A self-managed super fund can be a great means of saving on tax, and as a means to make meaningful investments, particularly in property, from within the fund. The amount of work involved however, alongside the constantly shifting laws and legislation around SMSFs, can leave the whole process feeling like trying to paint a car that’s already on the motorway.
The main benefit of SMSFs is the flexibility and control they afford their members. The members of an SMSF are also it’s trustees, keeping control over the fund within a small group of between one and four. By keeping the interested parties small, SMSFs can be catered to individual preferences and needs over the large scale collective interests that must be satiated in retail and industry super funds. With self management comes self reliance, and with it a certain amount of risk. For some, this is an easy trade off to make, and with a sound property investment strategy it can be.
SMSFs lend themselves well to investing internally in business property, with the majority of business property purchased through a SMSF then being let to someone within that same superfund. It does need to be leased at the market rate, no undercharging among friends here, and you’ll need to spend in the region of $500,000 or above on the property to make it a meaningful investment. If you can overcome, you’ll essentially be paying rent to yourself which you can use to build your nest egg. Assuming of course that the tenant is in for the long run too. With SMSF property purchase you’ll want to ensure that you can secure long term tenants and that the property is positively geared.
The stipulation of a market rate is representative of the SMSF legislative focus on cronyism. Residential properties purchased by SMSFs can’t be let to people within the fund or their social/familial circle, hence why commercial property is such a popular choice. If you or another member of the fund run a business, you should be using the fund to that end. Keep in mind however that tax losses from the property cannot be offset against your personal income tax.
Funding can also be difficult, and is an area that falls victim to the aforementioned legal alterations. There are less and less lenders in the market and they’re asking for bigger deposits. At the moment an SMSF cannot directly borrow to finance a property transaction, but current legislation has been relaxed to an extent that allows an indirect form of borrowing via a limited recourse borrowing arrangement. In essence it allows a SMSF to enter a contract in which they pay for the asset through installments, although there are further technicalities that may change in the future.
These sorts of details are indicative of the wider issues with SMSF. The time investment, the complexity and the governments constant tweaks to the formula. The latter is always going to be difficult to offset or predict, SMSFs appear sound at first sight but as a long term investment strategy they are among the most susceptible to forces beyond your control. Complexity and time investment on the other hand can be offset by the use of accountants and experts in the field.
As with any strategy, I recommend the use of experts, ensure that you do your research before you seek assistance. Go in armed with a good general knowledge of the process, and ask the right questions. Getting in experts, even just for the initial set up, is taking the self management out of a SMSF. Most SMSFs utilise a deposit account of some sort to manage surplus funds and manage investments. Financial advisors may well ask for access to this, as well as other aspects of the fund, and things can devolve into a cat-and-mouse game of limiting involvement of third parties whilst utilizing their expertise. Whatever way you play you’ll be spending money and loosening your control, so make sure it’s a worthy sacrifice. For those with an investment strategy already lined up, and a set of compatible trustees with their heads screwed on, it probably isn’t going to be beneficial to get outside parties involved. If you’ve done your research and you know what you’re doing, keep hold of the reins.
To see the true benefits of SMSFs, you’ll need knowledge, grit and a bit of luck. The leg work involved with SMSFs is tremendous. They require regular independent audits, large operating costs, mountains of paperwork and can be troublesome to set up. You’re in it for the long haul with a SMSF, and you’re always going to be at the whims of changing legislation. There’s a lot of responsibility, legally and financially speaking. It certainly isn’t for everyone, and even if it is, keep in mind the chance involved. You’re going to be dancing with government intervention, and it’s going to be a long dance.
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