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Self Managed Super Fund (SMSF) Article
Why SMSFs are popular under Choice of Super Fund
By Tony Negline.
This article may be out of date.
6th October 2004
SMALL super funds have always been an important part of the super industry but for the past five years they have been the fastest growing segment.
If the current growth rate in the assets of self-managed super funds (SMSFs) continues then in three to five years this type of fund will have more assets under management than any other super industry segment.
Only nine years ago, SMSFs had less than 40 per cent of the assets under management in retail super funds -- the largest super fund segment. This is impressive growth anywhere.
The average account balance in SMSFs is more than $250,000, compared with the average industry fund account balance of $8000 and retail fund account balance of $15,000.
SMSFs are being used by people who have higher super assets than other types of super funds.
To the best of our knowledge no one has ever done definitive research as to why higher net worth investors are attracted to SMSFs, how they approach investment once started and what they think of fund managers.
One very potent motivator in setting up a fund seems to be the ability to acquire assets from the members of the fund.
To use an example, David Kelly has $40,000 worth of shares in his employer, which is listed on the Australian Stock Exchange. He has acquired these shares via an employee share scheme. He has always paid the prevailing market price for each share purchased.
He doesn't really want to sell the shares but access to the cash locked away in them would come in handy. A minor issue, for David, is that selling would generate some capital gains tax (CGT). David has $500,000 in his employer's super scheme. His wife also has a small amount of super with a fund manager.
He is a little unhappy with his employer's super scheme and his wife's retail super. David thinks neither has done well in the past few years, despite better performance recently, and he thinks they can do just as well themselves.
David decides to set up a SMSF with himself and his wife as members.
He is looking forward to July 2005 when he will be able to tell his employer that he wants his super contributions paid to his own SMSF.
Once his fund is set up he seeks to transfer his employer's super account into the SMSF and also asks his employer to put all new contributions into his SMSF.
Unfortunately, David is not aware that his employer's super fund is not required to transfer his existing account balance if, in the six months before he made the request, the fund received an employer super contribution.
David waits for this period to lapse and then has his money transferred into his SMSF. Once his employer super monies are in the SMSF, the trustees decide that their investment strategy would allow them to buy the employer shares from him. This transaction must happen at arm's length -- that is, the price the fund pays must be the market price on the day the transfer occurs.
David extracts some cash out of his super assets and also, in effect, retains ownership of the assets via his own fund. On selling shares to the SMSF, David generates CGT.
Within the super industry there is much speculation about how employees will react once the Government's employee choice policy commences in July 2005. Super industry consensus seems to be that between 260,000 and 960,000 employees will exercise their choice in the first 12 to 18 months of the new environment or between 5 and 20 per cent of the 4.8 million eligible employees.
Everyone expects that SMSFs will win a reasonably large share of this new business opportunity.
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