With superannuation, a fairly small change can make a huge difference.
Firstly, let’s look at an important question, say you have a sum of money that you had control over and are looking to invest – $50,000 for example – and you have a plan to also invest 9% of your total income for the next ten years into it on top of the initial investment. Would you give that investment to an unfamiliar hedge fund manager? Or a stock broker you do not know? Or put it into any other investment with which you have no direct evidence of or control over? Probably not when you put it like that right?
Well currently the bulk of Australia’s superannuation system has gone that way by default and the results of this are in. Superannuation in Australian now stands at around $1.3 trillion dollars, with a bulk of the funds invested in default super options that place money into a wide spread of managed investments. Many may not know this but the traditional default option for super funds is the ‘Growth’ option, which has a large exposure (around 70% of investments) to riskier assets which are chasing a high return.
Now this is all fine by everyone if the investment achieves a good long term return, however the results over the past 7 years, according to studies by Chant West, indicate that ‘Growth’ funds have been failing to perform, earning just 2.6% to 6.0% per annum. This means that many of the far more ‘Conservative’ investments, even Term Deposits at the bank, have been outperforming Growth funds over the longer term.
Now this may not be news to many readers, but if you are one with a reasonable amount in super and feel like more control in this area is needed this would be time to review that’s for sure.
As a response to the recent poor super fund results, disenchanted investors have been moving to take control of their money by using Self Managed Superannuation Funds (SMSFs). This is no small movement with an average of 30,000 more SMSFs per annum across Australia during the past 5 years. Many of which are being set up for a reasonably low cost and which allow more control than ever for the owners.
One great thing about this increase in people seeking control of their super is that the Federal Government is now proposing some positive changes to the legislation to allow SMSFs more flexibility, especially for property investors – for example, a proposal to allow refinancing of debt within the SMSF; and a proposal to allow for renovation of properties that have borrowings against them within SMSF, are two things currently being considered. These changes are not yet legislated, but things are looking a lot more promising for property investors choosing to use this great tax effective tool to enhance their retirement position.
Below I have summarised some of the key advantages and disadvantages of an SMSF and also provide a description of the process involved for those interested in getting moving into an SMSF.
What are some of the key Advantages and Disadvantages to an SMSF for property investors?
As you can see there are many reasons why an SMSF might be for you. The potential financial upside of this was discussed in my prior article ‘the super cure’, it also discussed the numbers behind an SMSF property strategy and may be a worth revisiting – https://investorsdi.wpengine.com/blog/the-super-cure/
Before we continue, there are a couple of myths that have come up in recent discussions with clients recently that potentially prevented them from setting up an SMSF when they could well have.
The $200,000 myth
The Australian Taxation Office states in their ‘Guide to Self Managed Super Funds’ that the starting balance of an SMSF should be around $200,000 to be effective. Now that is fair if we are just going to stick the money in a managed investment charging 1.26% of the balance per annum in fees.
The costs of SMSF administration (including: the tax return; ASIC Supervisory Levy; and accounting costs in total) would need to be less than $2,520 per annum to be more cost effective than the current super fund (on a $200,000 balance).
The ATO seems to assume that cost effectiveness is the only reason we’d set up our own SMSF. Actually the true goal for many people is to take control of the fund investments, put them towards investments we believe in and hopefully reach more desirable retirement outcomes. So importantly, if the costs of management are slightly higher than the average fund we must target a higher return to compensate.
I found that when discussing this with property investors, as long as their investment selection was careful their potential returns were likely to outweigh a cost increase and in many cases the fund balances that suited investing in an SMSF were as low as $130,000 – so it’s definitely worth a look.
The administration nightmare myth
There are many who feel the extra administration behind an SMSF is burdensome and time consuming. To run a super fund, you as a trustee must ensure it complies with the legislation and completes its annual reporting. A good financial adviser can assist you to ensure that the administration of a fund is nothing more than a tax return and a few investment decisions per year.
Keeping administration to a minimum is part of the reason to employ a good team around you. This is not burdensome or time consuming, actually it can be greatly beneficial from an education perspective and even better if it keeps you motivated and aware of opportunities that present themselves such as tax tips, investment options and finance opportunities.
Ensuring you get the best outcome when using an SMSF
Too often I run into cases where investors have done a lot of the work to get a fund set up on their own but missed critical steps and therefore suffered consequences (delays, penalties or lost insurance) during their SMSF setup. Below we have provided a summary of the key stages of the SMSF set up (including the steps for buying property) which we hope can assist you. Having a consultation with us would be beneficial to ensure you don’t miss any critical points noted below.
What are the steps involved in setting up SMSF and purchasing a residential property within it and how long does it take?
So in total around 10 weeks is the time it should take to complete an SMSF set up where everything runs smoothly.
Notably, upon completion of the above several further steps remain: insurances for the SMSF property are required and lease agreements arranged. From there it is a matter of ensuring your fund remains compliant by doing an annual tax return and audit with an accountant.
While the above list is not exhaustive it provides a solid grounding of what can be expected to be faced within the process of setting up an SMSF for a property investor’s purpose.
As a team at Investors Direct we have been involved in hundreds of SMSF transactions and can assist you to ensure your SMSF set up is both prompt and smooth from end to end. We assist in our process with each and every step of the above, making certain that the providers of information are prompt and accurate. Taking this burden off the investor so that they can continue to focus on their busy lives.
Introductory Review including (10 Only, normally a charged service):
· Property Goal Setting Session;
· Review your current investments;
· See if SMSF is for you; and/or
· Ensure you are making the most of your opportunities as a property investor.
To book in click here.
Other articles of relevance to this topic are: