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In our latest video I discuss with Denis Durand, from Durand Financial Services, some of the common questions that clients come to us with in relation to Self-Managed Suer Funds and investing in property.
Let’s go back a step to understand:
1. What is a Self-Managed Super Fund and how is it different to your typical super fund?
A self managed super fund puts you in the driver’s seat, giving you control over your retirement savings. With a retail super fund the trustees of the super fund manage and control the way your funds are invested. Typically with an SMSF, you are at least one of the trustees and therefore you have greater control over how your funds are invested. Of course you are still obliged to comply with Superannuation legislation and regulations. Regardless of whether the fund is an SMSF or a retail fund, your superannuation must meet the Sole Purpose Test, which means that your fund and its assets are used solely to provide benefits to you and the fund members for retirement.
2. Why do most clients set up a Self-Managed Super Fund?
When it comes to SMSF, many clients are looking for greater control over their investments, particularly the property they want to invest in. In an SMSF you can have access to a much broader range of investments including property, but could also be direct shares or other investments.
A unique feature of an SMSF, is the ability to access ‘Limited Recourse Borrowing’ arrangements to fund property purchases.
Obviously the reasons vary depending on each clients circumstances. The Investment Trends SMSF Investor Report highlighted the main reason for clients setting up an SMSF were:
- To gain more control over their investments,
- To gain access to a wider range or investments,
- Unhappiness with an existing or other super funds,
- Advice from their Accountant or Financial Adviser.
As you can see, the main reason clients set up an SMSF is for greater control and this generally includes the desire to want to own property within a superannuation enviroment.
But, there are many reasons why an SMSF might be right for you, so it’s important you seek advice about whether it is right given your circumstances.
3. What type of investments can I invest in with an SMSF?
You can invest in the typical superannuation investments, such as Shares, Cash, Term Deposit, Bonds and so forth. But, SMSFs offer a unique opportunity to invest your superannuation funds in property that you choose.
4. What type of property can you buy in an SMSF?
This is the exciting thing about SMSF, you can have residential property such as houses, units, and apartments. You can have business real property such as commercial, warehouses and factories. You can have rural property like farming land, or primary production. You can invest in properties anywhere, not just in Australia. Of course there are some limitations on acquiring properties from a related party, but that’s why it’s important to seek advice. Overall, though, SMSF gives you greater control over the property you invest in.
5. Why would I buy property in an SMSF rather than just outside superannuation? What are the advantages of buying the property in an SMSF?
The main advantage to investing in property via an SMSF, is having the ability to use your superannuation funds to buy property you want, rather than having a fund manager investing in property funds they choose.
Our clients love investing in bricks and mortar, it makes the investment much more personal and real for them, and so they are more involved and engaged with their retirement plans.
The biggest advantage of SMSF it that, a couple for example, can pool their super funds together and using that higher balance, purchase a property they want.
Of course there are other benefits:
- Tax effectiveness – earning taxed at 15% whilst in accumulation phase and then 0 in pension phase. NIL CGT in pension phase if 60+.
- Business owners – Buying your business premises in an SMSF and leasing the property back to your own business.
6. Clients often ask do I really have enough super to set up and SMSF? How much is enough?
Every client scenario is different and you really need advice in this area, but generally speaking the cost competitiveness of an SMSF starts to become attractive once your superannuation balance is between $200,000 – $250,000 mark.
7. What if the combination balance between a couple isn’t enough to buy a property? Can you borrow?
Borrowing in an SMSF is done under strict conditions called a ‘limited recourse borrowing’ arrangement. It is a complex area and advice is critical in this space, as there are many rules. Essentially, the borrowing of the property is completed in a ‘holding trust’ and once the loan is fully paid, the property is transferred into the SMSF.
The diagram (in the video) shows how the structure is places into a ‘holding trust’ and the lender holds the asset. The numbers of the SMSF make contributions into the SMSF. Rent goes into the SMSF. Expenses are paid out of the SMSF and the loan repayments are made by the SMSF to the lender on behalf of the ‘holding trust’.
8. What are some of the potential issues to be aware of?
Cost effectiveness is an important factor in setting up an SMSF. However, you do need to carefully consider a number of other factors:
- As you are the trustee, you need to be aware of your obligations as trustee, who can be a trustee to begin with, what are your obligations, do you need a corporate trustee?
- Complying with legislation and superannuation regulations is vital as there are penalties for non compliance.
- There are some highly technical investments and borrowing rules, particularly understanding when you can and cannot borrow – for example you can’t borrow to improve a property.
- Cash flow requirements need to be managed to ensure liquidity in the fund to meet expenses.
- Ongoing Administration and Audit of the SMSF.
- Do you have time to be across these – if not you can get help.
9. It does sound like a complex area, how do you get help?
Specialist advice is key. As financial advisers we work with you, and the key specialist professionals to ensure our advice is right for you. It sounds daunting, but that’s where we come in and help make it simple so you can enjoy the benefits of property investing.