Buying Property Through SMSF ….in short….A Superfund
All good, but what is a Self Managed Superannuation Fund (SMSF)?
And how easy is setting up a self managed super fund?
I spoke to a financial planner from Bright Advice and he answered some of my questions that I think may answer some of yours as well.
Want to buy property through your SMSF? Click here for assistance
Self Managed Superannuation Fund (SMSF)
At Bright Advice we advice our clients on the setup, management and running of their Self-Managed Superannuation Funds (SMSF), as well as a host of lifestyle, goal, and financial orientated planning. With SMSF’s we find that most of our clients desire a greater control over their superannuation savings and where their funds are invested.
What is a Self Managed Superannuation Fund?
An SMSF is in essence, just a trust and like any trust structure, it is run by the trustees. An SMSF is another option in ways to save for retirement. It’s different from other super funds, because it is controlled by you and regulated by the Australian Taxation Office (ATO).
If you choose to manage your super through an SMSF, you take direct responsibility for:
- The investment choice for your superannuation assets; and
- The compliance of your super.
An SMSF has four members or less and amongst other rules, no member of the fund can be employed by another member of the fund unless those two people are related.
It is possible to have an SMSF with only one member, but there are different rules that apply. For example, the law does not allow a single member fund to have a single individual as the trustee, so a company trustee is required in this instance.
Can anyone start an SMSF?
In short, the answer is no. Trustees have to be competent to control an SMSF and need to display:-
- Investment knowledge, experience and skills
- The time to actively get involved in researching and managing your investments
- Commitment to keep up with the rules and regulations
- A large enough super balance to make an SMSF cost effective and allow you to diversify your investments
- An understanding of the fact that SMSFs are treated differently in the case of fraud, compared with other super funds.
Additionally, certain people cannot act as an individual trustee, or a director of a corporate trustee of a super fund. These include someone who:
- has been convicted of an offence involving dishonest conduct
- has been subject to a civil penalty under the superannuation legislation
- is insolvent or under administration (an undischarged bankrupt)
- who has been disqualified from acting as a trustee of a superannuation fund by the ATO.
An SMSF also involves set up and annual running costs, which can include financial, accounting, legal and audit advice, as well as an Australian Taxation Office supervisory levy.
There’s no strict rule, but generally the Australian Securities & Investments Commission (ASIC) suggests a fund with a balance of more than $200,000 may be cost-effective to commence an SMSF. This may be achieved by members combining their superannuation balances to start the SMSF.
Additionally, when SMSFs have a smaller balance it may also be more difficult to achieve diversification of the funds assets, due to its inability to spread the investment risk across different investment (asset) classes.
What are some of the Risks of an SMSF?
It is important to understand certain risks associated with SMSF’s, which do not apply to other superannuation funds. Members of SMSFs do not have access to the Superannuation Complaints Tribunal, which is a way that members of other funds can resolve disputes in a timely and low-cost manner. In an SMSF, you may instead have to take legal action to resolve disputes, which can be costly and time consuming. You will not have access to the compensation arrangements that apply to these larger super funds, which means that you may lose a substantial amount of your retirement wealth in the event of fraud.
Consideration also needs to be given to a future change in circumstances (e.g. marriage breakdown, bankruptcy, loss of mental capacity, reduced superannuation balance, etc) which could mean that you may have to wind up your SMSF. It is important to understand that costs may apply in these circumstances and to prepare for an exit strategy.
There are many other risks that may apply in your circumstances (e.g. legislative risk, investment risk, etc), and it is your responsibility as Trustee to consider these risks.
What are some of the Risks of Property Investment With an SMSF
The risks are quite similar to purchasing a property outside an SMSF, such as the costs involved in buying, selling, and maintaining the property, as well as applicable stamp duty, real estate agents’ commissions and the risk that the property is untenanted for a period of time, to name but a few.
Property prices fluctuate and if the they trend down at a time when you need to sell the asset to fund your retirement income, this can have a negative effect on your retirement standard and overall wealth. Property is not as liquid as shares and you can’t just sell off a bedroom when you need money, you generally have to sell the whole asset which takes time to market, sell and settle.
Tax concessions on investments and benefits payments
As an SMSF is a type of superannuation fund it receives all of the same tax concessions. You should always check with your accountant as to what tax applies in your circumstances, but as a general rule, tax on superannuation investments is less than the tax paid on wages for the average working Australian.
One of the great advantages of using a super pension as a long-term financial planning strategy, is the ability to manage Capital Gains Tax (CGT) within your SMSF. The tax considerations in superannuation can be complex, but CGT is usually not payable when assets used to support a super pension are sold by an SMSF. This can be a significant tax saving on the sale of large assets such as residential or commercial property held by the SMSF, where a substantial capital gain has been made.
As a simple guide, income after expenses and any capital gains on the disposal of an SMSF property is taxed at a maximum rate of 15%. Loan repayments can also become tax deductible where members use other strategies to manage their wealth creation such as salary sacrificing.
SMSF Trustees are not required by law to take out life insurance cover for members, but you are required to consider whether to hold insurance cover for each member in the event of death, terminal medical condition, and temporary and permanent incapacity. This needs to be considered by the Trustees in the preparation of the SMSF investment strategy,
As the Trustee, you are ultimately responsible for the operation of your SMSF, which includes complying with a range of important duties and rules. Significant penalties can apply for non-compliance.
If you are considering setting up an SMSF, give Bright Advice a ring on (07) 3394 8201 to book an obligation free complimentary appointment to discuss whether an SMSF is right for you.
Disclaimer: The information contained in this article has been provided in good faith and has been prepared from information believed to be accurate and reliable. This information is of general nature only and should not be considered as personal advice. The information is based on Bright Advice Pty Ltd’s understanding of the the present legislation, but no guarantee is provided. This document a substitute for financial or investment advice and should not be relied upon as such.
Bright Advice Pty Ltd ACN 163 823 998 is Corporate Authorised Representative No. 458957 of Alliance Wealth Pty Ltd ABN 93 161 647 007 AFSL 449221. Jamie Ogden is a Sub Authorised Representative No. 458956
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