Many Australians are embracing Self-Managed Super Funds as a way to plan for their retirement. There are many benefits to this type of investment, but one of the main reasons people choose this fund is because it gives complete control on the way money is invested.
What is a Self-Managed Super Fund?
Simply put, a Self-Managed Super Fund (SMSF) is a superannuation fund, which allows members to have control over their retirement savings and investments.
A SMSF can have up to four members, all of whom are trustees of the Fund.
How does a SMSF work?
SMSFs differ from regular super investment funds because all members act as trustees. This means they have the authority to decide how the fund operates and make key investment decisions.
Trustees are also responsible for complying with all legal and statutory requirements. Unlike public offer funds (industry or retail funds), which are regulated by the Australian Prudential Regulation Authority (APRA), SMSFs are regulated by the Australian Taxation Office (ATO).
Trustees must comply with both the superannuation law and the SMSF governing rules or potentially face penalties.
What are the benefits of a Self-Managed Super Fund?
Control
When you invest in a SMSF you have complete control over how and where your money is invested. This means that trustees can decide their super investment path and can take advantage of new opportunities that could be deemed as too risky for ordinary super funds.
Quicker Decision Making
SMSF trustees can make quick decisions on whether to invest in a profitable trend or get out of an investment which is not performing.
Lower Costs
The estimated operating expenses of a Self-Managed Super Fund is 0.5 per cent. You can also save on fees if you have more than $200,000 invested, which can be achieved by combining your and your spouse’s super balance. SMSFs also offer the potential to use tax saving strategies.
Wider choice of investments
An SMSF allows members to invest in residential or commercial property, and you can even use your super investment to borrow the funds to invest in property.
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What are the disadvantages of a Self-Managed Super Fund?
Time-Consuming
You have to administer your SMSF. Researching suitable investment paths and optimising your super investment performance can take a lot of time.
Financial And Legal Risks
You need to ensure your SMSF complies with laws and regulations. As a trustee of the fund, you are open to personal litigation if the fund is not run properly.
Inability o Access Government Compensation Schemes
SMSFs cannot access government compensation schemes in case of money loss for reasons outside the control of the trustees.
Using Self-Managed Super Funds to buy an investment property
Buying investment property with your super can be a good way to grow your retirement funds. In order to use your SMSF to buy property you will need to satisfy the following criteria:
– The SMSF property needs to be purchased with the sole intention of providing retirement benefits to the SMSF members.
– The SMSF property must not be bought from a related party of any of the SMSF members.
– The SMSF property cannot be used as the living quarters of any of the SMSF members or their relatives.
– The SMSF property can’t be rented by any of the SMSF members or their relatives.
How much can you borrow to buy investment property with super?
As a general rule, lenders will allow SMSF loans to be around 70 per cent of the property value. Tax-deductible personal super contributions, salary sacrifice contributions, and compulsory super guarantee payments made into your SMSF, can all be used by your SMSF to help cover the SMSF loan repayments.
Want to buy investment property with super? You can use the borrowing power calculator on our website to get a personalised estimate using your financial information.
What are the tax benefits of buying an investment property with a Self-managed Super Fund?
If you buy a property through a SMSF, the fund will pay a maximum 15 per cent tax on rental income it receives from the property.
If the fund holds a property for longer than 12 months, the SMSF receives a discount on any capital gain it makes upon sale, bringing capital gains tax to a maximum of 10 per cent.
Once fund members retire and start receiving a pension, the SMSF will not have to pay tax on either rental income or capital gains when the property is sold.
Thinking of buying investment property with your super? Get your free Home Loan Report now and take the first steps on your real estate investing journey.