SMSF’s (Self Managed Superannuation Funds) have become something of a hot topic in Australia in recent years.
Many people have little or no idea or little or no care about SMSF’s and what they do while others are gung-ho about them. Some even attribute the increasing cost of Australian property in part to SMSF’s and the potential “additional” buyers that have been driving the market up. SMSF’s, according to Your Investment Property magazine, account for $328 billion or 31.8% of the total superannuation assets in Australia. However of this $328 billion in assets, only $45.2 billion or 14% is held in direct property.
As an FYI, the Australian Taxation Office is the regulator for SMSF’s.
Check: Self Managed Super Funds.
Generally your super was and is allocated and paid to a fund of your choice and this is then invested on your behalf by experts in the hope of gaining a reasonable return for you to live on in your retirement years. There are over 500 funds in operation in Australia and 362 of these have assets totalling greater than $50 million AUD. So as you can see, there are a wide range of options out there!
SMSF’s are heavily regulated and I am not here to go through all the laws around them. What an SMSF does is pretty much as the name suggests, it is a Super Fund that you have the ability to control rather than being one of the faceless investors in one of the big super funds who invests your super on your behalf for a sometimes modest return and for a fee of course!!!
With your own SMSF you choose what to invest in, and that can include direct property, be it residential or commercial. Now with a property purchased through your SMSF, all running expenses of the property are paid by the fund, meaning you’re not out of pocket in the same way you would be with a directly-owned investment property, and your fund can also take advantage of significant tax benefits.
The ability for the average Jane or Joe to take control of their super and then invest this where they determine rather than a huge fund manager must be attractive. I wonder if the Global Financial Crisis and the hit Super took at that time where big losses were incurred may have spiked the interest of the average employee to want more control of their destiny and invest where they felt might be best? Also regarding the GFC, residential property had a strong growth spurt during this time as people sought the security of bricks and mortar rather than shares, managed funds and the like. Losses during the GFC were estimated to be in the range of $75 billion AUD!
The rules, the rules!
You can only buy property through your SMSF if you comply with the rules, and here we go!
The property:
- Must meet the “sole purpose test” of solely providing retirement benefits to fund members.
- Must not be acquired from a related party or member.
- Must not be lived in by a fund member or any fund member’s related parties.
- Must not be rented by a fund member or any fund member’s related parties.
However, your SMSF could potentially purchase your business premises if you are self employed, allowing you to pay rent directly to your SMSF at the market rate.
Now SMSF property sales may have many fees and charges. These fees all add up and reduce your super balance but some fees are:
- Upfront fees.
- Legal fees.
- Advice fees.
- Stamp Duty.
- Ongoing property management.
- Bank fees (if you borrow).
- Accountancy and audit fees.
Fairly recent developments, September 2007, (and there is talk this could be subject to change!) allow SMSF’s to borrow money under the SIS Act, see http://www.comlaw.gov.au/Series/C2004A04633 for some light reading if you have the time!
Borrowing or gearing with your super into property must be done under very strict borrowing conditions called a “limited recourse borrowing arrangement”.
A limited recourse borrowing arrangement can only be used to purchase a single asset, ie a property. A couple of pointers to note:
- SMSF loans have higher costs and rates.
- Any tax losses from the property cannot be offset against your taxable income outside the fund.
- You cannot borrow to improve the property, borrowed funds can be used to maintain a property but cannot be used to improve a property.
Also keep in mind that your SMSF must have an investment strategy. With lending, the maximum the SMSF can borrow is 80% of the purchase price with residential and generally less with commercial property, say 65-70%, so a reasonable super balance is required to begin the process.
Certainly more and more Australians with healthy super balances are looking into their options of starting an SMSF and therefore having more control over their own future. In reality, your super is an extremely valuable asset and may be all you have left come retirement age. The Australian love affair with property and the ability to borrow within your SMSF are naturally pushing more Australians into considering their options and controlling their own future and this cannot be a bad thing if they are receiving sound advice and talking to the experts in all areas of the process.
A word of warning, be very careful with scammers trying to get you to invest in poor performing properties, always seek assistance.