SMSF & Superannuation

superannuation eggs

Juston Jirwander

Juston Jirwander


In the realm of personal finance and retirement planning, high-income earners in Australia often gravitate towards a distinctive vehicle known as a Self-Managed Superannuation Fund (SMSF). But what is it about SMSFs that make them so appealing to high-income earners? In this article, we’ll delve into the strategic reasoning behind their inclination towards SMSFs, incorporating insights from the Australian Taxation Office (ATO) guidelines and relevant financial literature.

What is an SMSF?

Before delving further into why high-income earners are drawn to Self-Managed Superannuation Funds (SMSFs), it’s essential to understand what an SMSF is and how it functions.

Firstly, a Superannuation Fund in simple terms is a low-taxed investment entity taxed between 0% and 15% depending on a number of factors. The reason for the superfund to be low taxing is so it can accumulate wealth effectively to support its members through to retirement and hopefully not rely on a government-funded pension.

An SMSF, short for Self-Managed Superannuation Fund, is a type of superannuation fund in Australia. What sets it apart from other super funds is the level of control and responsibility it offers its members, who also act as trustees. In an SMSF, members are responsible for making investment decisions, managing fund assets, and ensuring compliance with regulations.

According to the Australian Taxation Office, as of June 30, 2022:

  • The number of SMSFs had surpassed 603,000, reflecting a 4% increase compared to the previous year and an impressive 8% growth over the five-year period from 2017 to 2018.
  • These SMSFs had a total membership exceeding 1.123 million individuals.
  • Collectively, SMSFs held a substantial $868.7 billion, accounting for 26% of the staggering $3.3 trillion in super assets under management.

So, what makes an SMSF so attractive to high-income earners? There are several key benefits to choosing this type of super fund, from securing more financial control to assisting with estate planning and intergenerational wealth management. If you’re a high-income earner for tax purposes and considering switching to an SMSF, you’ll want to consider the following points.

The Strategic Control Advantage

One of the primary motivations driving high-income earners to establish SMSFs is the unparalleled level of control they offer. An SMSF allows members to tailor their investment portfolio according to their individual risk tolerance, financial goals, and market outlook.

This level of customisation stands in stark contrast to traditional superannuation funds, where investment decisions are often made by professional fund managers. By exercising direct control over investment choices, high-income earners feel they can optimise returns and better manage risk exposure.

ATO Guidelines and Regulatory Framework

The Australian Taxation Office provides comprehensive guidelines and regulations that govern the establishment and operation of SMSFs. These guidelines ensure that SMSFs operate within the boundaries of the law while affording members the autonomy to make strategic investment decisions.

High-income earners are drawn to SMSFs due to the flexibility these guidelines offer, enabling them to explore a wide range of investment options, including shares, property, managed funds, and more.

The ATO also has a range of helpful SMSF resources, which are worth looking at if you’re considering making the switch.

piggy bank wealth accumulationTax Efficiency and Wealth Accumulation

Another compelling reason for high-income earners to embrace SMSFs is the potential for enhanced tax efficiency. The ATO guidelines stipulate that SMSFs enjoy concessional tax rates, particularly in the context of capital gains and income derived from investments.

This tax advantage can significantly amplify wealth accumulation over the long term, making SMSFs an appealing vehicle for high-income earners seeking to maximise their retirement savings.

Alongside an SMSF, there are several other clever ways to create efficiencies and reduce your taxable income if you’re a high-income earner. Combined with the proper management of your SMSF, you’ll be well-established for a very solid retirement bank.

Diversification and Risk Mitigation

The famous quote by Warren Buffett, “Don’t put all your eggs in one basket,” encapsulates a core principle of investment strategy. High-income earners recognise the wisdom of diversification, and SMSFs offer them a versatile platform to achieve it.

By gaining direct control over asset allocation, SMSF members can spread their investments across different asset classes, industries, and geographic regions. This diversification strategy is a pivotal component of risk mitigation, as it helps protect the retirement nest egg from the volatility inherent in financial markets.

Estate Planning and Intergenerational Wealth Transfer

SMSFs also hold a strategic advantage in the realm of estate planning and intergenerational wealth transfer. High-income earners appreciate the ability to create a tailored estate plan that aligns with their family’s unique dynamics, values, and financial aspirations.

Death Tax Notice

It’s important to make sure that there are strategies in place to reduce the possible Death Tax that can be applied to independent adult children who receive proceeds of superannuation on the death of a member. We highly recommend reading one our recent article “Death Tax” also known as Inheritance Tax to learn more about these strategies.

We understand this area of estate planning and wealth transfer can be difficult to navigate, so please reach out to one of our friendly team members for expert assistance and compassionate care.

Challenges and Considerations

While SMSFs offer a plethora of strategic benefits, they also entail certain challenges and responsibilities. High-income earners must diligently adhere to the ATO guidelines, including strict reporting and auditing requirements.

The burden of compliance and administrative tasks can be demanding, necessitating a keen attention to detail and a thorough understanding of the regulatory landscape. It’s imperative that individuals considering an SMSF undertake comprehensive due diligence and seek professional advice to ensure optimal decision-making.

If you’re concerned, it might also be a good idea to get tax audit insurance to protect yourself against the potential risks.

An SMSF Example

To illustrate the attractiveness of SMSFs as a vehicle for retirement planning among high-income earners, let’s consider a hypothetical scenario. Meet Lucy and Bruce, a high-earning couple with a combined amount of $700,000 in their retail super fund. They speak to their financial advisor about their desire to purchase property within their SMSF. After consulting with their trusted accounting firm, Bishop Collins, they decide to set up and manage their SMSF effectively. With the assistance of a Specialist Broker, they successfully borrow $800,000 through a Low Recourse Borrowing Arrangement (LRBA) via a Bare Trust.

Lucy and Bruce purchase a property in Byron Bay, where they plan to retire in ten years. Over this time, the property’s value appreciates to $3 million, resulting in a capital gain of $1.5 million. If this property were held in their individual names and assuming they were on the top marginal tax rate, the capital gain would be taxed at 47%, amounting to $352,500. However, under the SMSF structure, they place their fund into Pension phase and transfer the property to themselves, resulting in a tax-free gain of $1.5 million.

Yes, you read that correctly. $1.5 million completely tax-free.

While the entire process isn’t quite as simple as that (we wanted to save you the boredom of nitty-gritty details), the general picture is very accurate. This tax efficiency showcases why high-income earners often choose SMSFs for their property purchases in retirement, and why it should be very closely considered as your super strategy if you’re earning a higher-level income.

meet with an accountant at Bishop CollinsThe Bottom Line of SMSFs

High-income earners in Australia opt for SMSFs as a strategic tool for retirement planning due to the unprecedented control, tax efficiency, diversification opportunities, and estate planning advantages they offer.

While SMSFs come with responsibilities and complexities, the potential for long-term wealth accumulation and financial security makes them a compelling choice. As high-income earners navigate their financial journeys, SMSFs continue to serve as a valuable asset in their pursuit of a comfortable and prosperous retirement.

Before making any financial decisions, including the establishment of an SMSF, you should seek professional advice from a Financial Planner to ensure this type of investment strategy meets with your investment goals. If you wish to purchase property of your choice in a super fund then a SMSF is your only option. At Bishop Collins, we can provide you with expert assistance and guidance on navigating the setup and management of your SMSF. Contact our team today to discuss your options and start taking control of your finances in the best way possible.

Interested in taking the next step with your SMSF? Check out our ultimate guide to setting up a Self-Managed Super Fund.

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