Executive Summary:
In the following discussion which we sourced from credible resources, we believe that it was the advantages offered by SMSF as well as the legislative changes introduced by the Australian government that has increased the attractiveness of SMSF over the decade. Most importantly, it is the increased accessibility and attractiveness of the property investment through SMSF that has worked as the growth factor for SMSF. The latest survey relating to SMSF structure also suggest that during the recent years, more and more younger individuals have joined SMSF because of its flexible features to invest in real estate and allowance to borrow from within the superannuation funds. Hence, with younger age individuals likely to join the work-force in the recent years, we can expect the participation in SMSF to continue to increase.
Introduction:
Self-Managed Superannuation fund (SMSF) is just like any other superannuation fund but with great advantages as it can offer members with the greater control over their retirement savings than the other superannuation funds as retail super funds and industry super funds. In other words, it is just like a superannuation fund that is managed privately by its members. Another major difference between SMSF’s and other superannuation funds is that the former’s members are also the trustees of the funds, hence the members run the fund for their benefit of all the members as a whole or if any member dies before retirement, the fund must also work for the benefit of the deceased member’s beneficiary. Some of the primary requirements of setting up the Self-managed superannuation funds are:
- The fund should be constituted with less than 5 members in total.
- Each member of the fund should also be designated as the trustee of the SMSF and vice-versa, each trustee should also be designated to be the member of the fund.
- No trustee of the fund will receive any sort of remuneration from the fund for their services.
- There should not be any employee-employer relationship between two fund members, unless they are related.
Growth in Self-managed Superannuation Funds(SMSF’s):
Over the recent years, there has been a significant growth in the amount of Self-Managed Superannuation funds being created in Australia. This can be validated from the fact that by the end of July, 2013, out of the total assets held under all the superannuation funds, around $500 billion, i.e., 1/3 rd of the total amount of superannuation funds was sourced from SMSF. Interestingly, this amount also constituted of around 30% of the relative GDP of Australian economy. The graph below also indicates the tremendous growth in SMSF recorded over the last decade:
Reasons for growth in SMSF’s:
As for the reasons for growth in SMSF’s amount over a decade, the same can be attributed towards the advantages offered by the fund and also the legislative changes that fostered this growth and the same are discussed below:
i)Growing balances in superannuation funds:
One of the primary reasons for the growth in the SMSF’s is the growing amount of balances in the superannuation funds. Important to note, during 1992, the Australian federal government made it compulsory for all the employees to contribute a portion of their income towards superannuation funds via Superannuation Guarantee Charge(SGC). Hence, over the last 22 years, the majority of working professionals in Australia have been accumulating the superannuation balances. In addition, during the past few years, the Australian Government has also proposed to increase the SGC from 9% to 12% that has also resulted in the increase of superannuation balances as indicated by the data below:
ii) Advantages offered by SMSF:
(i) Greater control over retirement savings: With SMSF allowing high flexibility over developing own investment strategy and decision over when to buy or sell the individual investments, an investor enjoys greater control over the retirement savings.
ii) Lower fees and high tax advantages: In comparison to other super funds such as retail and industry funds, SMSF’s allows for high tax advantages and lower annual fees
(iii) Wide choice of investment options: SMSF offers wide number of investment options to the investors with the list including:
- Corporate Bonds
- Listed Shares
- Listed Investment Choices
- Exchange Traded Funds
- Real Estate
iii) Favorable legislative changes:
In addition to the advantages offered by Self-Managed superannuation funds in the form of control and flexibility offered, even the legislative changes has played an important part in the growth of the funds volume over the years:
i)Choice of Funds- This was the very first legislative changes introduced during July 2005 that allowed the Australian investors to select as to which superannuation fund their employer’s superannuation guarantee contributions are paid into.
ii) Simplified Superannuation- Another legislation that was introduced during July 2007, offered another advantage in the form of waiver for the members of SMSF who are 60 years or older from tax payment liability on the retirement benefits earned through superannuation funds. In addition, this legislation also allowed the individuals to contribute $1 Million in after-tax contributions. This factor alone resulted in significant contribution to the SMSF during 2006-2007.
Works Cited
Dixon Advisory and Superannuation Services Ltd. (n.d.). What is Self-Managed Super Fund. Retrieved October 1, 2014, from http://www.dixon.com.au/knowledge-centre/self-managed-super-funds/what-is-a-self-managed-super-fund
Vertical Financial Solutions. (n.d.). The Rise of Self Managed Superannuation Funds. Retrieved October 1, 2014, from http://verticalfinancialsolutions.com/self-managed-super-funds/the-rise-of-self-managed-superannuation-funds/
