Semester 2 QUT AYN442 Superannuation and Wealth Management Report

This report compares and contrasts Industry Funds and Self-Managed Superannuation Funds (SMSF), focusing on management, security, and cost considerations. The report highlights the regulatory oversight of each fund type, with Industry Funds overseen by the Australian Prudential Regulation Authority (APRA) and SMSFs regulated by the Australian Taxation Office (ATO). The analysis delves into the operational aspects of each fund, including the trustee responsibilities, and the costs associated with each, such as management fees and compliance expenses. The report also explores the impact of non-concessional contributions and Capital Gains Tax (CGT) on superannuation savings, offering insights into managing superannuation effectively. The conclusion emphasizes the importance of fund size and trustee involvement in determining the overall cost-effectiveness of SMSFs, and provides recommendations for managing superannuation based on individual circumstances.

STUDENT
[COMPANY NAME] [Company address]
SUPERANNUATION

INTRODUCTION
An Industry Fund is supervised under guidelines and rules given by Australian
Prudential Regulation Authority (APRA), whereas a Self-Managed Superannuation
Fund, commonly known as SMSF is supervised under the rules and regulations framed
by Australian Taxation Office (ATO). Another important aspect that differentiates the
two is the cost of management. As you pointed out, your industry fund levied a charge
of 0.88% on your investment amount. That, Sarah, is the industry norm of these funds.
Apart from this, there are other fixed charges, as you have noticed. Comparatively,
SMSF is not cheaper, when you consider the amount of time and effort you have to
personally put in for running the fund smoothly.
PART – A: INDUSTRY FUND vs SMSF
Sarah, when comparing an Industry Fund with a SMSF, three major factors play
important role – Management, Security and Cost.
Management – Industry Funds
As you are already using the services of an Industry Fund, you must have realized that
you need not worry about investing your money for good returns. In fact, as per (Smith
& Koken, 2011), all major funds take good care that they are able to give the maximum
possible yield to their members on their investments.
Management – SMSF
In case you start your own SMSF, you will have to keep searching for sources which
give you maximum yield on your investments. Since ATO issues guidelines for
managing the SMSF, you will have to keep yourself updated on the rules and
regulations otherwise you can be penalised (Smith & Koken, 2011). The mandatory
requirements of ATO are –
 A SMSF must have a minimum of two individuals as trustees and they should also
be its members making investments in the fund.
 A SMSF is required to have a Trust Deed. This legal document must state:
 How the fund is to be established,
 How the fund will operate.
 How the fund is to be administered.
Since this deed needs to comply with the superannuation regulations of ATO, you need
to take the services of a professional for drafting it (Cch, 2013).
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 ATO regulations require you to file an annual return of the earnings derives
from your investments. As this is a statutory requirements, you must take the
services of a qualified accountant (may be your uncle if he is competent).
Security – Industry Funds
You are not concerned how your industry fund keeps your investments secure. Your
only concern, when choosing an industry fund, is that your investment must be safe.
Security – SMSF
When you start your own SMSF, your primary concern will be to search for those
sources which can assure you of security of your investments (Barkoczy, 2013).
Costs – Industry Funds
Your industry fund will charge you a fixed percentage fee which is based on the size of
the funds it is managing. As per data released by APRA in June 2018, the average
annual fee charged by the industry funds was 0.8% of the member’s fund balance.
Costs – SMSF
In comparison, fee charged by a SMSF is not fixed according to the member’s fund
balance. The ATO regulations are that the fee is to be charged on a flat advice and
services fee. According to ATO data, the expense ratios of SMSF shall vary according
to size of the fund. For a SMSF which fits your fund quantum of $100k-$299k, the total
cost will about 6.41% of fund balance. It has been estimated that cost of setting up a
SMSF shall be between $916 and $2,035. (Source: ASIC, June 2018) (Barkoczy, 2013)
The above mentioned costs for a SMSF are essentially for ensuring compliance with the
superannuation and taxation legislations of ATO. These costs include:
 Preparation of Annual Financial Statements to be submitted to the ATO.
 Preparation and Submission of the Annual Tax Return to the ATO.
 Payment of the Compulsory Annual SMSF Supervisory Levy to the ATO.
 An Annual Corporate Trustee Fee (if applicable).
 An Annual Audit Fee for getting all financial records audited.
The ATO has made these compliance costs as mandatory since SMSFs are privy to
concessional tax treatment similar to industry funds. Preferential treatment to SMSF
Members is that their earnings from fund investments are taxed at 15%. Moreover, all
expenses which a SMSF incurs and which are not domestic, private or capital in nature,
are deductible from the tax as these expenses are considered as essential for producing
the assessable income of the SMSF (Barkoczy, 2012).
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PART – B: MANAGING SUPERANNUATION SAVINGS
(a) Non-Concessional Contributions
As per ATO the annual limit for non-concessional contributions is $100,000 for
income year 2019/2020. All contributions above the threshold limit will be taxable
@47% by the ATO. As per the information provided by you, your share portfolio is
valued at $150,000, hence you shall be liable for tax @47% on $50,000 only. However,
you can claim this amount of $50,000 as an Exclusion provided you choose to elect this
amount towards your lifetime limit of CGT assets. This is eligible both for industry
funds as well as SMSFs (Nethercott, Devos & Richardson, 2010).
(b) CGT Impact on SMSF Contributions
Since the transfer of the asset (from you to the SMSF) changes the ownership of the
asset, the asset shall be deemed to have been sold. This shall result in one of the
following CGT implication namely:
 In case the asset was held by you for less than 12 months, the capital gain made on
the asset shall be taxable on the full amount of the capital gain as the capital gain
amount will be included in your personal taxable income.
 In case the asset was held by you for more than 12 months, the capital gain amount
realized shall be subjected to a 50% discount and the balance 50% of the capital
gain amount shall be included in your personal taxable income.
However, as per (Marsden, 2010), in case of a capital loss on the transferred asset, the
amount of loss shall be deducted from your personal taxable income. This is eligible
only for SMSF.
(c) Tax Penalties on Excess Contributions to SMSF
If however you defer the transfer until the first year after you stop working and
assuming you are under 65 you can dramatically alter the tax bill (Barkoczy, 2013).
(d) Factors affecting SMSF management cost
Simply put, all the costs associated with managing a SMSF are fixed in nature, hence
under all conditions they remain the same irrespective of the fund balance, whether it is
$50,000 or $2 million. The fixed costs include costs related to the ATO Supervisory
Levy, Auditors Annual Audit Fee, fee for preparing the Annual Financial Statement and
the Annual Cost of Lodging Tax Returns with the ATO. The ATO’s statistical overview
of SMSFs for 2018–19 report, as per (Barkoczy, 2013), has revealed that SMSFs having
fund balances under $50,000 incurred average operating expense ratio of 12.55%, while
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those with fund balances between $500,000 and $1 million incurred operating cost
ratios of 1.43%.
(e) Other Factors affecting SMSF management
 A SMSF must have at least two individual trustees who should also be investing
members of the fund.
 A SMSF is required to have a trust deed. This is a legal document and outlines:
 How the fund is to be established.
 How the fund is to be operated.
 How the fund is to be administered.
 The trust deed has to be made compliant with the ATO’s Superannuation
Regulation, hence it is essential to have professional advice to prepare it (Barkoczy,
2012).
CONCLUSION
The larger is your SMSF fund balance, the lower is your annual operating expense bill.
The three different categories listed below illustrate this viewpoint (Smith & Koken,
2011).
 $100,000 to $150,000:
The SMSF in this range can have competitive cost factor as the cost is spread over
larger super fund amounts. But this requires the trustees to undertake the administration
duties. However, in comparison, the industry funds options prove to be a cheaper
alternative.
 More than $200,000:
The SMSF in this range can prove to be competitive with the industry funds. Here again,
the rider is that the trustees shall have to take responsibility for all the administrative
work.
 More than $250,000:
The SMSF in this range can prove to be a cheaper option for fund balances of this size
as compared to the industry funds. However, the trustees have to undertake the
administrative duties.
From the above factors as per (Smith & Koken, 2011), you can draw the conclusion that
as far as costing is concerned, you can manage to have a cheaper operating cost for your
SMSF if you are able to –
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- Have two trustees for your SMSF.
- These trustees are also required to be investing members for the SMSF.
- Your total fund for the SMSF investments should be in excess of $250,000.
The most important and essential requirement is that the trustees are able to contribute
their TIME and EFFORT for managing the SMSF on a regular basis. The trustees
should also be able to take responsibility for safe custody of the investments and their
regular earning capabilities.
In the opinion of this author, you should wait till you reach your preservation age of 60
and then contemplate managing your own SMSF. Till then, you should keep investing
your super savings in an Industry Fund of your choice and concentrate more on your
earning capabilities.
LIST OF REFERENCES
Barkoczy, S. (2012). Australian Tax Case book. (9th ed). North Ryde, NSW: CCH
Australia Limited.
Barkoczy, S. (2013). Foundations of Taxation Law. (5th ed). North Ryde, NSW: CCH
Australia Limited.
Cch. (2013). Australian Master Tax Guide. Sydney: CCH Australia Limited.
Marsden, S. J. (2010). Australian Master Bookkeepers Guide. (3rd ed). Sydney: CCH
Australia Limited.
Nethercott, L., Devos, K. and Richardson, G. (2010). Australian taxation study manual:
questions and suggested solutions. (20th ed). Sydney: CCH Australia Limited.
Smith, B. and Koken, E. (2011). The Superannuation Handbook. Milton, QLD: John
Wiley & Sons.
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