SMSF expert Darren Kingdon says Self-Managed Super Funds provide many benefits for property investors looking to maximise and have greater control of their super.
Many Australians expect to rely on their super fund in retirement, but Darren believes that many Australians, including property investors, may be far from their superannuation goals, especially if they lack financial education.
The nationally recognised superannuation expert and author of ‘Master Your Super’ spoke to KnowHow founder Bushy Martin on the Get Invested podcast about how property investors should consider using Self-Managed Super Funds (SMSF) to maximise their wealth.
“It’s important to know what options you do have, because there are a number of choices out there. But we do have things called self-managed funds, which is (ideal) if you’re thinking about property, development and building something,” Darren said.
“[People with SMSFs] are also wanting to go on that financial education journey, take control and do a bit more for themselves … they’re real seekers of knowledge and they’re interested in financial advice. They also want to know a bit about the system, like there’s a lot of great tax benefits attached to superannuation and a lot of those can help improve your returns just by simply knowing how to pay a bit less tax along the way.”
Darren explained why SMSFs can be effective for property investors and small business owners.
“When you look at the most successful Self-Managed Superannuation Funds in terms of their asset performance, a lot of the time there are strong elements of real investment grade property in there, and a lot of the time it is linked in some way to a small business. So Self-Managed Super Funds can buy business premises and lease them back to your own business,” Darren said.
“So effectively, the landowner can be the Self-Managed Super Fund, whether directly or potentially if there are borrowings that’s got to be done in a slightly different way, but the overall scenario is that property can end up being owned by a superannuation fund that you pay rent for to your own fund. So, you’re not paying a landlord or a stranger or a bank, it’s going to your own superannuation fund at a low tax rate because the maximum tax rate for superannuation funds is 15% on its income, and that can potentially go to 0% once you get to what they call retirement phase and when you start drawing a pension.
“But also on top of that, you know, it’s a way to keep the bottom line of the business down. So if you charge yourself $50,000 a year rent, and that’s all got to be commercially justified, that $50,000 is actually a tax deduction for your business, so that can help keep the business taxes down and you’re able to then convert assets from an active environment, which is like an at-risk environment (your business), into a passive environment which that money can then be used to invest and hopefully grow that from there.”
However, there are several factors to consider with a SMSF. Firstly, cost management and associated services need to be evaluated.
“Costs is one factor, or at least being aware of the costs. In the Self-Managed Super sector there’s a lot of service providers out there that provide different services to help people run their Self-Managed Fund. Some of them, there might be some onus of work on you to keep the fees down, or sometimes they might be doing everything from paying the bills for you. So you’ve got these different levels of service, and it’s important to compare an apple with an apple,” Darren said.
“There are all different factors [annual reporting, audits, ATO fees] that need to be thrown into the melting pot and have a real look at the cost benefit of staying or leaving. But I’d argue that more importantly it’s more about your attitude to your own financial education and whether or not you’re there for the long haul or you think this is going to be a quick fix and a quick win.”
In Darren’s 25+ years of industry experience, he has also witnessed the common mistake of property investors rushing into with a SMSF and making decisions in the property market without a set strategy.
“From the mistakes I have seen people make over the years, quite often it’s on the back of something going wrong with their fund or under-delivering, they then roll it into a Self-Managed fund,” he said.
“Then, without really any financial education or a plan to begin with, they might want to go and buy a property and then they realise properties, generally speaking, if you’re going to do it yourself it’s hard work, it’s a grind, a relentless pursuit to find the right property and give yourself a bit of margin of safety and those sorts of things.
“And unfortunately, those people then lose patience so they buy something off the plan out in the sticks with a rental guarantee and all of a sudden the value of that property over a period of time plummets.”
However, Darren advised property investors not to be disheartened by their mistakes and turn back to a managed fund, especially if it isn’t the best option for your super and investments.
“It’s really just having the right mindset, taking action and learning from your mistakes. So when you make mistakes you dust yourself off, you learn from it and you move on. So if you’re prepared to invest in your own financial education over the long haul, then I think it’s something worth thinking about for a lot of people,” he said.
“People roll over money into a Self-Managed fund, and if they can’t find the property they desire, quite often they end up getting sucked back into that managed fund world because it becomes too hard, which can mean effectively doubling up on your costs.
“So generally speaking, having managed funds in a Self-Managed fund defeats the purpose in many ways because the purpose of it is for you to take control and do more for yourself. There might be a particular market you’re wanting to invest in that might need a manager, and usually that’s a small part of a portfolio, but putting the lion’s share back into managed funds, why would you do it?”
Listen to the full interview here.
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