Episode 48: The ins and outs of Self Managed Super Funds

April 4, 2022

Nick joins us once again for the 3rd and final in a mini series to talk about SMSFs or Self Managed Superannuation Funds. These are very common among those who run their own business and those who want to have more control over how their superannuation is invested. Trudi, Sarah and Nick take you through why, why and when you should consider a SMSF and the upfront and ongoing costs of having an SMSF. They also talk about some of the special rules and restrictions that apply to SMSFs as they are a highly regulated product. If you ever wanted to know more about SMSFs or have considered setting one up, this is a great episode to start with on your learning journey.

Podcast Transcript Available Here

Duration: 25:33

Sarah Eifermann: Welcome to today's episode of financial FOFU, we're talking about one of my favorite topics, which is self-managed super funds, Trudi Cowan: Great topic and very worthy of having a good chat about. Sarah: And we have our good friend Nick Zahra from Concilium Wealth back with us today to discuss it because he can talk about it. Nick Zahra: Thank you, yes, we can talk about that. Trudi: And we should say the reason that we've commented a couple of times that Nick can talk about it, there's a lot of financial advice, you actually have to have a specific license to be able to talk about some of these things which Sarah and I don't have. Sarah: I have a lending license on self-managed super funds, so I can talk about the lending aspects, Trudi: I can talk about Tax aspect,  Sarah: You can talk about the tax. So, we've got you covered today. Nick: [unclear 00:47] the investment to that as well. So, the three of us together and we can help you out because; [inaudible 00:54]. Sarah: We've got you covered. All right, Trudi: We have got you covered. Nick: Yes. Sarah: So, for those that don't know, what is a self-managed super fund? Nick: So basically, a self-managed super fund is basically super fun, first of all. And basically, when you are setting up you basically are responsible for any decisions and basically complying to make sure that you are within the rules. So that's basically what you need to be aware of. Trudi: So, you're basically operating your own fund  Nick: Exactly.  Trudi: then going through one of the big industries. Nick: Yeah, so basically, your personally liable for all the funds' decisions, where you're investing, you can get assistance from your accountant, your financial planner, and also your mortgage broker with regards to getting the loans done. But you're solely responsible for the whole thing basically, that's the main thing to be aware of. Sarah: And I think whether you are an individual trustee, or your fund has a corporate trustee, so, a company as the trustee, and you're the director, you are liable to the SIS Act, the superannuation Act, and it has, perhaps the right word is stronger requirements than just the Corporations Act as a director, like the implications of being responsible to the Superfund are really important. I think a lot of people take for granted how serious it is to be a trustee of a self-managed Superfund. Trudi: Like we mentioned last week, Superannuation is a very heavily regulated sort of area.  And then making sure that even though you're managing your own superannuation, you're still meeting all of those regulations. Sarah: So how many members are normally in an SMSF? Nick: It depends. Now, I've got clients that are solely just themselves. You can get more, I believe now, you can have six as well. Trudi: But we're talking very small. It's very different to the large funds in terms of the numbers of members. Nick: Yeah, definitely. Definitely that.  Trudi: So why would I set one up, then? Nick: It depends on the person, their needs. What I'm finding mainly, where they set them up, is they want to purchase a commercial property. So, they might be a particular occupation, that they're renting a premises, and they want to basically; they've seen that their business is growing, and they will give rent money to somebody else, where if I've got some money in my Superfund, they can use it as a deposit to buy commercial property. And in that way, they basically pay rent into their super fund. So, they're the main things that I'm finding.  Other things that I'm finding is people wanting to buy a property like a residential property, but they're not going to use it for themselves, but more for investment purposes for long term as well. So, this is a long-term type goal, where they might want to purchase an investment property, they rent it out, rental goes into the Superfund to pay off the debt. So that's basically what I'm seeing mainly what people are setting up. And the third one is more; this gets a bit tricky for estate planning purposes. So, depending on if they've got a blended family, where they want to have more control in regards to how the money is distributed, because they basically, they are the super fund. Yeah. So, upon death, where the money goes and things like that. So, they're the three main things. And then also people that want to have more control of the money how it's invested. Trudi: Yeah, well, as we've said, you're managing yourself so you can really; within the regulations invest in whatever you like. And I know, obviously, you mentioned rental properties and things like that, but there are quite a lot of regulations around how that gets set up and doing commercial rental at market values and things like that. So, it's not a way of buying an asset for your own personal use, is it? Nick: No, no, no, definitely not. You can't use it; it's basically what they call the in-house asset test. So, in other words, you can't actually use it yourself, or any family members. So, you're sort of like an arm's length that they call basically. Sarah: It's got to be an arm's length transaction. Nick: So, you can't buy your property off your cousin or whatever like that. So yes, also when you're doing that transaction as well.  Sarah: Yeah. Okay. Now, is there sort of a minimum amount of money that you should have in Super for it to be worthwhile setting up as [unclear 05:43] fund? Nick: Yeah, definitely. There is a; they say at least $200,000 as a minimum. Sarah: Yeah, yeah.  Nick: And the reason why they say $200,000 is also the government's come out and said this as well, is because the cost in setting up a self-managed Superfund and the ongoing costs cost of it. And if you've got less than $200,000, the costs outweigh the benefits.  Sarah: Correct, yeah.  Nick: So basically, what you need to understand is that setting up and the running costs can be high, the costs are investing, your accountant basically they do the tax return each year, there's audit.  Sarah: So, you got compliance fees to have that sort of around the $3,000, mark $2.5 to $3000 a year. So, they're not the cheapest? but they have, like anything, if you've done your sums, there are benefits potentially, for having it. So often, I'm the first point of call for self-managed Superfund. someone's read or been told that you should have a self-managed Superfund and you should buy a commercial property in it like Nick said earlier, and you can rent it back to your business, and they ring me and I go, okay, you've only got $150,000 in your fund, it's going to cost you two and a half grand a year in compliance, it's going to cost you maybe $10,000 to set it up if you've got the trust with a trustee. And then when you borrow from money within the fund, you have to use what's called a bare trustee and we haven't talked about that yet. But they're not cheap things. So, not saying don't do it, but just do it for the right reasons. Like do your research, know what it's going to cost you, know what the implications are, etc., etc. Nick: Definitely. So that's basically what you need to be aware about, setting up a self-managed superfund takes only about that. Sarah: Yeah, absolutely. They're not cheap. And the lending is not cheap in them either. So there needs to be a viable reason for why you do it. And you need financial advice in a lot of instances especially if you're doing lending. Trudi: Well, in all instances, because Nick tells who is allowed to set an SMSF up?  Nick: Who is allowed? Trudi: Yeah, who's allowed to actually set up. Can I do it? Can Sarah set for a client? What type of; or is there a license that I have [inaudible 08:24]? Nick: Okay, so generally, what we would be doing is, at the same time with the accountant, so the accountant could be setting up the self-managed Superfund. So, there'll be a good start dealing with the accountant. So, they set it all up, you need to get also the accountant with some sort of legal advice in regard to drafting the contracts up, and then you'll get the financial advice from myself. Especially if you're going to be borrowing to making sure that you've got the system set up today into the future and how it's going to project, and how it's going to end up being basically an exit strategy as well. Trudi: And I just think it's important to note that while the accountant can set up documents, most accountants don't have the license to advise you that you should have a superannuation or self-managed superannuation fund. So, it really is something that we work in conjunction with financial advisors on because we need your financial adviser to actually give you the advice that yes, it makes sense in your financial circumstances, to have a self-management and as you say, then work with the accountant and potentially lawyers in setting the whole thing up. And that's where you can see that it can start to get costly because there are multiple advisors involved in that phase. Sarah: Yeah, absolutely. Absolutely. Trudi: So, are there restrictions on what other than what we've already spoken about in terms of the property? Are there any other restrictions on what I can and can't invest in within a self-managed fund? Nick: Basically, investing there's; as long as the; so, to give you an example, you can invest what you have in your existing super funds like what everyone does have, like, Australian shares, your global shares, your cash, you can do all that sort of things. I've got some clients that have got commercial buildings, car parks in the city, but they can't use it they basically rent them out. You can have those types of assets in there, there are personal assets that you'd use yourself. You can't just have; like to give an example, I've heard of people wanting to buy a painting that may go up in value, you can't really do that, because you're going to hang that painting up on your wall, you're not allowed to do that type of things.  Sarah: Doesn't make sole purpose test? Right? Nick: Exactly. Yeah, there is something with regards to 5% in house asset roles. Sarah: Sorry. So, let's wander back then. Have we talked about sole purpose test yet? I don't think we have. So, what does sole purpose test actually mean?  Nick: Well, the sole purpose test is basically; your investment for your retirement, basically, that's the main thing.  Sarah: So, it needs to bring you a return on the investment to provide funds for retirement? Nick: Retirement, correct. So, it's not your personal pleasure. In other words [inaudible 11:21]  Sarah: If you were to look at your painting example, the sole purpose of that is not a retirement investment. So, part of the purpose is you having a beautiful object in your house. Nick: Yeah, exactly. Because basically, as we said before, you've got tax concessions in super funds. So basically, the sole purpose is to provide retirement benefits for yourself and new members basically.  Sarah: Yeah.  Nick: And dependents. Trudi: What about crypto? Can I invest in crypto in my self-managed fund? Nick: Can't talk about that.  Sarah: And we can't talk about that, because crypto is not on the list of asset classes that you can talk about. Right? Trudi: Alright, okay. Nick: I can't talk about it; unfortunately, financial planners can't talk about crypto in that regard. Sarah: And can we say that's because it hasn't been deemed to be an actually defined asset class yet? Nick: It's basically like a license, Yeah, we can't talk about crypto. Unfortunately, I've seen it being done. But I can't comment on that. Sorry. Sarah: No, no, that's completely fine.  Trudi: But the reality is, if you can't talk about it, then why would you be investing in your super fund?  Sarah: Yeah, thanks for reading my mind. So, when we talk about what you can do in super funds going off the back of that some people might be sitting here confused then as to the scenario we gave earlier is, then how can you buy a factory and rent it back to your business?  Nick: That's different?  Sarah: Why is it different? Nick: Because you're basically using it for your own business for your retirement. So, it's a different type of area in that regard.  Sarah: Also, commercial property is defined as real property:  Nick: Correct, correct.  Sarah: So, it's a very, unique definition as to how it circumvents the other rules that they have in place, but effectively there is a line drawn in the sand on this and commercial property is deemed acceptable.  Nick: Yes.  Sarah: for your business, because your business is a separate entity to your Superfund, not you personally. And we've talked about entity types in the past, and a superfund trust, and a trading entity. So, a PTY Ltd, are a separate legal entity. Trudi: And it's still important to note though, that you do need to have market value rent.  Sarah: Yes.  Trudi: And recording everything at appropriate market arm's length top values, you can't just buy the property in your super fund and then not charge any rent. Nick: Correct. Trudi: through the business.  Sarah: It has to be market value. It has to be. Again, really important things. Trudi: Yeah and look when I'm doing the financials and the books for persons SMSFs. I actually get them to go and get valuations from a local real estate agent of what would be a reasonable rent. If they were to rent it to a third party.  Nick: Correct. Definitely get that down because you'll get into big trouble if you don't, Sarah: Yeah, you can't just use it to circumvent from your business. Really, really important. So, I love BAs and lending. So limited recourse borrowing arrangement and lending to a self-managed super fund we briefly touched on earlier. But when super funds were first back, self-managed super funds were first allowed, they didn't allow lending within the fund, if you wanted to buy anything property or otherwise, you have to pay cash.  Nick: Yep.  Sarah: This changed a while ago, I think it was about 15 years ago, not 40. But it was about 15 years ago. And what they did is they amended the act to say that if you utilized a bare trust, and the bare trust took the loan out on behalf of the Superfund, then the Superfund wasn't doing the lending, and it would be deemed acceptable to allow that fund to borrow. Have I got that correct?  Nick: Correct. Sarah: Okay. So, the reason that I've explained it that way is that this is where a lot of people get very confused when it comes to borrowing within a superfund, technically, yes, you're borrowing for the benefit of the Superfund, but you borrow through another vehicle, called a bare trust and a bare trustee. And you actually need to have that set up to borrow in a fund. And so, your super fund becomes the guarantor to the transaction, and the borrower becomes your big trust. And the reason I'm raising it, again, is that it also adds extra cost because you now need to buy another trust, and usually another corporate trustee that goes with that, and they are only allowed to be utilized per property. Trudi: And is that where the limited recourse?  Sarah: Correct? Because you can only; the lender has limited recourse against the loan that's within the bare trust and no other assets of the Superfund. Nick: So basically, if it does go Billy up, the bank can't take the self-managed Superfund they can only take what's in the bare trust,  Sarah: Correct.  Trudi: And when you're lending in a superfund, Sarah; if I was to go and just buy a house or commercial property myself, I might need a 10 or 20% deposit, is that the same within a superfund or do they require [inaudible 17:05]? Sarah: Yeah, so it does depend on the lender, and it also depends on what sort of interest rate you're prepared to pay within the fund. There are some lenders that will only take a 20% deposit in the fund now. It's a sliding scale though, from about 60 to 80% leverage that the lower the loan amount, or the lower the loan to value ratio, the lower the interest rate. So, it just depends on what your strategies are for the fund moving forward and what your advice piece is around it. Because if you utilize a higher deposit to get a lower interest rate, you can't leverage a property within a superfund the way you can leverage a property in a company or in an individual name. So, you can't borrow against that property, to cash the equity out to buy again, you can refinance Superfund loans from time to time with some lenders if it's a dollar-for-dollar refinance, so you borrow 400,000, you refinance, $400,000, but you can't cash equity out. And this is where a lot of people get confused. So, this is, again, why you need advice. And okay, no, you don't have to have advice for a super fund, specifically, if you take the obligations and risks as the trustee seriously. And we'll see, I'm part of a couple of groups on Facebook, where people trying to do it themselves. And it scares the crap out of me. Because there are so many things that could go wrong if you're not an expert in this space. And I've spent 15 years becoming a leading expert in this space. And Nick, how long have you been a financial planner that's talked about super funds for, like? Nick: 20 years. Sarah: Right. So, it's a really specialized, unique area, that has risks that go with it. And so, the wrong decision about how much deposit you put in can impact your growth strategy within the fund,  Nick: Exactly. Sarah: which has its own purpose test for retirement. So, there are some serious implications there. Yes. Okay. You can get away without advice. But my advice to everybody from a lending point of view is to get some serious financial advice around this, even if you don't think you need it. Nick: Definitely. Especially if you've got a client, or someone's looking at seeing that self-managed super fund and buying a commercial property, to use themselves, what they're actually doing is pretty much putting all their eggs in a commercial property and not diversifying something else. So, yes, the property's been going pretty good in the past but what happens in the future you might not been diversified. Trudi: Then you consider a full investment strategy and not focus on this one thing. Nick: Exactly. Exactly. And the other thing is when you're setting up a self-managed Superfund just remember that you've got insurance on your old Superfund.  Sarah: Yes,  Nick: that before you transfer across, making sure that you've got the insurances set up, the personal insurances like your normal life covered disability cover? if you're transferring it across, what's going to happen is, that you're going to lose out on that insurance that you have. Sarah: Yes, so, it's again, looking at your total financial package and how they interlink together and what the implications are of that one decision, Trudi: I've got a client who has a self-managed fund, but they also still have their old industry fund because he wasn't able to get the same level of insurance cover in the SMSF as to what he had in his industry funds. So, he actually runs both funds so that he can keep the good insurance, but he gets the benefits that he wants in his self-managed fund as well. So, I guess they're all things that really should be considered before you jump in and close down the old fund and have the new one running. Nick: Correct. Sarah: Yes. And depending on the state that you buy in, it's really important as well, in Victoria, we have nomination clause, where you can nominate a name onto a title for a contract of sale, New South Wales, you can't you'll pay the stamp duty again. So, there's a pre-planning position about setting up a fund first, making the decision to get your loan pre-approved, is another one I would recommend for you. Again, another reason why a planner is a really good option to have to cement the positive outcomes that come with the fund.  Just back on lending quickly, I briefly touched on it, but the lending is not cheap. In terms of interest rate, it's also not cheap in terms of application fees, application fees, up to point five to 1% of the loan amount. So, if it's a $600,000 loan, you could pay six grand in an app fee, if it's a commercial property, commercial property valuation costs apply. And they're three and a half thousand dollars. And I also charge a fee for this type of lending because it's complicated. There's a lot of liaison work that needs to go on with your accountant, your financial planner, and your conveyancer, potentially, and if they're not experts in self-managed Superfund, it gets very complicated very quickly and very time-consuming. So, I think if this is something you want to consider that a $200,000 minimum balance is important  Nick: Yes definitely. Sarah: for extra reasons than just the basic administrative costs of the fund. So, Nick, we've talked a lot about the costs and some of the restrictions around it is the main benefit of it just that control piece and having a bit more control over your funds?  Nick: Control. That'd be definitely control. And then the other thing is a normal rate of fun, or a normal Superfund can't really invest in direct property.  Sarah: Yes, okay.  Nick: That's when you sort of like go down the self-managed Superfund way where we want more control as well.  Sarah: Yes. Okay.  Nick: Definitely. Trudi: Any last tips or hints for anyone? No. Sara has one more question, I think? Sarah: I think the thing to talk about is probably relevant, and we haven't discussed it. We did talk about it in the last episode, but the tax benefits of a self-managed Superfund, especially if we're talking about property around capital gains tax. Nick: Yeah, yes, it definitely. So, do you want us to talk about this? Trudi: Yeah, so obviously the 15% tax rate and the pension rates that we talked about last week all still apply within a self-managed fund. But where a lot of people like the self-managed fund, especially where they are looking at property investments, if you were to buy let's use the commercial property example in your own name, when you sell that property, you're going to pay capital gains tax on that property, which can be quite expensive, depending on how much the property has gone up in value and your tax rate at the time. If, however, you hang on to that commercial property and to your self-managed Superfund is in pension phase, potentially you pay no tax at all on the sale of that property. So, if it is something that you're planning on hanging on to for the long term, until you are retired, there's definitely can be big, big tax benefits for the sale of that asset. Sarah: Yeah, absolutely. If you think about it, if you buy a factory for $500,000 now and hold on to it for 25 years, and it's worth $2 million. Trudi: It's a one and a half million-dollar gain that is potentially tax-free. Sarah: Yeah. So, there are some benefits to it. So, control and then tax rates and other things that would come out on the other side of it. So, lots of information there again, guys. If you've got any questions, feel free to reach out to us online through our social media. Follow Nick's pages online. You can see his website. He's at conciliumwm.com. Nick:  Yes, concilium.com data u,  Sarah: .com data u, you can reach him on LinkedIn as well. Nick Zara. And have you got the S on your name on LinkedIn?  Nick: Yes. Nickzaras.  Sarah: Nickzaras, there you go. So, I think that's probably enough mind-blowing information for today's episode, thank you so much for joining us, Nick. It's been an absolute pleasure having you again.  Nick: Likewise. Sarah: You're such a wealth of knowledge. Nick: Thank you again, it's been fun. Sarah: Yeah, absolutely.  Trudi: It's been fun.  Sarah: We will see you next week with another episode we're talking about ways to protect your business personal property security register all pap etc., etc. Google if you don't know what it is. Trudi: All just tune in next week. Sarah: That’s the other option will speak to you then. Looking forward to it.  Trudi: Thanks, everyone. Bye.  Nick: Thank you. Bye

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