Why tax time is a great time to think about DIY super? Tax time is approaching and it’s a great time to think about setting up a DIY superannuation fund. Why not have hands-on control of one of your biggest investments.
Jonathan Younger is a successful entrepreneur, who started his SMSF five years ago:
“When my super got to a certain size, it made sense to go down this road. It gives me control over my own finances if it’s set up correctly. It’s tax effective and I get more flexibility. For example, my income protection insurance is paid for by my super.”
What is DIY super?
Also known as a self-managed super fund (SMSF), it allows you complete control over your super investments as a way of saving for your retirement. It performs the same role as a managed superannuation fund, but in the case of DIY Super, the members are also the trustees – you control the investment decisions of your contributions. As trustees, you are also responsible for running your fund within the law and reporting to the Australian Tax Office.
What makes DIY super worthwhile?
- A minimum of $200,000 to $250,000 to invest. Anything less can make the fund very expensive to run
- Some level of investment experience and understanding of investment strategy
- Time to manage the fund
- Discipline and understanding of what it is to be a trustee of the fund.
Advantages to managing your own super fund:
- Control – as trustee, you get to choose your own investments
- Flexibility – in choice of investments as part of your strategy
- Cost-effectiveness – DIY Super can be cheaper to run than managed funds if done well, but depends on factors like , how much you have to invest and how much professional advice and professional and administrative assistance you need; and
- Lower income tax investing in superannuation can offer tax advantages
Some ways DIY super lowers income tax
One of the benefits of superannuation and a DIY Super fund is the impact it can have on lowering your income tax. For example: Investment income earnings are taxed at a maximum rate of 15% rather than your marginal tax rate.
DIY super can also minimise capital gains tax on your investments and assets, so you may be able to integrate your share portfolio into the fund. While you won’t be able to access these funds until retirement, your ability to decide when to buy or sell these investments could help you minimise capital gains tax.
The tax treatment of the transfer of accumulated assets to the pension phase of a DIY super fund incurs no capital gains tax, as there is no change of legal or beneficial ownership. For example, Jim’s DIY super fund has owned an investment property for the past 10 years in its accumulation phase. Now it’s time to sell, but before he does this, he transfers the property over to the pension phase of his fund. Now when he goes to sell the property, it will be classified as a segregated current pension asset and his fund will not pay capital gains tax.
Five ways you can use DIY Super to maximise your return
Mark Howarth owns a thriving software services business and believes that, “That’s the goal – maximise return because the value of the portfolio directly translates into dollars in your pocket in retirement”.
Here are five simple ideas that with a bit of effort will help you get the most out of your DIY super fund:
1. Take control
As a trustee you will have control over the investments your fund makes. You will determine the investment strategy of the fund and choose which investments and/or assets the fund will acquire e.g. business owners often take advantage or the ability of the fund to purchase the business property and then lease that property back to it.
2. Get a great team together
“You need a good accountant and a good broker to get good advice. These people will help you make decisions,” says Younger, “I use a broker to handle my share trading and advise me”. “The statement I get at the end of the year is fully audited, which is a real benefit to me as it saves time when reporting to the ATO.”
Don’t be afraid to acquire the expertise and systems where it’s needed. There will be things to learn in the beginning, and experts can help save you from potential traps and pitfalls. Or as Mark Howarth puts it, “Don’t try to be Buffet and ending up as dufus!”.
3. Tax-concessional contributions
Maximise your tax-concessional contribution with a salary sacrifice and/or contribution splitting with a lower superannuated spouse that will save you tax.
4. Tracking contributions
Work with your accountant or administrator to keep abreast of how much you contribute. That way you can avoid paying heavy penalties that apply to excessive tax-concessional contributions (can be as high as 93 per cent!).
5. Start a transition to retirement pension
You can start a transition pension from your super as early as age 55. If you haven’t then you could be missing out on converting taxable investment earnings in your DIY Super fund into tax-free earnings.
As Howarth says, “Make sure you have the knowledge, expertise, systems and time to maximise your return”.
Younger is a little more pragmatic, “You don’t’ necessarily have to manage the whole thing yourself. It does take more time, at the end of the year there is more compliance – but for me the benefits are there”.
You can find out more about DIY Super by speaking with your accountant, the Australian Tax Office, or the team at Commonwealth Bank. Click here.
The Australian Tax Office
Important Information: As this advice has been prepared without considering your objectives, financial situation or needs, you should, before acting on this advice, consider its appropriateness to your circumstances. The information on taxation is of a general nature only and is based on the continuation of present taxation laws, rulings and their interpretation. As individual circumstances differ, you should seek assistance from your taxation adviser. Commonwealth Bank of Australia ABN 48 123 123 124.