The pros and cons to managing your SMSF

Hi all.

After receiving a few comments (from brokers, BA's, FP etc) over the past 12 months, I'm considering setting up a SMSF. There have been suggestions that I use a SMSF to buy an IP, and I know that there are definite incentives to investing through this medium.

However, I'm concerned about the time, and legal knowledge, needed to effectively manage my SMSF. Between sorting out the trust deed and investment strategy, ensuring that I meet all the (changing) requirements, and dealing with half-yearly review and annual audit etc, I'm just not sure I've got the time (or the legal know-how) to take this on. I'm really worried that I'll stuff up, and cost myself a fortune (by either breaching the rules/regulations, or not having enough investment knowledge to make wise investment decisions).

Are there any SMSF investors out there who can offer me their voice of experience? Has it been worth it? Given the choice, would you do it all again? Are there things I should do at the start up phase to make it easier? Things to avoid?

Any comments or suggestions would be greatly appreciated (I feel like I'm drowning ……..)

KayTea

 

I do it thru esuperfund,
they setup whats required,
EOY they audit and file tax
they charge 699/yr for this, first year is free.

I get one bank account one broker account, optional life insurance cover.

Their default investment strategy is broad enough for shares/bank deposit/etfs (not derivatives though). But one can make it more rigid or more broad if need be.

End of the day you make your investment decisions.

But purely from smsf mgmt perspective they take care of everything.

I don't do property investment thru super as tax advantage and leverage available outside smsf is more. For positively geared property(from tax perspective) it might make sense to be in super.

 

Considering getting yourself good experts particularly a good Accountant that does these day in day out.

A lot of lender have dropped their resi LVR lending which makes commercial properties more attractive within an SMSF particularly if you don't have a huge balance in your SMSF.

One of the benefits of going down the commercial path is that you can rent the premises to your own business which may work well for the self employed.

There are a number of strategies so it really comes down to your current SMSF balance and longer term strategies.

 

Thanks TheSackedWiggle.

I've had a quick look through the eSuperfund site - they have a lot of great features, but the one red flag for me is that they only allow borrowing for an IP through a couple of set lenders. That could be a problem, as the lenders they go through may not have the best rates, or loan structures, available.

 

I like the idea of commercial property investing, especially seeing as how I'm getting a residential IP in my own name. Diversify the total portfolio = sounds like a great idea.

But I'm not self employed, so there's no benefit there.

I believe that a lot of commercial property investment loans have higher rates, and tighter regulations, but can come with the benefit of longer leases and potentially better rental yield. Please correct me if I'm wrong.

 

Commercial loans interest rates are quite good particularly when the recent increase in investment loan rates.

The thing that gets you is the fees but again if you note it in your cost of purchase it should still work out ok. In addition to that you don't have the liquidity requirements like you do in resi finance.

 

I have closed my eSuperFund account. It wasn't for me. I was going to buy a residential IP through the super fund but I have decided against that.

What attracted me to consider this option initially was that any rent being earned in the super fund is tax free (provided the member is retired and over 60) and also selling would have no capital gains tax provided the member is retired and over 60?

Anyway, there are a couple of issues with IPs in smaller funds. The main issue for me was the mandated minimum withdrawal per annum. For example, if you are 55 to 64, the minimum annual pension payment is 4% per annum. Taking that amount out year after year will be an issue if most of your capital is tied up in IPs. The other is the leveraging is not as attractive in a super fund as outside a super fund because deposits are a lot bigger in a super fund.

In my situation, I have private (non-super) investments in residential property and a super fund with a mix of shares, cash, bonds, property etc. I figure I have somewhat diversified my investment portfolio with this option. I felt that with most of my non-super captial tied up in residential IPs, investing my super in residential IPs was too much of a concentration of investment capital in one asset class.

 

If you don't mind me asking, Perthguy, what super fund have you got that allows this diverse mix of asset classes - is it some sort of master wrap, or a similar sort of managed investment fund provided by one of the big investment firms (i.e.. AMP, Colonial etc)?

 

It is a very old WA state government super fund from 1994. I worked for them briefly in 1994 and they set the super fund up automatically. I've worked in a few places since then and each new company set up a new account. A few years ago, I looked at all my accounts and rolled everything into the old government super account because I liked that one best. It performs well for what I need.

 

I think it is irrelevant that super funds can leverage less that ourside investing. A superfund has money separate to the funds outside. So it is not as if you would be diverting funds from yourself outside of the super into the super.

You should look only have what funds can do. Investing in shares has generally better returns than property, but a SMSF can still leverage property and not shares. Even at 70% LVR this is a substantial difference in return.

 

Super is great, ive got an smsf with my family.

Youre righr though, the rights come with responsibilities and you dont want to make mistakes as the penalties can be severe.

Overall though i wouldnt have it any other way. Its allowed us to put money into inveatments that i otherwise might not have had soare cash to, eg early stage/seed investments etc

 

Kaytea, just be wary about Esuper as you are so right they will insist on arranging your finance with a limited number of lenders who may prove not to be particular competitive.

Also need to watch the cost such organisations charge for establishing a Bare Trust or Security Trustee company etc as this is often where they make money.

Other consideration is do you really want you personal details being processed overseas.

I have managed my own SMSF for 20 years and would never let anyone else manage it.
Choice and flexibility of investment is well worth the limited amount of extra paperwork required.

Cheers


Richard

 

I'm talking to Jacqui about this next week

 

The idea that a 3rd party will "look after everything" is fundamentally flawed. You as a SMSF trustee are who the ATO will hold accountable. So you can buy the skills to prepare your return and do the audit, but imo this is not "managing" your SMSF, they are administrative processes.

 

I am very glad that @Terry_w has pointed out that "it is irrelevant that super funds can leverage less than outside investing. A superfund has money separate to the funds outside".

The thing people forget is that their money that is already in super is stranded in super anyway, so they might as well put it to work. You should not compare apples with oranges and say "oh but outside super it would be better". Inside and outside super are different vehicles, and it's all about making each vehicle work hard for you given the rules that surround them.

It is interesting how many people say they would rather invest in property outside of super when in fact that have no financial means to do so, but have a big pile of money sitting dormant in super that could have been used.

 

Certainly a very valid point and well made. Try hiding behind an online overseas administrative service when the ATO come knocking after an audit.

Cheers


Richard

 

We use experts to set up and ensure we comply with all the appropriate requirements. It'snot a major drama

Only thing I do is decide what to invest in . I'm happy to put my judgement in that area up against the so called experts .

We bought two units in Manly Sydney around 4 years ago and two in Many Wynuum in Brisbane two years ago . Happy with those decisions .

Cliff

 

You've clearly got a thing for Manly, See Change. That's okay. I spent most of my high school years at school in the Sydney Manly, and now live only a few minutes from the Brisbane Manly - maybe we are kindred spirits?

 

First point is only an issue if you have gone into retirement . If you are still working you don't need to take any out . Most days I enjoy my job .

For me , the reason to invest in super is gearing in an investment I feel confident to gear into .

As a result of that Gearing , we have come close to doubling our equity in our super fund since we started investing our super funds in property four years ago . So you need a bigger deposit ... But ... It's still making my money work harder

We have four properties in our super . Don't intend to buy more .

Our aim is to keep them as long as possible and pay down as much as possible via normal contributions and additional contributions .

We have the option of selling one or more at any stage and use the profit in an offset account to decrease the loan repayments or fund distributions if necessary .

We could also invest in shares . Personally the more I watch the share market the less I am inclined to invest in it .....

I'm a big believer in the alternative interpretation of diversification , and believe it is just deworsification ..... Be good at one or two things , rather than try to be a jack of all trades and master of none .

Cliff

 

@See Change ... you've got a great grasp on SMSF matters and a great at explaining things in a way people can understand. Awesome to see