What is a self managed super fund (SMSF)?
Self Managed Super Funds are funds established for a small number of individuals (fewer than 5) and regulated by the Australian Taxation Office. Generally the Trustees of the fund are the fund members (where there is a Corporate Trustee, the members are the directors of that company). This is now the largest segment of the superannuation industry by value.
How does Superannuation generally work in Australia?
Most superannuation is concessionally taxed at a flat rate of 15% at two main points: on contributions, and on earnings. Contributions either in the form of employer superannuation payments, or member salary sacrifice, are taxed at this rate.
In most industry funds, the earnings tax is paid before profits are disbursed to members so it appears as a lower level of interest on the member’s statement. Members can also contribute funds into their super after income tax has been paid on it; in this case they are not liable for 15% contributions tax and may be eligible to receive a matching contribution from the government depending on income.
These taxes contribute over $6 billion in annual government revenue. Superannuation is a tax-advantaged method of saving as the 15% tax rate on contributions is lower than the rate an employee would have paid if they received the money as income. The Federal government announced in its 2006/07 budget that from 1 July 2007, Australians over the age of 60 will face no taxes on withdrawing monies out of their superannuation fund if it is from a taxed source.
In 1996, the federal government imposed an extra ‘superannuation surcharge’ on higher income earners as a temporary levy to raise revenue. As part of the 2001 election campaign, the government promised to reduce the surcharge from 15% to 10.5% over three years. The superannuation surcharge was eventually scrapped in the 2005/06 budget, and has been abolished since 1 July 2005.
From 1 January 2006, the government has allowed the splitting of contributions with a spouse. This allows a couple, who are members of superannuation funds, to split their contributions — personal and employer — evenly. They can thus reduce the risk of exceeding their reasonable benefit limits and therefore reduce their chances of paying a higher rate of tax on their retirement savings. Since the reasonable benefits limit have been removed – 2007 legislation – it is no longer necessary to split contributions expressly for this reason.
Why a self managed super fund?
Some benefits of a SMSF include: