Self managed superannuation funds, commonly known as an SMSF, have gained huge popularity in Australia over the last decade or so.
Self Managed Super Funds
During the global financial crisis (GFC) many Australians lost a large percentage of their superannuation as the funds they had invested in lost value.
This major loss of wealth, albeit a paper loss until the funds are cashed in, left many Australians thinking that they could do a better job managing their own super. The isn’t the sole reason for the growth of SMSF over the last few years, but it has certainly been a contributing factor.
The idea of managing your own super is very attractive for many people, especially the feeling of control and power that it can give you. But commonly the reason that many Australians go with an SMSF is that it allows them to indulge in that great Australian pastime – property investment.
That’s right, a self managed super fund will allow you to use your super money to purchase residential or commercial property for investment purposes. There are a few rules regarding arms-length transactions etc, but if done property there are no major issues in going down this path.
Now you may be thinking that you don’t have enough money in your super fund to purchase a property, but never fear, because having an SMSF allows you to indulge in yet another favourite Aussie pastime – going into debt to purchase property!
Your SMSF can borrow money to invest in property just like any other person or entity can do. Generally the required deposit amount is higher, but it shouldn’t be a problem for most SMSF balances.
When considering a property purchase using your SMSF, or any other large single asset, keep in mind the importance of diversification. For many people a property purchase would take up a huge chunk (maybe even 100%) of your SMSF. This is not good for diversification, and will leave you with all of your ‘super next eggs’ in one basket.
Another issue to watch out for when running your own SMSF is compliance. You can’t just invest your money into anything, and you most certainly cannot use it for your own benefit until you reach retirement.
Some small business owners have fallen into the trap of using cash from their SMSF to prop up their businesses during a rough period. This is a huge no-no and can result in major penalties from the ATO.
There is one personal benefit that you can get from your SMSF before retirement, and that is that your SMSF can pay the premiums on your personal insurance such as life insurance, income protection and TPD insurance.
The benefit of this strategy is that the premiums can be paid from your SMSF rather than coming out of your own pocket. Smart operators can then use the money they would have used for insurance, and instead contribute that money to the SMSF in a more tax effective way.
Effectively, this can make the premiums on your life insurance and TPD insurance tax deductible, when normally they wouldn’t be. Income protection is tax deductible regardless of whether you have it inside or outside of your SMSF.
There are a few traps when holding income protection or TPD insurance in your SMSF, or any other super fund for that matter, so it’s important to speak with a financial adviser first before going down this path. Life insurance on the other hand can generally be held within your SMSF without any major complications.
Under no circumstances may trauma insurance be held by an SMSF.
There are many benefits for Australians in holding their own SMSF, but there are also a lot of rules that you need to be aware of and abide by.
For more information on setting up your own SMSF we strongly recommend you speak with your financial adviser. They will be able to tell you whether or not a self managed super fund is the right strategy for you.
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