What makes an SMSF a super fund for life?
An SMSF is a super fund for life because almost everything about the fund can change without the members needing to move funds. That means it can change to meet the members’ needs as they evolve. This is important because changing super funds creates disruption (new investments, new bank accounts) and costs money (capital gains tax). The fact that it lasts a lifetime is a key benefit of SMSFs.
SMSF Benefit: Making changes without moving to a new fund
These days, many people have super for a long time.
Certainly, the 'best' public superannuation fund today probably won’t be the best forever (it might not even exist in 20 years). That means members of public super funds are likely to change funds several times over their lifetime.
But an SMSF has a special benefit in that pretty much everything about it can be changed without the members needing to move to a new fund:
- Investments (and the platform which holds them)
- Types of services the trustees buy (administration, advice and others) and who provides them
- Rules (ie their trust deed)
- Insurance bought for the members and more.
So someone who starts an SMSF might never need to change super funds again.
Even if an SMSF is no cheaper and the members aren’t likely to invest in anything that wouldn’t normally be available in a public fund, the fact that their SMSF will last a lifetime is a clear benefit of having one.
SMSF Benefit: Helps you avoid practical disruption of changing super funds
First, there’s some practical disruption when you move to a new super fund and avoiding this is a key benefit of having an SMSF:
- employer and personal contributions need to be directed to a new fund;
- any pensions in place in the old fund have to be paid up to date first and then formally started again in the new fund;
- regular pension payments need to be restarted in the new fund;
- if a member intends to claim a tax deduction for contributions paid to the old fund, they’ll need to do the paperwork before changing funds. If that’s missed, the deduction can’t be claimed; and
- any insurance will need to be set up again.
In contrast, even if the SMSF changes everything about its investments, none of these things need to happen. That’s because the fund itself hasn’t changed – just what’s happening underneath the SMSF umbrella.
If the SMSF will ultimately have a new bank account, pension payments and contributions will have to be re-arranged in due course. But there is nothing to stop the trustees from leaving the old account open for a time and making the changes progressively rather than all at once.
SMSF Benefit: Avoid the capital gains tax implications of changing funds
This is mainly relevant where the 'old' fund allows members (or their advisers) to choose specific investments from a menu. When a member moves from this fund to another one, all those individual assets are notionally sold and capital gains tax is explicitly charged to the member’s account.
That means moving super funds has an immediate tax cost that can’t be avoided.
In contrast, let’s say SMSF trustees or their adviser want to move to a new investment platform. If some or all of the existing investments will be kept, they can just be moved to a new platform (this is known as an 'in specie' transfer) rather than being sold and repurchased.
Because the assets are ultimately owned by the SMSF throughout, there is no capital gains tax.
But couldn’t the two public super funds do the same thing – just transfer the assets from one to the other in specie?
Yes but even if they do, legal ownership has changed from one trustee to the other. That triggers capital gains tax anyway.
Of course, if the investments actually change as part of this process then capital gains tax comes back into play. But in an SMSF, the process can be managed over time rather than all at once. That’s because it's fine for the SMSF to be split across two investment platforms at the same time or even hold assets off-platform.
Sometimes people leaving their public super fund don’t have to pay capital gains tax because their investments have lost money. In other words, selling the investments means the existing fund has a 'capital loss' rather than a 'capital gain'. Surprisingly, even that’s a real benefit of an SMSF. When investments make a capital loss, it’s normally possible to keep track of it and use it in the future to reduce the tax paid on other capital gains. But not if the member has left the fund. In that case, the loss is forgone entirely (in effect, the benefit goes to other members of the old fund).
Again, in an SMSF the situation is different. Capital losses 'belong' to the SMSF and will be available to be offset against future capital gains no matter what.
SMSF Benefit: No loss of special rules (grandfathering)
Tax, social security and other rules change from time to time and sometimes people who were already in the system when the change happened get special treatment known as 'grandfathering'. Grandfathering basically allows these people to stick with the 'old' rules for a time if they are more favourable. Generally, any grandfathering like this is lost by anyone who changes funds.
