value for money for those with small account balances. They are the perfect fund in which to start an individual’s superannuation savings journey. Over time, the member may wish to have more investment or insurance options, take advantage of new strategies or simply even appoint an adviser to help them manage their increasing wealth. Any of these could mean they need to change superannuation funds. Changing funds triggers costs – ranging from capital gains tax (when assets are sold), explicit costs associated with selling one set of assets and then buying new ones in a new fund or even simply the cost of being “out of the market” for a time while the change is put into effect.

In contrast, someone with an SMSF can change suppliers or adopt new strategies within their existing fund. Even if they do need to sell investments, this can be managed over time rather than abruptly as part of a move from one superannuation fund to another.