If you’re one of the many Australians concerned about their superannuation and whether your retirement is safe in the hands of a fund manager, you’ve probably heard of and even considered opening up an SMSF. For everyone else, SMSF stands for Self-Managed Superannuation Fund.
That’s right, rather than just allowing your employer to throw 9.5% of your salary at a superannuation fund of their choosing, you actually have the option to take control of where your nest egg is invested and open up your own super fund. Let’s look at some of the benefits.
An SMSF gives you control over where your money is invested. You can take your pick of investments such as shares, cash, term deposits, international markets, ETFs, to name a few, and most importantly for our readers here…property (see final section of this article for more info).
SMSFs benefit from superannuation tax rates, as in ‘concessional’. While accumulating a nest egg, investment income tax is capped at 15%, unlike the 30% plus outside if super. When you hit the pension phase, there’s no tax! Think of the savings on Capital Gains Tax (CGT)!
Your SMSF can have multiple members (between two and four), which means more diversity in strategy and the ability to combine your assets. This is especially good because the more value a SMSF accumulates, the more cost effective it is to run. You pay an annual audit, tax return and capped ATO fees, and don’t have to pay a percentage of your balance to a fund manager.
So is it right for you?
SMSFs require a significant commitment on your behalf, in order to be set up, administered and kept compliant. Before you dive in, consider the following:
Admin: Even with professional help, SMSF trustees spend an average eight hours a month on fund administration such as researching investments, accounting, record keeping and arranging annual audits to ensure compliance.
Costs: SMSF trustees spend more than $6000 a year on ongoing expenses such as legal and financial advice, auditor’s fees, management and admin expenses and levees.
-You are personally liable for all the fund’s decisions and management, even if another trustee makes a mistake or your circumstances change.
-You are not protected against theft or fraud via compensation schemes that can be accessed by regular superannuation members.
-Your investments might not be as great as you think they will be…historically, SMSFs have not performed as well as retail or industry super funds.
-Relationships with other fund members may end due to death, divorce or a falling out and this may require selling of assets or complex legal proceedings.
Investing in property using SMSF
You, our Binvested friends, are likely most interested in using SMSF funds to invest in property. So here are some of the main pros and cons:
– You can use money already accumulated in your super to buy the property outright, or as a deposit if you need to borrow within your super.
– You will only pay 15% tax on rental income and if you sell the investment property after holding it for 12 months, but before retirement (accumulation phase), your CGT is calculated at a discount rate
– If you sell it at retirement age (pension phase) you don’t have to pay any tax on the sale.
– Expenses involved with owning the property and receiving rental income are tax deductible.
– The investment must pass the sole purpose test…ie to provide retirement benefits to the fund members only.
– It cannot be bought from, rented to or used by a person or entity related to the SMSF member…so no living or holidaying there!
– You can only service any loans with 9.5% of your salary, plus rental income, so unless your SMSF buys it outright, it must be a safe bet for rental returns.
– Banks require much larger deposits when lending to SMSFs because of extra risks involved. Most banks will only lend to those funds with a balance of more than $200,000.
– You can’t renovate to add value, only make repairs that maintain the property’s original state
– You can’t offset any tax losses against personal taxable income outside the fund.
– Property is expensive, so there may be little room left within a SMSF for investment diversity
Do you want to talk to someone about how you can use your Superannuation as a vehicle for property investment?