Many people ask why are SMSFs so popular?

‘The sole purpose of superannuation — and why it gets favourable tax treatment— is to fund a retirement.’

Being able to control how super is invested

This is a big selling point for self-managed super funds. At least close to one million Australians think so given there’s more than half a million SMSFs looking after retirement nest eggs.

Self-managed funds perform the same role as any other super fund, by investing contributions and making them available to members on retirement. The Australian Taxation Office also regulates them. The difference is fund members are also the trustees.

So why are SMSFs so popular?

The main appeal is their ability to invest in a broad range of investments. These range from shares, managed funds, direct property, high interest cash savings, term deposits and gold, for example. The upside to an SMSF is that you decide what to invest in and when benefits are paid. The downside is running them requires much more work, though it helps that they’ve become more cost-competitive. Having said that, SMSFs are still popular.

Some of the reasons to establish SMSFs include:

• Greater control of investments
• More flexibility and choice
• Better tax-planning opportunities
• Better investment performance of assets
• Greater cost savings vs other super funds

When you compare superannuation assets overall — $3.0 trillion as at December 2019— it is impressive that individuals running popular SMSFs control $742 billion (25%) of all super assets invested.

So if you want to get your foot in the self-managed fund door, it’s good to know that costs involved in administering SMSFs have come down. They are much more accessible, especially for 30-and-40-year-olds. Previously this group felt locked out due to the big balances they felt they needed to make setting them up worthwhile.

What are the costs for popular SMSFs?

Some industry and retail funds charge up to 6 per cent to run a SMSF. And some providers charge up to $10,000 a year to administer a self-managed fund.

ASIC also publish a guide to self managed super funds too.

If you’d like to chat about finance, please contact us.

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When applying for SMSF finance or an SMSF loan, keep in mind that your fund must have enough cash (including rent) and other liquid assets (such as bonds and shares) to cover loan repayments as well as administrative costs and income tax.

‘Getting it right first time can not only save money, it will put you in a good position to make it too’

1. Regulators – through lenders – have recently tightened lending criteria

With Australian regulatory authorities concerned about the fast growth of property prices in our largest cities, there’s been a recent crackdown on property investment lending. As a result, a number of banks and smaller lenders have tightened their Self Managed Super Fund (SMSF) lending standards too. Some have even completely stopped SMSF lending.

2. Lenders have reduced LVRs for SMSF finance

In response to concerns of the Australian Prudential Regulation Authority (APRA), Australia’s chief banking regulator, lenders have changed the way they’re handling loans for SMSFs. One of the ways they’re doing this is by reducing LVRs. A number of prominent banks, have also put a cap on what investors can borrow. Many lenders have stopped lendings to SMSFs entirely.

3. After property settlement, you must meet minimum cash requirements

Liquidity (i.e. cash in the bank or assets that you can easily and quickly convert to cash) can be challenging when you’re investing in fixed assets, such as property. Because it can take a while to sell a house and get the cash back in your bank account if you need it. Keep in mind that your SMSF must have enough cashflow (including rent) and other liquid assets (such as bonds and shares) to cover loan repayments as well as to cover administrative costs and income tax. With the recent crackdown, lenders will likely want to see two years’ worth of sufficient super contributions and / or they’ll want proof that your compulsory super guarantee is enough to cover repayments in addition to seeing that your SMSF has up to the equivalent of 1 year of cash available to cover any loan payments after you’ve settled a property.

4. Regulations prohibit you from topping up your SMSF loan amount in the future

The law governing SMSF’s essentially means that you can’t go back to the bank in the future and ask for more money if you need it, so it’s important to get the amount you need right before you start.

5. Redraw is not available for SMSF finance, but offset accounts can be very effective

SMSF loans do not allow for redraw of additional payments. However, you can benefit from an associated offset account. By linking this type of transaction account to your investment loan, your loan balance is offset on a daily basis by the credits in the account and can significantly reduce the interest you owe on the loan and allows you the flexibility to access any additional payments over and above the minimum.

6. The loan process is taking and typically takes much longer for an SMSF loan

This is true for a number of reasons. First, SMSF loan applications require a lot of time-consuming paperwork. Second, because of the regulatory crackdown, there are simply fewer lenders in the marketplace to handle the loan applications. Along those same lines, SMSF loans are specialised loans; a lender with specific expertise will need to review your loan application, which can take more time than your typical home loan review.

7. There are fewer lenders in the marketplace for SMSF finance

Some experts and lending institutions suspect that because of the new lending restrictions, there will be a slowdown in the number of people investing in property through their SMSFs. As a result, we may see more banks and lenders pull out of this area of the market.

ASIC publish a guide about SMSF and property too.

If you’d like to chat about finance, please contact us.

The post SMSF finance: 7 things you need to know appeared first on You Can Finance.

Assuming you keep the property in your SMSF until you retire, you’ll pay no tax on the rental income in retirement and the tax rate will be only 15% until then.

Investing in property within your self-managed super fund (SMSF) can seem complex and overwhelming. We’ll try to clear up the confusion with straightforward answers to some of the most commonly asked questions.

1. Can I live in the property?

If you’re investing in property within your SMSF, there are a number of restrictions on who can live there. You – as a fund member – are not allowed to live in or rent the property.

2. Can my family, friends, mother, or siblings live in the property?

Likewise, no ‘related parties’ or relatives of fund members can live in or rent the property. The purpose of this type of property investment is to provide retirement benefits to the fund’s members or members’ dependants. ‘Related parties’ include other members of your fund, business partners of fund members, spouses or kids of those business partners, any companies those business associates control or influence, any trusts they control, employers who contribute to your super fund (also known as ‘employer-sponsors’), and any associates of employer-sponsors.

3. If I sell the property, do I get to keep the profits?

Any profits stay in your SMSF. Like other SMSF assets, you’ll gain access to that money when you reach retirement age.

4. Does the rent have to go into the SMSF?

Yes. All rental income goes into the SMSF. The good news is, assuming you keep the property in your SMSF until you retire, you’ll pay no tax on the rental income in retirement, and the tax rate will be only 15% until then.

5. Will the bank take security over my own house?

If you borrow money to buy a property within your SMSF, you must take out a separate loan in which only the property you’re buying is the security for the loan. This way, other assets in your super fund or from your personal life are separated. However, because lenders may consider these circumstances high-risk, they may require personal guarantee(s).

6. Can I borrow 90% of the purchase price?

Currently, the percentage you can borrow typically ranges from 65 to 70% of the property’s purchase price.

7. Do I have to keep my property until I retire?

No. But if you sell a property in your SMSF before you retire, any capital gains that the fund makes may be subject to tax.

8. Does it cost $10,000 to set up an SMSF for property investment?

No. Set-up costs vary widely across the industry.

9. I’ve heard that the legal minimum is $200,000 to set up an SMSF, is that right?

No. There’s no legal minimum; however, there are a number of things you’ll want to consider before you setup an SMSF. According to the Australian Tax Office (ATO), for example, funds with higher balances had lower operating costs than funds with balances of less than $50,000. The ATO estimates that annual operating expenses for SMSF’s are 0.56%. These expenses include set-up costs and ongoing maintenance fees, such as accounting fees, insurance, and charges you’ll encounter when you make investment decisions. You’ll also want to think about whether you’ve got the time and the know-how to manage your SMSF well. The easiest way to answer some of these questions is to seek professional advice first.

10. I’m married. Can I have my own SMSF that I don’t share with my spouse/partner?

Yes.

For more information, ASIC publish a really great SMSF Property guide too.

If you’d like to chat about finance, please contact us.

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