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SELF–MANAGED SUPERANNUATION
By Glenn Harris – Bishop Collins.
When using a Self-managed Superannuation Fund (SMSF) to assist in creating your wealth for retirement we would like to highlight the importance of having a strategy when investing. With an SMSF, as trustee, you are responsible for developing and implementing the investment strategy.
IMPORTANCE OF A CONSISTENT INVESTMENT STRATEGY
A strategy provides a pathway and focus when it comes to making important decisions on where to invest your hard-earned wealth. Not unlike a professional athlete, focus, a clear plan, and a consistent strategy is critical to success when it comes to investing and building wealth. If your pathway is unclear it is likely you will change strategy too frequently resulting in a poor long-term outcome.
Investors who attempt to ‘pick the market’ have very little room for error. Consider the following Morning Star analysis. Investors who stayed in the market for the last 20 years (or 5,035 trading days) achieved a compound annual return of 6.1%. However, that same investment would have returned 2.4% had the investor missed only the 10 best days of stock returns.
Further, missing the 50 best days would have produced a loss of 5.5%. Although the market has exhibited volatility, on a daily basis, over the long term, stock investors who stayed the course were rewarded. COMMERCIAL CONSIDERATIONS
Using your SMSF as your investment vehicle, offers numerous positive commercial outcomes. You will have full choice on individual investments. This may even include using gearing to acquire property or other investments. (e.g. Commercial property to be used by a related business). With this choice comes flexibility in changing investments depending on individual members circumstances including having members in both accumulation and pension.
Taxation is a significant benefit of having your investment portfolio in an SMSF. Investment income and gains will be taxed at 15% and discounted capital gains at an effective rate of 10%. When your account
balance is in pension phase your tax rate will drop to 0%.
The administration costs of an SMSF are fixed and not a percentage of the assets. This means as your fund grows the administration costs decrease. Also, an SMSF provides transparency in relation to administration and other costs. COMPLIANCE CONSIDERATIONS
Using an SMSF also has significant compliance considerations. As recently as February this year the ATO has provided further detailed guidance on what they expect to see from trustees of an SMSF regarding documented investment strategies. The days of a boiler plate ‘one size fits all’ template for an investment strategy is unlikely to make the grade. The ATO has provided this guidance clearly to SMSF auditors. A breach could possibly result in a penalty of $4,200 on each trustee.
The ATO is not a prudential regulator and will therefore not assess the merits of an SMSF investment strategy. However, the ATO will assess trustee compliance with the development and implementation of the investment strategy. A properly formulated investment strategy is also a strong defence for the trustees and advisers, should investments fail against potential actions that might be initiated by the ATO or others who have suffered a loss. l
Should you require any further information in relation to your superannuation savings journey or the benefits and responsibilities of operating an SMSF please contact Phil Keenan PhillipKeenan@bishopcollins.com.au or (02) 4353 2333.
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