Your SMSF investment portfolio.

Hi friends at PC, I am currently looking into setting up SMSF. Can you guys be kindly share your SMSF setup such as:

1. what your portfolio looks like now.
2. what's the LVR,
3. which bank/institute are you using for finance.
4. how are you going with it so far.
5. What's your long term strategy
5. Is it worth the trouble? How does it compare to the regular industry super fund if you ever have one of those before.

I am keen to learn a few things from members before taking the deep dive.
Thank you very much in advance.

 

We have purchased a commercial property within our SMSF and the idea is to rent out the premises to my business. LVR is sitting at 70%.

The idea is to leverage the commercial purchase within my SMSF instead of using my funds outside of the SMSF to invest. I'm also contributing a large amount each year so it definitely makes sense.

If you are looking to invest in residential you should definitely consider a lender like St George or AMP that has an offset. You can't do equity releases within the SMSF lending space so its a worthwhile strategy paying IO and accumulating the principle repayments in the offset so that you can potentially invest the funds in other asset classes.

With all the restrictions in residential SMSF lending (lower LVR's, liquidity tests) considerations should be made to commercial property. @pinkboy made a post about his commercial purchase within an SMSF and that was a good example - definitely recommend looking at real life cases like that to learn.

 

Thanks @Shahin_Afarin, some members claim that they can get up to 80% LVR, not sure which lender they are using and which type of investments.
I couldn't locate the post you mentioned from @pinkboy do you mind copy and paste to this post or PM me. Thanks.

 

My Commercial Purchase.

pinkboy

 

We setup a SMSF and first purchase almost 12 months ago now still early days but happy to comment

1. One residential property in Brisbane (Wavell Heights) 10km to CBD current value about 560k
2. LVR @ 70%
3. We went with AMP, very few will do an offset as already mentioned all ones at 80% at the time didn't offer offsets, also watch out for new liquidity requirements.
4. So far so good have learnt a lot!
5. Ideally get another one or two properties with a long term view of all 3 being worth ~1M mark in 25 years, either live of the rent or sell down, hard to say lots will change in 25 years.
5. It is a high barrier to entry lots to learn, and harder to buy property as oyu have more restrictions etc. especially in a hot market. I love the fact I'm in control, also love the fact I can invest in something I know a bit about and enjoy (residential property).

Worth noting we make max contributions every year so have a healthy income into the SMSF, investment property is yielding about 5% gross. Also super for us is a "plan b" ideally we won't need it and it will just be cream but if "plan a" doesn't pan out then we should still have a comfortable retirement.

We had about 300k when starting out, like most people say 200k is really bare minimum.

 

Care should be taken with SMSF property loans that the LVR is set at a level that means the property is neutrally geared. There is no true tax benefit available for negative gearing and the tax rate of 15% is truly trivial and it could actual consume cashflow to sustain ownership if large tax neg gearing cashflow occurs. This means contributions evaporate and the SMSF strategy consumes contributions endlessly. So unless the property has an assured growth in value there is no growth in super. And IO loans mean that equity from loan reductions doesnt occur. If the contributions cannot be sustained a problem results and forced sale may even be the only option. Thats worst case.

Be very very wary of chasing high LVR loans for a SMSF. It may be a sign of a problem or may even be prudent but smsfs arent like personal ownership and require a different approach. Many lenders seek to lend to SMSFs based on cashflows and a negatively geared fund may find it harder to get approval v's one with neutral cashflows AND proven contributions. Cashflow buffers now are more stringent than once before. There can even be some members who cannot contribute to a SMSF and I often encounter those. Imagine finding that out too late !! eg Wife is a nurse, husband is a bricklayer. Both may have compulsory contributions to industry funds not SMSFs so choice of funds in not allowed ....There is a strategy to address that BUT it has some limits too. eg Hubby may be allowed to rollover from CBUS to SMSF once a year and wife may be stuck in a state defined benefit scheme and unable to rollover.

Remember too that a decision to start a SMSF and to make contributions to a SMSF and all issues surrounding acquisition of a property requires licensed financial advice and not accounting advice. While people think they can "do it themselves" the practice in reality encounters major roadblocks often learned after a decision is made and can lead to mistakes that are costly to rectify. I could write a book on SMSF mistakes I have seen even when seemingly experienced accountants are involved.

 

Totally agree with everything Paul has said, setting up a SMSF and buying property is pretty daunting but like most things if you get a professional who is an expert in this areas makes it much easier.

@Paul@PFI while I agree on your view about negative gearing in SMSF due to 15% tax rates, what's your view on people earning over 300k and therefore paying 30% tax on contributions, in your view would this change the strategy at all and if so how ?

 

STG does a good offset for smsfs. Effective earning rate is around 6.5-7%

I have sought a ruling for the ATO on SMSF offsets.
Are they a part of the bare trust or are they a SMSF asset ?

The reason I say that is the offset is tied to a loan. The loan is to the trustee of the bare trust. Hence the offset may or may not be part of the bare trust. If the offset is a bare trust asset it may be unable to be used for acquisition of other assets. Use of an offset for a purpose other than the original acquisition may pose a compromise of the "limited recourse" nature of the bare trust. ie using the offset for any other purpose wont offend the loan rules but may affect the limited recourse such that greater recourse is given to the trust when the offset is used than existed immediately prior to its use.

Just because offsets are available doesnt mean they are allowed. I asked for a opinion as I have doubts. I truly hope they are allowed.

 

My reply is general information and not advice. It may provide information to be discuss with an adviser relevant to your situation however.

In some limited situation such as a high income earner the negative gearing from the property may offset known contributions tax and provide a equal benefit eg Lets assume a $10K IP cashflow loss and a salary sacrificed contribution of $10K. The true tax rate on the contributions is 30% but the 15% is borne by the fund and the other 15% comes from the member so really the 15% ne gearing equates to the 15% tax on contributions. Hence it is square. BUT the fund will need to pay the other 15% as release to the member so a cash outflow of 15% ($1500) occurs.. Hence the fund incurs a 15% cashflow loss over the year.

While it seems cashflow is square its not. Thus further contributions are relied upon to sustain the bank balance. In the example given thats probably not a concern but could be if loss of contributions occurs and there is no capacity to replace the contributions with other inflows (eg non-concessional top up or rollovers). Also the neg gearing is highly inefficient at a tax rate of 15% v's the marginal tax rate of 47%. eg you are losing 30% of tax benefits but using a SMSF in the strategy.

A ungeared unit trust strategy (reg 13.22C) however can ensure that a similar acquisition is :
- Positive income to the SMSF unitholder and taxed at 15% and
- Neg geared for a individual unitholder and a tax benefit occurs at their marginal tax rate (47%);
- Improved Div 293 outcomes may result

IMO the other issue that is coming is that any salary sacrifice after 1 July will be inefficient. Stopping the employee sal sac and making personal deductible contributions still up the the $25K cap may mean a deduction benefit at 47% rather than 30% AND potentially a possible reduced Div 293 outcome (that cannot be assured however).

 

Hi Paul,
Thanks for the great information. Could you explain your comments above more? Are you saying sal sac for SMSF is inefficient, or all super sal sac? And why inefficient?

 

Great info Paul, I saw this mentioned in another thread but I'm still not sure why salary sacrifice would now be inefficient for those in the 47% bracket but still have a little bit of wiggle room to make a small salary sacrifice contribution while not exceeding the $25k cap.
Thanks.
Hugh

 

I didnt explain it well I will admit. I believe almost all taxpayers havent seen a opportunity under FBT to access TWO concessional caps. See FBT rules apply to any benefits given to a employee or their spouse...Thats often ignored.

Two concessional caps....One for the employee and another for their spouse. I am not talking about making a spouse contribution for the tax offset. I am talking about the employer making a spouse concessional personal deductible contribution under the otherwise deductible rule. Such a contribution would be a reportable benefit to the employee as a spouse benefit is given but does not affect Div 293 as the contribution is a spouse contribution so its doesnt count under Div 293 to the employee and it is a reportable fringe benefit NOT a reportable super contribution so doesnt count under the adjusted income rules either.

Provided it is a deductible contribution after 1 July opportunities to make deductible contributions will increase as the 10% rule and the employer supported super rule will no longer apply allowing more to do this. Another catch - Does the otherwise deductible rule apply ? A super contribution cannot create a tax loss. A spouse with $18K or more of income would be ideal.

 

We've had our SMSF for around 5 years now and it's way out-performed the industry super.

For the first 2 years I played the blue chip share market (CBA, WPC, BHP, RIO, Cochlear etc) and only lost money on CocaCola. From memory the return was around 20%pa by the time we cashed out.

We then rolled the $$ into a tourist accommodation venture of 6 cottages on one property in the middle of wine country which, after costs, returns fixed rent of 16% into the super. This will increase when we finally finish all the repairs and old furniture replacements required on the property.

We are building up the 15% cash in a high interest comsec account. Waiting to see what happens with Trump before buying shares again.

With the accommodation, had great difficultly funding the mere 30% LVR we wanted to borrow as was rural, tourist accom and SMSF. Banks couldn't get their head around it. Eventually we simply funded the 30% ourselves from an offset account against out PPOR - fully paid back P&I at relevent interest rates - but I gather you're not allowed to do that now without a massive paper trail.

We recently had the accommodation revalued for the SMSF changes coming in - and it's going up in value by 44% over the 3 years we've owned it (bit of sweat equity there too).

My accountant is a SMSF specialist (that's all he does) - costs around $2k year for him and another $1k for the auditor. I would recommend going with a specialist as SM super is very complicated and getting worse.

 

The ATO issued guidance that all related party loans needed to be fixed to comply with specific rules. Undocumented loans etc were never allowed and the limited recourse loans are the sole way a fund can borrow (for property). Seems its repaid so thats not a great problem but.... If you lent the 30% to the fund rather than a bare trust that legally owned the property (and has since transferred the asset back to the fund when the loan was repaid) you have almost certainly breached superannuation law and the fund may be considered non-complying and exposed to 49% tax - even if the loan has since been repaid.

Important others dont read posts and think what was described above is now permitted or its as simple as described. Many issues affect such a strategy. The tip to use a smsf adviser is a good one and will avert many problems.

 

Had our set up for some years now, never touched it so far.
1. No property yet, few hundredish in cash, bumping up to almost 1.5m likely in coming months.
2. All cash.
3. Self funded for now, until we need more funds.
4. Setting up and preparing now, for later.
5. Likely get a commercial with it, or just use it as play money to keep things interesting.
5. No trouble really, although more costs involved, but good flexibility.

 

What we did is not permitted any longer. Adamant about that. It was also documented within an inch of it's life - but now (since 1st Jan) it needs to be documented within 100th of a mm - and at 3 arms length instead of the 1 we dealt with.

Was all passed via the ATO and auditor as being above board, so comfortable but - as I thought I did say in my post, but maybe not - what we did is no longer permissible

 

What you did may also no longer be permitted and be non compliant. The ATO required all loans be made compliant. An audit opinion is only good as the auditors knowledge and should never be interpreted as an approval by the ATO. Only if the ATO rviews and accepts all aspects in compliance with the ruling could you be deemed compliant. If the ATO review it can be held to be a non compliant fund. NOTHING gets "passed by the ATO" and review by the auditor is never an ATO endorsement of acceptance.Only an audit decision or court decision that is not challenged can be accepted as a final OK. Or The Commissioners opinion in writing to the taxpayer.

.The ATO almost never act as a source of approval for specific arrangements other than product, class or similar rulings which are now very hard to get.