HI folks Im just about to purchase two IP's through my SMSF. My research on here tells me that an offset feature is highly desirable. I ran this info past the accountant that is setting up my SMSF and he tells me its not worth it (after running the numbers) as the earnings will be reinvested into shares to ensure I have a diverse portfolio. There is obviously something i am missing here. Can someone fill in the blanks for me please.
Tell your accountant that you are unable to pull equity from the property within SMSF lending - therefore its extremely powerful to save funds within an offset so that you are able to use it to diversify asset class or even to use as a deposit for the purchase of another property. So you need to weigh that up against savings 20 basis points.
Your SMSF will have a certain amount of cash for a certain amount of time even if the fund is buying shares. There is employer contributions too. Hope your accountant is licenced - AFSL or authorised rep?
When people talk about an offset feature being highly desirable, they are talking about investments outside a SMSF. In your SMSF, if you put all of your investments in real property, you will not have a diversified portfolio. It is generally considered undesirable to concentrate your risk buy investing in one asset class. Your accountant is talking about buying shares within you SMSM to diversify your portfolio and spread your risk. Of course the shares will need to be carefully selected or you will just go backwards. You could also consider EFTs or managed funds. The point is that these investment should outperform the interest you are paying on your residential investment loans. Otherwise it is better to put the funds in an offset account.
No, its desirable inside a SMSF too. The accountant is partially right. It should definitely be investing in other stuff IMO, but there's always that in between time when holding cash, and may as well be offsetting interest during that time.
True. Interest on a morgage is much higher than a 'high savings' interest account. So better to park money in an offset in the meantime. Last time I looked, there were providers offering SMSF loans with offset accounts.
Employer contributions will have to remain in my main super fund (QSuper) as insurance premiums are paid from there. As I understand it the SMSF then draws, when required, from QSuper. So the cash is sitting in my work super account and not the SMSF. Is my understanding how this works right or am i way off base?
I have no idea how your super is set up, but this may not be the best way. You could leave a small balance in the QSuper to cover the insurance premiums for a few years and have the rest paid to your SMSF. Hope your accountant is licensed to offer this advice.
Having an offset gives you flexibility. Park your SMSF cash against the loan while you decide what to do with it. As far as I know you can't redraw equity within an SMSF, so offset was the only option for me. In relation to your SMSF the practice I have followed is to rollover my industry fund cash into the SMSF and then split my contributions so that some go to the SMSF and some to the industry fund. This keeps the industry fund "live" and injects cash into the SMSF as well. I don't think it is right that the SMSF "draws" from your industry fund, you do a rollover when it suits you. As Terry says, I hope your Accountant has expertise in this field and is independent of the property transactions.
Being a CA is irrelevant. You need to know if he has an AFSL or is an authorised representative of an AFSL holder as this is financial advice. There is an accountant's exemption but only for incidental advice. Not licenced = no insurance.
An old thread however still relevant Where shares are averaging 10% and interest rates at 6% - would it not make sense to put spare cash into shares instead? Understood - there is the risk of the share not performing well, however just looking at my retail super and is average 10%+ in balanced/ high growth fund over the last 10 yrs. i would imagine banks would be charging higher interest rate for that flexibility. And also considering the loan would eventually get paid out..
Hope he has an AFSL as its a financial product and investment advice. Offsets are a terrific way to hold cash and actually earn a real return. v's a traditional business style bank account which pays nil to neglible returns. Not all lenders do this. STG do.... Think of a loan for $400K. And cash in a offset say $50K....So the interest (cost) saved at 6.2 % is $3100 which reflects as a form of income since it lessens costs. But this lowers the funds expenses so the tax applicable could be $465. Net benefit to the fund is $2635pa. $2635 / $50,000 = 5.27% earning rate on the $50K. And zero capital risk. In time you accumulate and decide to buy another IP. Use the cash. FULL deductibility is restored. Its a flexible and functions strategy v's a traditional bank account earning 0.01% or even 1.5% maybe..... Its a no brainer IMO. Alternatives can include income producing ETFs....I posted a link to all the main ones the other day. Blackrock ishares and betashares have a load of different income ETFs. Some more capital stable than others. Watch out for share based ones or bond ones as markets can arode capital value. One new one is CRED...Its a corporate debt based ETF...benefit of market listed ETFs is you can bail (in theory) in minutes. Just look for an active market.
