Self-managed super funds (SMSF) in Australia – Pros and Cons (Ep.86)

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In this week’s episode, Dave, Cate and Pete take you through:

What is an SMSF? The trio take you through a crash course in SMSF basics and who you can turn to for advice.
How does property fit in the picture? Your SMSF can invest in a number of asset classes, including residential or commercial property, provided that the asset meets your documented ‘investment strategy’. Business owners and those short on cash flow, may find it particularly appealing as a way to invest in property. The trio explain why.
What attracts people to invest via an SMSF? Managing your own super gives you a higher degree of control over your investment strategy than you would otherwise have if your super was in a managed investment fund. But don’t be fooled, it takes a village to run a ‘self’-managed super fund.
SMSF game changers. The trio explain how the SMSF landscape has changed over time, including the advent of instalment warrant arrangements, which changed the playing field completely in the SMSF space.
How does SMSF lending stack up? The Property Planner outlines the critical differences between SMSF loans and regular residential mortgages. Do you feel comfortable risking the farm with a personal guarantee?
SMSF property restrictions you need to be aware of. The Property Buyer and Planner explain the key restrictions that relate to your SMSF investment strategy and how your freedom in asset selection could be impacted.
The risks behind purchasing a property in an SMSF. Like the boxing day sales, the unfortunate reality is that whenever a new market opens up, the spruikersare the first to run in and elbow their way to a sale. The SMSF market is no different and many mums and dads have fallen prey to dodgy investments and underperforming assets sold to them under the guise of an ‘investment strategy’. An SMSF may be a great strategy for you, if you’re getting your advice from an independent expert who is tailoring a strategy specifically for you.
Can you hear the alarm bells ringing? The Property Planner and Buyer share the tell-tale signs that a bad SMSF decision is about to be made.
Setting up and running an SMSF, have you got what it takes? So, you want to manage your own super fund? The Property Planner outlines what goes into setting up and maintaining an SMSF. Do you have the time and the cash flow to take on this responsibility?
And of course, our “gold nuggets”!

Resources:

Show notes:

Disclaimer
This is not advice – this is general education that we’ve picked up from our own experience.
A licenced product and you need to hold an appropriate Australian Financial Services licence to give advice on this.
We cannot advise on asset allocation, whether you should use an SMSF or not, how to set it up, tax and legal advice.
What is an SMSF?
Superannuation in general is devised so that we’re not relying on pension and so that we have a future income for our retirement.
Legislated that employers must pay a nominal amount to super to save away.
You can choose the level of aggression of your investment strategy.
Self-managed super fund means that you are managing your investments in your super yourself.
BUT don’t be fooled, you can’t manage it on your own. You need the help of a whole host of other people.
Why are people attracted to invest via an SMSF?
Be able to control their own investment decisions
Not having to spend your own cash flow – it’s in your super
The superior tax environment. The concessional tax rate is 15% during your working years, and 0% once you meet the retirement requirement. This also applies to CGT upon the sale.
Borrowing in SMSF won’t impact your personal borrowing capacity. Might use it up first outside of super.
Can also be the most cost-effective solution. EG fees can be lower proportionately, but that may be subject to the amount you have to invest.
How does property fit within SMSF?
You are more comfortable with property as an asset class.
You might like more exposure to property.
You would like exposure to commercial property and can only see that this is affordable via super because of your restricted cash flow, equity and savings out of super.
You are more overly exposed to shares across your asset base and you would like property to play a larger part in your investment strategy – diversification.
Owning your business premises rather than paying someone else’s mortgage – can be an advantageous situation for business owners.
What changes have happened over the last 10 years?
Whenever a new market opens up, the spruikers run in – like the boxing day sales.
Mum and Dads to look out for ‘advisors’ who are spruiking SMSF and also selling the property.
June 2018 – ATO media release – after auditing randomly selected SMSF – around 90% of financial advice on setting up an SMSF did not comply with relevant laws, in particular the ‘best interest duty’
- In 10% of files reviewed, the client was likely to be significantly worse off in retirement due to the advice;
- In 19% of cases, clients were at an increased risk of financial detriment due to a lack of diversification.
- 38% of respondents found running an SMSF more time consuming than expected;
- 32% found it to more expensive than expected;
- 33% did not know the law required an SMSF to have an investment strategy; and
- 29% mistakenly believed that SMSFs had the same level of protection as prudentially regulated superannuation funds in the event of fraud.
June 2018 – October 2018 – Scrutiny of Royal Commission – caused many banks to discontinue SMSF lending (CBA, Westpac group, AMP)
Oct 2019 – ASIC has warned Australian investors considering establishing their own self-managed superannuation fund (SMSF) to be particularly aware of the potential downside to such a strategy, and that many Australians set up SMSFs that are inappropriate for their circumstances.
ASIC cracking down on SMSF where more than 90% of the investment has been with the same asset – which is property
Instalment warrant arrangements
Rules changed in September 2007, allowed people to borrow money within their super fund – previously was not allowed.
What does it mean? A huge amount of money coming into the property market – as there would be more supply of capital for people who couldn’t afford to buy property outright within their super fund, but now can because they can borrow.
How does lending stack up from personal non-SMSF purchases?
Lower LVR for SMSF – meaning higher personal contribution
- Residential – 65%
- Commercial – 55%
- Might be some obscure lenders that you can get 80%
Rates are higher – in the 5 to 6% range, whereas you can get 2 to 3% on your personal loan.
Still need to be a guarantor, even if it is a ‘limited recourse loan’.
How does the Property Buyer tackle an SMSF brief in terms of compliance and independent licenced advice?
Need to have someone’s strategy before we talk about what sort of property is suitable for the super fund.
What are the restrictions?
You have one chance with each purchase to get it right – you need to be maximising your retirement income. You don’t have the option to take high risks, it’s a regulated product – you must have diversification and liquidity.
You need to be running in the black, not red. Negative gearing is not an option – which is why LVR are so low.
You can’t flip or renovate – you must maintain the asset.
What are the risks
People have unfortunately purchased poor performing new properties or in mining towns, which have lost value. Some mining towns have decreased as far as 75%.
If you needed to sell up and the super fund couldn’t meet the repayments, you are responsible as the trustee and your personal assets could be up for grabs by the lender. Anything else in your super, the lender can’t touch.
We have advocated legislation for 50% LVR and people are not taking too much risk from a leverage perspective.
Taken high level, you want to purchase an asset that will help fund your retirement.
What are the alarm bells?
Where someone wants to do it so they can call themselves a property investor and they think it’s an easier path than doing it in their own personal name – eg: they haven’t been able to save or they don’t qualify for the loan. It must have a place in your long-term investment strategy, it’s not a trophy on the mantle.
Wanting to make fast profits – you don’t want to take any chances, you don’t want to bet the farm. There is no plan B if your super fails, this is what you’re supposed to live on after you finish working.
Be careful about anyone who strongly advocates for you to set up an SMSF, particularly if they are also selling you a property.
The responsibility of setting up and running an SMSF is significant
Documented investment and exit strategy – reviewed yearly
an independent audit and the supervisory levy each year
preparing the SMSF annual return
valuations of the SMSF’s assets
actuarial certificates for SMSFs paying income streams (pensions)
financial advice
legal fees, for example if the trust deed needs to be amended
assistance with fund administration
insurance for members
You need to have the time and cash flow to be able to do this.

David Johnston- The Property Planner’s Golden nugget: purchasing property in an SMSF can be a good strategy, you just want to make sure it’s the right strategy for you and aligns with your retirement goals before going down that path. And ensure that you get financial advice and speak to a great independent property advisor and property planner to assist you with the property and potentially mortgage components of the decision.

Cate Bakos – The Property Buyer’s Golden nugget: Make sure you know where all of your super is. There’s $20B of lost super floating around in Australia, that people don’t know about. Google ‘find my super’, you can get some good info on the ATO website, track it down, get it all in the one place and go and see your advisor.

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