The other day, in response to a blog of mine, I received an email from an accountant; he said “I think the sole purpose of a SMSF is to minimize tax. There would not be SMSF’s, if there were no tax advantages”.
That got me asking, what is the rationale for establishing a client SMSF?
What Tax Benefits?
- Superannuation contributions, up to a certain amount, currently $35,000 pa, can be tax deductible to the employer
- Where a fund is in Accumulation Mode – then earnings of superannuation funds are taxed at a maximum of 15%.
- Where a fund is in Pension Mode, then there is no tax on earnings on pension capital.
- When a fund pays a pension to a member over 60, that amount is received free of tax.
If there were no tax benefits with SMSFs, would advisors still establish them for clients? I started some lists.
Reasons for establishing a SMSF, assuming no tax benefits
- A SMSF ensures client funds are put aside on a regular basis, so as to build up monies outside the client business
Benefit => Asset Diversification
- Over time clients see the benefit of paying themselves a reasonable salary and putting aside superannuation monies. This focusses their mind on ensuring the business profitability is sufficient to allow for the salary and superannuation.
Benefit => Focus On Business Viability
- The monies put aside into SMSF are separated out and, in most cases, cannot be attacked by creditors, liquidators, banks, etc. They are protected, should the worst happen at some later time and the business fail, this money is not attacked.
Benefit => Asset Protection
- Continuing to put aside extra profits, indicates a successful business and should make it easier to sell at a later time.
Benefit => Asset Protection
- By using a SMSF, trustees are able to ensure their own, or at least better, control over their investments
Benefit => Asset Control
- A SMSF is a good vehicle for estate planning purposes
Benefit => Control Over Estate Planning
- Trustees of a SMSF can exercise greater choice about investments, compared with a SMSF managed by a wealth management company
Benefit => Greater Investment Control & Choice
- Generally investments selected by the trustees will attract a lower cost than those invested by a retail investment manager.
Benefit => Cost Control & Larger Retirement Savings
- It is possible to arrange more flexible insurance arrangements within a SMSF
Benefit => Increased Insurance Choices
WHAT IS THE PURPOSE OF YOUR SMSF’s?
In my most recent article, I said I believe the purpose of a SMSF is to provide retirement benefits to members. If that is able to be done tax effectively, then clients benefit twice over.
I caution against suggesting a SMSF be set up only for the purpose of tax benefits. There are many other benefits.
© David Saul
David was among the first professionals to be accredited through SPAA as an SMSF Specialist Advisor™. He is also a Chartered Accountant and holds a Bachelor of Financial Administration from the University of New England, Armidale NSW.