Not enough talk of SMSFs

I think we should discuss SMSFs and the various strategies more on somersoft. This is a huge area that most people know little to nothing about and there are heaps of stategies out there with many strategies involving property. These strategies become increasingly more attractive as we get older and closer to meeting a condition of release (or death), but many can be implemented by younger people.

Anyone doing any SMSF strategies?

Hi Terry,

I'm at the very early stages of this, having recently set up a SMSF for myself and my husband but am yet to purchase property in it (still waiting for a tardy industry superfund to hurry up and send me the cheque... they've only taken 3 months so far ). Not sure I can even call this a strategy proper since I know relatively little about it and am letting my accountant handle the nitty gritty for now.

As far as the type of property I'll be purchasing in it, I'll be going for an established house or two, with as large a land component as possible. If the pension age is raised to 70, that gives me 35 years holding time.

Would be good to hear what others are doing in this area and the level of involvement.

Had an Smsf since 2003, have not had industry fund since.

Three props on LBR arrangements with offsets. If purchasing nothing else props paid off in six years with rents and contributions, however I am likely to use that cash to purchase more investments. Also have in the fund substantial unleveraged share portfolio. Using DRP to purchase more shares. Currently rebalancing accounts using contributions splitting in preparation for any tax changes. salary sacrifice for the last 18 years has helped fund balance with little impact on lifestyle.

Strategies I am using are vanilla, but work nicely. I think spouse contribution splitting is overlooked and is really income splitting for retirement. If the govt start taxing higher super balances on retirement, this helps couples to avoid potential future asset balance caps and reduction of tax free super income after 60.

You went to Grants seminar? I think he has great ideas and knows his stuff.

I used $120K in SMSF to fund 2 property purchase this year. $170k and $250K achieving rent $285/wk and $310/wk respectively. While some suggest I should to go with 1 properties instead of 2 small value ones and I am aware of of the high bank fees and bare trust setup fees, I am yet to see annual accounting and audit fee charges.

I have some funds left in SMSF, and is exploring is margin lending/gearing on asx200 is a feasible option.

Hi Terry, great idea, would like to see more discussion on this too.

We've had a SMSF for about 13 years, since we migrated from UK and transferred pension funds over here. Last year we changed over from individual to corporate trustee, and we are actively investigating LRBA for property purchase, just getting all our ducks in a row and researching the market.

Beyond that it will be interesting to see discussion on the longer term plans/ transition strategies ppl are planning to use as they near retirement

Me!

We have a SMSF with 4 members. 2 are Mr and Mrs Westminster and the other 2 are my parents who are over 70.

Strategy
- Westminster superannuations rolled in and also this financial year we are doing 3 year pay forward voluntary contributions.
- Westminster Seniors (parents) are actually not rolling in their Super as we'd like to keep their risk low and they are happy with their pension set up. We are making a voluntary contribution on their behalf this year as a loan to them.
- We have purchased a development site and will build 4 apartments with a gross profit estimated at 40%
- We can sell these and be taxed at SMSF tax rate of 15% and roll money back into SMSF BUT also have the option to take money out using Westminster Seniors (this is the major bonus in this strategy)
- Rinse and repeat

I think I have outlined it correctly. It is only a few months old so I might have some of it a little mixed up but essentially we invited my parents in as members so that we can take out money if we wish at 0% tax as they are allowed to take money out being of pension age. Downside for them is that they are no longer eligible for govt Pension but we have agreed to pay them equivalent (or more) so they are no worse off.

Wow great post terry

Westminster that is fantastic you certainly have it sorted.

My husband and I have a combined super of 300k I hadn't thought to do a smsf as I thought diversification would spread the risk. Having said that I am mid 30s and hubby mid 40s so maybe we have time to mitigate the risk. Just a bit scared to put all the eggs in the property basket. We only have 10k of shares plus super.

I've had an SMSF for a while now with my parents, younger brother and I as members but have only really been maximizing the opportunities over last couple of years. We are all self employed and hate the idea of other people managing our money so it was a no brainer and I think when they're used correctly there are so many opportunities available within SMSFs

Fwiw sammeee we don't own any property in our fund, prefer to invest in other things. People seem to get overly fixated on property imo

Myf be careful with what you re that devvy site, I don't believe you're allowed to undertake commercial ventures but you can invest in them

Hi Terry, If I was to buy an average house with an average yield say 500k, what would be the minimum amount you would need in super to start one up ?

What about the risk of adverse regulatory changes to super?

I see this as a big, and obvious risk.

I had a SMSF in the past, jointly with family members. The feeling was that the family would be able to invest better than the fund managers. This was in the days before levering into property became available.

Unfortunately this wasn't the case in this instance. The share guru in the family (not me) managed to dwindle the fund away to practically nothing. In the grand scheme of things we didn't loose a disastrous amount, but it did eat up most of the super I'd accumulated prior to that point.

Obviously the markets played a part, but it was mostly bad management. My lesson from the experience is that you're better off leaving to a professional to manage, or oversee and control it yourself. Don't leave it to another family member who's not entirely qualified. Super paperwork and compliance is a minefield and should be approached with caution and with professional help.

Chomp said:

Hi Terry, If I was to buy an average house with an average yield say 500k, what would be the minimum amount you would need in super to start one up ?

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Hi Chomp -

There is never a minimum, however the way you would measure it is to say I would like to buy a resi property which will achieve LVR of 80%. I would need to lay down a 20% deposit which is 100k.

I can borrow the remainder of $400k. This will depend on number of members and forecasted contributions into the fund. With the scenario above for a $500k purchase I would want $150-175k in Super with a 10% cash buffer at least. This obviously depends on your strategy as you balance can be increased with concessional contributions of at least $30k per member.

You would like to budget rental income (5% fingers crossed), loan costs at 5.6% of loan amount, property mgt and expenses. Then

Costs:

SMSF Set up and Bare Trust: $2650
Loan application fee $0-1000
Banks legals $600-2000
Stamp duty (Between zero and $25k depending if off the plan)

Annual SMSF costs of $1100.

Hope that helps

Cheers, Ivan

Good point Terry - I have wished there was "superannuation" thread on SS for a long time. Its a massive industry with huge $$$ and 560,000 funds. And that's just SMSFs...Lets see if Sim can deliver on our wish list. Property for a SMSF is very different to that outside super.

I have been involved in super and strategies for a long long time. Employer funds, audit, industry funds, retail and SMSF. My view is that SMSF are less a structure and more a series of endless options for strategies. There isnt a "manual"'on this stuff. Its like buying a tailored suit. Much of which can be tweaked provided its given good guidance. Often with good hand holding too.

The difficulty in advising on SMSF strategy departs from the usual rules about legal advice. Its financial advice that requires a license, tax advice, accounting services, administration, property management, mortgage broking, asset protection, estate planning, insurances and more...All in one. And sometime with legal advice too.

SMSFs can be combined with other entities and can be very powerful. Then there can be merits in a SMSF to SAF strategy and even reasons to combine retail / industry with SMSF rather than just having 100% in a SMSF. Strategies such as exit strategies are important too....One strategy often overlooked for older members is the SMSF to industry fund strategy to access anti-detriment in some cases. Trust expertise is very important too.

SMSFs aren't for everyone. You cant put a $ minimum on these things but its fairly evident that under $100k is NOT viable on a cost basis. But cost may be just on part of the picture. A long term strategy may use that $100K and still be viable. That where the financial advice is important. SMSFs aren't for people who don't like rules. Or clients with hairbrained ideas....

How many times have I been asked about buying a holiday home that wont be a holiday home except when its used as a holiday home.

Redwood said:

Hi Chomp -

There is never a minimum, however the way you would measure it is to say I would like to buy a resi property which will achieve LVR of 80%. I would need to lay down a 20% deposit which is 100k.

I can borrow the remainder of $400k. This will depend on number of members and forecasted contributions into the fund. With the scenario above for a $500k purchase I would want $150-175k in Super with a 10% cash buffer at least. This obviously depends on your strategy as you balance can be increased with concessional contributions of at least $30k per member.

You would like to budget rental income (5% fingers crossed), loan costs at 5.6% of loan amount, property mgt and expenses. Then

Costs:

SMSF Set up and Bare Trust: $2650
Loan application fee $0-1000
Banks legals $600-2000
Stamp duty (Between zero and $25k depending if off the plan)

Annual SMSF costs of $1100.

Hope that helps

Cheers, Ivan

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Speaking of strategy....Some alternatives may include:
- Joint SMSF owners (ie two families)
- Ungeared unit trust (far cheaper sometimes)
- Ungeared UT with individuals accessing neg gearing and SMSF +ve geared
- Related party lend (far cheaper than bank loan...ie using equity in PPOR)
- Buying non-resi and buying business premises, factory unit etc and renting this to the family business.
- Transfer of property to a SMSF in-specie.
- A Related party loan with debt forgiveness strategy to bring forward "contributions" into one year well above caps.
- Importance of pension strategies for a fund with property that wants to avoid death benefits being "cashed" after death. Or an insurance strategy that supports the death benefit issue.

All with different costs, issues, benefits etc.

I over heard someone with a SMSF say something scary the other day. It was to do with a property they had purchased. They couldn't recall what they had paid for it and said, 'Oh, I can't remember. It doesn't matter because I bought it in my super fund.'
I've heard other people say similar things. Some people buying property in their super funds don't apply the same rigor to selecting property as they do when buying it in their own name. It's an odd, and unsettling, attitude. Great for spruikers, though.

+1.

Probably a warning sign that they didn't get financial advice. I reckon I wind up as many SMSFs as I setup for that reason. I argue that very few people possess the skills to determine whether a SMSF is suitable for them. Sadly in many cases its hubby pushing wifey along. Its easy to argue you can do better in a year of declining returns but the issue is one the industry and retail funds hide. The issue is their strategy is designed to lose investor money.

Whhhhaaaatttt....That right. See most industry funds have strategy choices. Each ranges in % for various classes - ASX shares, Intl shares, fixed int, cash, property etc. And the PDS refers to risk as being short term, medium term and long term....But the key failure of some funds is that very strategy.

eg : Lets look at Sunsuper. They offer 4 strategies. The class mix is shown on the link provided.

So if the Dow / ASX etc crash 40% what happens is most of the classes lose 40%... ASX shares, international, private capital, infrastructure all follow. So around 30-70% of the fund loses 40%. The weighting towards risk classes determines that effect. And what does the strategy mandate ???? It mandates the same % as it did before it crashed. So there isnt a reason to sell early. So the balance suffers a loss. Now the $1m balance is worth $600K...The $600K must earn 66.7% to match the 40% loss....Just to break even. Perhaps then the investor considers a higher risk profile to chase that outcome...In the pre-retirement years.

Perhaps more people should consider strategies that limit losses in the first place. I suspect that limited choices available to avoid this "mandated investment" problem drives many towards a SMSF and property.

Ed Barton said:

What about the risk of adverse regulatory changes to super?

I see this as a big, and obvious risk.

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Good question. In the past most generous benefits from super have been eroded or wound back. However, there is typically a feathering of new restrictions. ie Grandfathering from a date, aged based tests etc.

However, the foundation of superannuation law and practice is supported by principles based around the concept of "retirement". The gradual elevation of the retirement age is likely for social security pensions but given the incentive to assist growth in super balances using transition to retirement pensions and compulsory contributions etc I wouldn't expect a sudden age leap leaving balances stuck in super. It would be a lead balloon to re-election. Its why nobody mentions taxing over 60 super pensions. In our ageing population this would be certain defeat and trigger a revolt. Even the MPs would be affected !

sanj said:

Myf be careful with what you re that devvy site, I don't believe you're allowed to undertake commercial ventures but you can invest in them

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I did run it past accountant but all moves with this strategy will be carefully done and advised on.

Thanks for reminding me to not go off half cocked

Hubby and I have been talking about this for a while but haven't done anything. The pessimist in me thinks the rules will change and the benefit for us having the SMSF will be long gone by the time we retire.

Guess I'm still bitter about the changes to hybrid trusts since we created one...

We set up a SMSF a couple of years back, no property though, it's in the Stockmarket