SMSFs can provide a solution for those who want to control how and where they invest their money, but they certainly have their risks as well.
Using your self managed super fund (SMSF) for investments requires a sound and particularly powerful strategy. It needs to be well considered, appropriately implemented and aligned with the financial aspirations of your fund - which is to support your retirement. According to Chrish Samuel, Finance Strategist from Finstar Financial, your investments should be sustainable and diversified. ‘When investing remember not to rely solely on high yielding assets, take into consideration investments which have consistent long term growth and are not susceptible to market volatility,’ he says.
Think long term; what may be a good investment today may not necessarily by a great investment in 30 to 40 years.
In this guide
Work out your strategies
Dealing with the Tax Man
Things to consider
Working out your insurance.
Documents you'll need
SMSF investment strategies
To decide whether capital gains or cash flow is the more important goal, you need to look at what you want from your SMSF. If you’re looking to build up the funds for you retirement, a general investment approach is usually dominated by a capital growth strategy. However, if you’re looking to sustain your balance in retirement, then you may want to consider a cash flow strategy. You, as the trustee of the SMSF will then establish whether or not your fund should be looking for capital gain or cash flow, which will heavily depend on your own financial objectives.
The existing benefits of a borrowing strategy with your super, similar to the one when investing in property may be more noticeable when a property that is appreciating in value is used. Equity would be building up in your property which could effectively be crystallised at some point in the future when you can access your super, or when you start receiving a pension when your income is tax free.
Cash flow has significant value in ensuring your investment remains affordable and shouldn’t be ignored. It would become particularly useful during the phase when you are receiving pension payments. However, these factors will eventually come down to your own financial goals and objectives and how your investment strategy could meet them.
Did you know?
All members of a SMSF must be trustees either individually or appointed director of the corporate trustee. According to current tax regulations, there is a maximum of four persons allowable in an SMSF, which means that of a family that has more than four member will need more than one SMSF to be set up if all members wanted to be included. The ATO has released statistics showing that over 90% of SMSFs have two or fewer members, however, it tends to ignore the fact that larger families are forced to operate through multiple SMSFs.
With multiple members, you may want to consider writing the SMSF in a way to give individual trustees or directors (therefore including members), proportional voting rights to ensure people with higher balances are not taken advantage of by members with lower ones. You may want to consider a system where one person has one vote in the SMSF.
SMSFs and the ATO
The Australian Tax Office (ATO) have become aware some SMSFs do not comply with the superannuation law. The purpose of the Taxpayer Alert is to issue a warning to SMSF trustees and advisors to exercise care and compliance, ensuring that all processes are properly implemented. There are hefty fines payable if your SMSF is found to be non-compliant, which then may affect the quality of your retirement. It should serve as an informational and educational source when deciding whether or not to proceed with your particular investment strategy that’s being watched carefully by the ATO. In fact, these alerts can be a useful tool in terms of highlighting the considerations you should make before creating your strategy. You can also use this to assess the progress and standard of the professionals you may be consulting with to assist you in developing strategy.
Things to consider about your SMSF investment strategy
Be certain that a SMSF aligns with your financial goals and decide whether the risk is worth the return. ‘There’s more control of your financial future and your own investment strategy’ emphasizes Chrish. ‘You can choose your own investment allocation, these could be out of the norm that provide long term capital growth which a lot of industry funds may not invest in. For example, I personally invest a portion of my portfolio into Art and Fine wine, as this is my passion. This has proved to be quite rewarding for me personally.’ So if you can achieve your financial aspirations with an investment strategy that is low risk, there are other options available to you. Research your duties, responsibilities and legal obligations by yourself or through a professional and decide whether you’ll be able to handle the process.
If you’re thinking of using your SMSF for property, carefully review the super property borrowing strategy of your fund and whether it corresponds with your fund’s investment strategy. Understand exactly how much you’ll be making versus the costs of setting up and the ongoing expenses of your SMSF. The quality of the property is crucial for its success, so you need a very high level of understanding of how it will meet your fund’s investment objectives.
Chrish also emphasizes how crucial it is that you understand and correctly implement the necessary processes and rules of your SMSF investment, ‘seeking the right financial advice is paramount for the success of any SMSF, to ensure that you are complying by all government body guidelines whilst obtaining investment advice relevant to the allocation of your assets’ he says. Each investment type has its own rules and regulations, so to ensure their compliance and the relevant laws are met, you may want to consult a professional as well as log onto the ATO website for information.
SMSFs and insurance
There is a recent trend that holding insurance through an SMSF has been increasingly popular because it is often cheaper to hold the cover and pay for premium through the fund. The members or beneficiaries make contributions that are typically made to help meet premium payments into their SMSF. The fund then owns the policy and transfers the premium from the fund assets to the insurance company. The insurance company is responsible for following any claims made as well as issues a policy of insurance to the fund. In the end, the SMSF will pay the proceeds to the member or beneficiaries when appropriate. While insurance through SMSFs has played a critical role in addressing Australia’s underinsurance problem, it is essential for you to assess how much cover you actually need to have in place and know exactly what you’re entitled to in the event of a claim. You may want to consult an insurance professional to discuss and weigh up the different options available and what is most suitable for your investments.
Your strategic approach needs to consider the most tax-efficient structure to buy and manage your investments. Utilise tax laws and group these activities into the most cost-effective path from the purchase to sale of your asset. Remember to base these decisions according to how you lifestyle may change. Consider significant life events like marriage, having kids, job changes and retirement. These personal changes show that you need to be prepared for whatever financial challenges you might have in the future.
Generally speaking, a superannuation attracts a lower earnings tax of 15% and Capital Gains Tax (CGT) of 10% on the sale of assets if you’ve had them for more than year. As well, if you earn an income of $180,000 plus, you could be taxed up to 45.6%. If you’re over 60, you can sell your property within your superannuation free of CGT, the same applies to shares and interest from term deposits. So when creating a strategy these are some of the tax considerations you need to consider.
It is highly recommended that you consult a professional when considering an SMSF. An expert financial advisor can assist but it may be hard to find one to talk to properly without him or her telling you to sell off your existing properties and purchase funds that are managed by reputable investor or agent. You may want to find an independent advisor instead who charges a fixed fee and expertise in the area of assets you want to invest in, as they may give you more tailored advice.
Another consideration is that you cannot access any of equity you’ve made in your assets until you’re 60, so if you’re a young professional, that could more than 20 - 30 years away. If you’re considering to invest in a property, you will also need a large deposit as most banks tend to loan around 80% loan to value ratio (LVR) otherwise your loan will incur Lender’s Mortgage Insurance (LMI).
Depending on your income and expenses, experts suggest that you salary sacrifice around $25000 per annum (for SMSFs with two members or more) into their super to reduce the debt and increase your equity, allowing you to buy new property or assets every few years or so, depending on the type of loan you have. If you’ve invested in property, given that you obtained a low LVR, many properties could be cashflow positive and therefore, not require further funds to repay interest. Effectively, it all goes to paying off your debt to allow you to buy more properties faster.
Compliance
Eddie Chung
Partner
BDO
Just be mindful and careful in the way you do this [your SMSF] because getting it wrong can have major consequences. While SMSFs can now borrow to buy property, they are not allowed to use borrowed funds to renovate the property, so the fund needs to have sufficient cash in its own right if renovation is required. Theoretically, people can set a SMSF up by themselves but I highly recommend using a professional because there are too many compliance issues and rules as to what they can do. Given the complexities of a SMSF, I wouldn’t recommend setting up a SMSF to fund property investment by yourself.
Tips
Chrish Samuel
Finance Strategist
Finstar Financial
Personally my strategy is to not have more than 20% of my assets in one particular investment class. Within that 20% invested I do not have more than 5% allocated to one particular share or investment item. This strategy has proved to be successful time and time again. Speaking to a financial planner and finance broker is paramount to looking at investments from a holistic point of view and seeing what strategies might be crucial for your current age and current circumstances.
SMSF Documents
As a family or a couple you can pool your super funds together to increase the overall value, but experts recommend a ballpark figure of $150,000 - $200,000 to get started. You will need a debt installment trust and debt structure to repay within your SMSF for every asset or property. Altogether, these can cost up to $1500 - $2000 each in addition to purchasing the documentation which can cost another $1500 each.
Jargon Buster
A debt instalment trust is established to allow a super to borrow money for purchasing assets such as property, shares, trusts and term deposits. The debt instalment trust holds these assets in trust for the superannuation fund without it being exposed the standard risks associated with borrowing funds.
High quality research and advice is the only way to ensure a successful SMSF investment strategy. It is also one of the best ways to avoid any penalties that may be imposed as a result of Australian regulations. Use as many tools as you can to avoid the costly mistakes of managing your own super fund to ensure the success of your SMSF.
The information on this page should be treated as general advice only and in no way considers your personal situation. All rates and tax information is correct as of 4 July 2013. Before starting a self managed super fund (SMSF) professional advice is highly recommended.
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