Listen as Sentrika Director Darryl Dyson discusses the finer points of self managed superannuation funds on this episode of the ProActive Podcast.* *This podcast does not constitute financial advice
[Announcer] Welcome to "The PROACTIVE Podcast," brought to you by MeMedia.
Good day, world, Chris Hogan coming to you from MeMedia Studio here at Burleigh Heads for episode 137 of "PROACTIVE Podcast," and today, I have with me Darryl Dyson, Managing Director of Sentrika Accountants and Business Advisory. Today, we're gonna be talking about SMSFs. Yep, you've heard it, and I like to say Smurfs because I can't say SMSFs all the time, but Darryl's gonna break down what self-managed super funds are for us, and I'm properly intrigued, Darryl. Thanks for coming.
Thanks, Chris. Thanks for having me.
Might just get that mic in front of your face. Right in front of my face.
Beautiful. All right, what is an SMSF?
An SMSF is a self-managed super fund. So as the name suggests, it's self-managed. So you would've heard Cbus, AustralianSuper, QSuper, all those types of funds, superannuation funds. They're retail funds. A self-managed super fund is essentially a fund that you, as the member and trustee, will manage yourself. So you're responsible for the super fund. You're responsible for the investments. It's entirely self-managed. So you can obviously use external advisors and external people, but you're the individual or entity that's responsible for it.
So as opposed to, obviously, a superannuation fund that employers and some self-employed people actually put money into. What is it, 10.25?
10.5 as of today.
10.5.
So just gone up this year, so yeah. So you, an employer, obviously, has a legal obligation to play super. Now, you as the employee have the right to tell them what super fund to put it into. So that could be self-managed. It could be a retail fund. Could be, you know, any of these big retail operators and fund managers, so all the super, AustralianSuper, Cbus, Hostplus, QSuper, all of those. So self-managed super fund is just another form of superannuation, the difference being that you have to manage it.
Okay, so first of all, who can have one? Can anyone have one?
Literally anyone can have one.
Right.
Now, unless you're a minor. If you're a minor, you've gotta have a guardian or legal representative that's over age, or you're a disqualified person. So a disqualified person may be an undischarged bankrupt or someone that's subject to a civil penalty order or something like that. So other than those prohibitions, anyone can have a self-managed super fund. You've got a disqualified person, also someone that has been convicted of a dishonest act or something of that nature, so fraud or something along those lines. So if you've got one of those convictions on your record, then the ATO who's the regulator may decline your application to be a trustee of a self-managed super fund or a director of a corporate trustee of self-managed super fund.
Okay, so how do you start one, and is there a sort of a minimum amount of money you've gotta have in there to begin with?
Yeah, good question. How you start one, literally 'cause you could go and set one up off of an online provider today, if you wanted to. We strongly recommend that you don't just because of the complexities that are involved with setting it up, and if you get the setup wrong, then the super fund can lose its concessional tax status, so the concessional tax status is that it's incomes tax of 15%, and capital gains are taxed at 10% if held for longer than 12 months. So you wanna get that set up right. You wanna get the trustee. You wanna get all of the documentation correct, so we strongly advise that you use a tax agent, an accountant, or a financial planner or a specialised self-managed super fund advisor to set up the structure. So super fund is a trust, so super fund, it has a deed, so you need to set up the deed, and then you've gotta either set up a company to act as a corporate trustee, or if you have more than one trustee, more than one member, you can have individual trustees.
So you have to have a company to set up a SMSF.
You don't have to, but we, in our office, we recommend using a corporate trustee. With a corporate trustee, it means administratively, it's easier to administer if you need to add members or if you need to remove members. For example, if Chris, you set the fund up, and you had yourself and your wife, then you wanted to bring in your adult children at a later date, if you've got individual trustees, you've gotta then add each individual trustee, which is you have to do a deed of variation to add them as trustees, and then you'll also have to, all of your underlying assets that are in your super fund, you then have to go and change the name of those asset holdings to add the additional trustees, so for that reason alone, administratively, we find a company is much easier and preferable.
All right, so first of all, what is a trustee? What's the function of a trustee?
A trustee, so a trust is not a legal entity. So for a trust to be valid, it has to have certain components, so it has to have a trustee, and it has to have beneficiaries. So in this case, with the super fund trust, it's slightly different to a discretionary trustee that needs a pointer and settler, et cetera, so with a super fund trust, for it to be legally valid, you've gotta have a trustee, and then you've gotta have beneficiaries, which in this case are the members.
So yeah, so before, you were saying I could possibly add my children as trustees.
Yeah.
Well, in my family trust, I have them as beneficiaries, not trustees. Why would I have them as trustees? Is that because they're gonna use the SMSF for their own, you know, super fund contributions, or?
Yeah, it's just a legal compliance requirement, so with a discretionary trust, your legal representative is the trustee, and that trustee essentially can control who gets income distributions and capital distributions, whereas a self-managed super fund trust is a little bit different. So the balances and the income and capital that's within the super fund trust, it's automatically distributed or held on trust for the beneficiaries, the members, according to their balances. So if, say yourself and your wife set up the trust, and you each put $100,000 in, those balances at 50/50 are retained throughout the life of the fund. If you then add in your children and they might have, say, $20,000 balance, they have that percentages retained through the membership balances throughout the life of the fund, so it's a little bit different in how the mechanics of it work and how income is distributed. So with a discretionary trust, the trustee has the ultimate responsibility of making beneficiaries presently entitled to income and capital of the trust, whereas the super fund's a little more automatic, so it's just a legal and compliance requirement, according to the regulator, that if an individual is a member of the fund, they must be a trustee.
All right, so let's go back a bit. Why are we even setting up an SMSF, you know, as opposed to just going run-of-the-mill, you know, super fund? Is this getting complex? So that, you know, I'm putting my children in, or adult children in, as trustees. My wife and I are trustees. Like, why am I doing this?
The main driver to do it is flexibility, so.
For?
Investments.
[Chris] Right.
In most cases, it's because of the flexibility of investments. The retail fund providers won't allow you to invest in property directly, for example. The retail fund providers won't let you undertake a limited recourse borrowing arrangement to go and buy a commercial property. So it's the flexibility of it being self-managed, deciding where you wanna invest the money. When you're dealing in the equity markets, managed funds, et cetera, et cetera, whether you do it yourself or you allow the retail fund managers to do it, you know, the outcome's gonna be the same: a lot of 'em invested in the same investments, but it's more so that flexibility on things like cryptocurrency, property, unlisted investments.
So businesses?
Yep, you can-
So you could do angel investment sorta thing?
Yep, you can, so you can invest in private companies. It comes down to control, so if you have a controlling interest in the entity, then it may be a breach of the SIS Act, sole purpose test, or in-house asset rules, so if you're investing in a private company, for example, it's unrelated, you're not a director, you're investing an amount of money that equates to, say, 20% of the equity in that business, then you don't have a controlling interest under those rules, so it's an allowable investment. Just have to make sure that your investment strategy allows for that within the fund administration.
Okay, okay. So let's get back on track again. So what is a corporate trustee?
Corporate trustee, so corporate trustee is just a company. So as I said before, a trust is not a legal entity, so the trustee is the entity that's essentially the legal entity responsible for the trust, so you can have an individual or a corporate body. As I said before, our preference within our office is to have our self-managed super fund set up with corporate trustees. It just allows changes within the structure of the fund to be done a lot simpler, a lot quicker, less paperwork, less hassle, so we advise corporate trustee, and each member of the fund has to be a director of that corporate trustee. It's a special-purpose entity under ASIC, so it will have a slightly different constitution. The constitution should state that the members of the company can't receive a distribution of income or capital from that company, so you couldn't set up a special-purpose entity superannuation trustee and then use it as a trading entity in the future without changing the constitution and doing a number of other things.
So is that just like a shelf company? Is that what people tend to use?
Yeah, correct, it's a shelf company, and when you set it up, you actually nominate it to be a special purpose entity. It just means that you have a lower annual ASIC fee.
And it has no income, no trading.
No trading.
Gotcha. Specifically to be the trustee of the SMSF.
Yeah, if operated correctly, should only act as a trustee for that superannuation fund.
Okay, I wanna just explore all the things I can purchase or, sorry, invest in. Not purchase. We're not purchasing, not going shopping.
[Darryl] It's always investing.
Always.
For the sole purpose of retirement.
Got you. Got you. Retiring early, hopefully. So what can I purchase through an SMSF: collectibles, cars, artwork? What else can I think of? Yeah, can I build? You know, can I renovate?
[Darryl] Okay, we'll start with the first question.
Sorta getting excited here.
Yeah, think about what you can do with your new self-managed super fund. So collectibles, you can invest in collectibles. So you can invest in artwork. You can invest in jewellery, antiques. You can invest in cars, but there's fairly strict rules around all of those types of investments, as you can imagine, because those types of investments could, you know, be utilised before retirement, which would be a breach of the CIS Act.
Oh, so the car, the Aston Martin that I've just purchased in my SMSF, has to sit in the shed just and be looked at and not used.
And gets even better than that. You can't drive it at all. So even if you had to drive it to the storage facility, they don't want you to do that either.
Can James Bond
It's gonna have to be freighted.
use it in his movie, though?
Well, James Bond could use it, provided he pays you an amount of money, and it's a reasonable rate of return in accordance with your investment strategy, so.
Yeah, well, that was advertising to increase the value of the collectible.
That's right, so look, theoretically, you can do it, but in practise, it has a lot of limitations. So they've gotta be in storage. They've gotta be insured. They've gotta have a separate insurance policy.
Oh, okay, yeah, so you can insure, the SMSF can purchase insurance for its collectibles?
It can. Well, it has to as well. With collectibles, there's the ATA has a long list of strict guidelines. So with artwork, for example, it cannot be hanging in your business. It can't be hanging in your home. It's gotta be in an unrelated third-party premises, and there must be a genuine commercial arrangement in place. It must have its own separate insurance policy and all these other things.
Like a museum, museum
Yeah, a museum would be good example.
or an art gallery.
Yeah, for sure, so one of those. So it sounds great in practise, but the reality of it is unless it's something that you got a defined strategy with, it may not, there's probably better investments out there that would provide a better rate of return or at least a more guaranteed rate of return, so.
Okay, okay. So I touched on before, can an SMSF, you know, invest in startups or other companies, buying shares in private companies? You said yes?
Yes.
So long as I had no other interest?
You can't have a controlling interest. So if you have a controlling interest in that private company, then it can be deemed to be an in-house asset. So if it's-
Can I be chairman of the board?
Depends on whether or not that would mean a controlling interest.
Yes.
If you're the chairman and you've got other board members, you probably don't control the company. If you don't have greater than 50% shares in that private company, you probably don't control, and you're not a director, then you probably don't control that company.
I could be a CEO, not a director, without controlling shares.
It all comes down to the control, and their legal definition generally is around directorships and ownership, so if you were the CEO, and you were the only director on the register, and then you had 40% shares in the company, and there was no other directors, it would probably be fair to say you control that entity, and I would expect the ATO's view would be that that is an in-house asset. If you had two directors, two shareholders of 40% and one shareholder of 20%, then you wouldn't control that entity legally 'cause you've got another director that is your equal likely, and you're not over 50% in the shareholdings. We have seen it approved by the ATO two directors 50/50.
Oh, okay.
[Darryl] And that was deemed to be not an in-house asset.
Okay.
So that's right on the line.
It sure is.
That's right on the line. 51, and he's over, so that's the position with proprietary limited private companies. Now, touching on the in-house asset component, if you've got a reasonable size super fund, say 1.5 million, 5% of that is 75,000, you could lend 75,000 to your business that you control, put it on commercial terms, and it's not gonna breach any of the rules because it's under the 5%.
Oh, that's pretty rad.
Yeah. So if, I'm sure it's probably happened in the last, you know, 12 or 24 months with COVID and interruptions to businesses, access to funds, sometimes a super fund sitting there with some cash there, so you spend-
There's been a lotta that in the last three years.
So you can take up to 5% as an in-house asset.
And didn't they increase it in the last few years where you could take like 20% or something?
I'm not aware of that with in-house assets, but I know that they decrease minimum pension repayments, so meant that you didn't have to take as much money out, but we need a, have we got a young Jamie, can we get a young Jamie to look up that 20%?
No, we don't have a Jamie.
[Darryl] Don't have a Jamie?
We don't have a Jamie. I could give it a crack, but we'll continue on.
Just do 20% in-house asset, SMSF, see if it comes up.
20% in-house asset. In-house assets ATO. "In-house assets can't be more than 5%." Basically what you said.
I don't believe they changed it.
[Chris] Doesn't look like it. All right.
They may have changed it back when we had a big property depression because property values, because we're the super fund, you have to value the properties every three years. So if you're in the middle of that period where we had that big crash in property prices and you happened to have an in-house asset alone to a related party or whatever it happened to be, your property prices decreased by half, which, you know, 40% which they did in that period, that in-house asset, which was under 5% is now suddenly over, so these are some of the complications with running a self-managed super fund, though.
Good times.
Yeah.
Oh, that's actually terrifying. Okay, so we covered buying shares in a private company. Property, buying property.
Property.
So commercial property is probably one of the most popular things, or no, investment property as well, I imagine. So our investments in property can happen through our SMSFs?
Yeah, absolutely, so we're a big fan, big advocate for commercial property within self-managed super fund, within self-managed super, particularly if you're operating your business from it, so.
Oh, okay.
One of the biggest problems or deterrents from people, mom and dad type investors investing in commercial property is the tendency risk. So you don't wanna have a substantial commercial asset that's vacant, so it can be a deterrent. Back, when was it, back here on the Gold Coast, maybe five, six years ago, you know, all around this area, there was a lotta vacancies, a lot of empty buildings. You know, now, they don't have enough stock, so the vacancy rate's very low, so that risk at the moment is really not there, but you just don't know what's gonna happen in five or 10 years, so that's a big deterrent, and also the amount of money required to get in, which I'll come back to in a minute, but so with self-managed super, the business real property or the commercial property is one of the few assets that you can utilise or rent from yourself whilst you're under the age of retirement. So you can purchase your commercial property directly or through a loan within the self-managed super fund and then rent it back to yourself, rent it back to your trading entity, so-
So I can, if I've got enough super in my super fund, I can buy it outright.
Yep.
And then rent it myself?
Yep.
Right.
And just has to be on commercial terms.
If not, I'm using a deposit to get a mortgage, commercial mortgage, and then still be able to rent it.
Yeah, you can, so you've got one of those two options. So if you have enough money to buy it outright, then no loan. It's quite simple. It's just a straight purchase. If you need to get funding, then the only way that you can purchase the property is through a limited recourse borrowing arrangement. So I did, here's something I prepared earlier.
Okay.
So here's, that's the structure and operation. So you have the self-managed super fund, so with the trust, with the corporate trustee, and then you have the lender sitting off to the side, and then you have what's called a holding trust or a custodian trust, and it's a little bit different from a normal mortgage. It's called a limited recourse borrowing arrangement. So the loan itself, it's a bit of a technicality, the recourse on the loan is limited to the asset itself. That's one of the reasons why the major banks are not really in this space anymore. You're looking at second and third-tier lenders predominantly. The bigger banks saw it as risky for them, so they've basically pulled out their products from this market, but so the holding trust, the custodian will then purchase the asset, and the self-managed super fund repays the lender, and then when that last repayment's made, the holding trust ceases to exist, and the property transfers automatically to the super fund.
So who's on the title then?
[Darryl] Yeah, so on the title at first instance, it'll be the name of the holding trust, the custodian.
Okay, okay, so if, you know, you said earlier that someone that goes bankrupt can't have an SMSF. What happens if they do go bankrupt, and there's a commercial asset being owned by the holding trust, funded by the SMSF. What happens there?
[Darryl] That's a tricky one.
Sorry. That wasn't in the preparation notes.
Well, you would need to probably resign the director from the company because if they're, depending on the situation, they may be precluded from being a director. If they're then not a director, they could still be a director of the custodian company 'cause that's not the trustee of the super fund, but if they had to then resign from the directorship of the trustee of the super fund, then your fund could be noncompliant, and if that was the case, you'd then have to go to the regulator and seek to have a trustee appointed.
Oh, okay.
So there is a mechanism to resolve it. You've also gotta remember, there's gonna be an amount of time before the regulator catches up with that, but if that was the case, you would probably have to unwind the structure at that point, if the director became bankrupt. So yeah, if you're having some solvency issues, definitely do not go into a self-managed super fund.
Oh, okay. Well, you know, and most people don't know that they're in that.
No, they don't, no.
Most people don't wanna be there and don't know that they're gonna be there in the future, and so it's kind of like a, you know, a harsh blow. It's a harsh blow, yeah. There's a mechanism to get out. The mechanism, the solution is to have an appointed trustee, and then they basically manage the fund until the assets are liquidated or the director is no longer disqualified and can become a director of the trustee company again.
Okay, if you had other directors in there, that would solve the issue?
No, because the requirements are that every member is a director of the trustee company, so if you had enough cash in the fund, and you could pay out, the other option is to pay out the bankrupt director, pay out their member balance, roll them out into an industry fund, industry-type fund, and then you can have, if it was a two-member fund, and you only had one director left, that's fine. If it's a corporate trustee, you can have one director, one member, so that would be the other solution as well is to physically pay that disqualified person's member balance out and remove them from the fund.
Right, and let me just put a caveat in there, that this is not advice.
[Darryl] This is not, this is general in nature. It shouldn't be taken to be investment advice.
Yeah, but it's interesting to know that there, I guess, there's lots of different solutions, potential solutions.
Yeah, and if this happens to be a situation that someone is in or could be facing in the short term, best thing to do is to get on the front foot with it. Contact your advisor. Contact your accountant. Contact your financial planner because if you are in a structure, in a self-managed structure, and most of your assets are in property, then you're gonna have a liquidity problem. If your balance, if that fund is a million-dollar fund, and your balance is 500,000, but most of it is tied up in the property and there's a loan against it, you're gonna find it difficult to get the cash. So you're gonna have a potential liquidity problem.
Okay, all right, so we got the SMSF. It's got collectibles. It's got property, all that sorta stuff. I've heard-
An auditor's worst nightmare.
Right. Like an ATO auditor or?
No, the self-managed super fund auditor.
Oh, okay.
So super funds are audited every year, so with us, we use an external company, so they audit all of our funds, and yeah, some firms do it internally. We do it externally, so just for transparency and separation, so an auditor, as you can imagine, where, you know, you've got all these sort of nontraditional investments, and they all have their own different compliance requirements, if you had a fund with a car, some artwork, bit of cryptocurrency, a property or two, you know, it'd be a nice and challenging audit for them.
Right, 'cause I gotta get valuations every year. Is that right?
Property, three years. Most assets, generally, it's every three years, but some of those ones, particularly cryptocurrency, they want that every year. Artwork and things like that, if it's nontraditional, just to ensure that the records are accurate, they might want them every year.
Okay.
So.
I've heard a rumour about SMSFs and the amount that they have to invest per year.
Yep.
There's a percentage on that; is that correct?
There's no defined percentage that you have to invest, but the ATO did recently write to a lot of trustees about asset concentration. What's happened in this space, and this is a big industry, so there's last year, 30 June '21, something like 598,000 self-managed super funds, you know, 580 or 800 billion, 800 billion under management within the self-managed super fund environment, $3.3 trillion industry. So self-managed super represents about 25% of the superannuation balances in Australia. So when there's that amount of money around, that can drive, you know, certain structures to be promoted. So one thing that we have seen is companies will set up, they'll market rental properties in a particular area. They'll have call centres. They'll call Mom and Dad. Mom and Dad get signed up to buy property, and then setting up self-managed super fund. They've only really got $120,000 equity, so they use that $120,000 equity to go and buy a $400,000 house out at North Lakes. Now, those funds, their asset concentration is basically 100% in one asset, so ATO was writing to a lot of these types of trustees that's saying, "We think you need to reconsider your investment strategy," so they're basically saying that you don't have any diversification. They don't feel it's a great strategy. So the regulator's guidelines really are that you should have about $250,000 as a minimum for self-managed super, 250 to 300, and that's based largely around the fees that are associated with operating self-managed super funds. So you're looking at about one to 1.5% generally in fees for most superannuation accounts. The retail providers, they're a little bit lower, depending on your balance, but with a self-managed super fund, the compliance costs are two to $3,000 for a standard-sized fund that might have $200,000 with, you know, some equities and some managed funds and maybe a rental property. You're looking at around about 2 1/2 to three, including the audit, so if you look at that as a percentage, it's around about 1%, so if you've got $60,000 and your fees are 2 1/2 to $3,000 a year, it's not gonna take long for that balance to get eroded away, so really, for us, our guidelines, our advice to our clients is it's a minimum sorta 250 to 300, and that's in alignment, what the regulators are promoting.
So there's no minimum, just to get back to my question, there's no minimum amount we have to invest per year.
There's no minimum. Oh, sorry, I didn't answer the question, no. There's no minimum. You can have it sitting in a bank account.
Right.
It can just sit in the bank account and not do anything, but your investment strategy has to state that, and then there could be argument to say that you're not meeting the sole purpose test because how is that gonna benefit your retirement? Not that anyone would do it because you're not getting a return, but you don't have to invest a specific percentage, so if your investment strategy states that you want 40% invested in just, you know, an at-call interesting-bearing account that generates 1% interest, and then you want the balance invested in, could be just direct equities, then that will be compliant. So your investment strategy, which is one of the administrative documents that you need to have in place every year that outlines where the funds are going to be invested, so as long as your investments meet what the strategy says, then it will be compliant on that side of it, but there's no specific percentage that has to be invested, so it just has to meet that sole purpose test, so it's gotta be, the funds have to be used for a purpose that's gonna benefit you in retirement. So that's the main test under the act.
So I've purchased pink diamonds, for argument's sake.
Yep.
And I've got a client that sells pink diamonds, so that's where my attention is, purchasing pink diamonds, and they've gone up in value in the last 12 months.
Yep.
One, I can't keep that on my premises, is that correct?
You could keep it, but it can't be on display. You can't be benefiting from it.
Yeah, most people wouldn't put it out for display anyway, okay, and can't wear it.
Can't wear it.
Got it.
Can't give it to your wife to wear to the.
Gala ball?
Gala ball just for a night.
Yeah, got it.
So.
All right, so it increases in value in the last year. Do I pay tax on that increase in value? Does the super fund have to pay tax on that?
It will if you then unsell those diamonds.
[Chris] Only when I sell it.
Only when you sell, yeah, not on unrealized gains.
Got it.
Yeah, similar to if you're in the business of selling pink diamonds, so you only sell when the gain is realised.
Great, now-
You only pay tax when the gain is realised.
Am I paying less tax than if I would, if I did it myself? Well, essentially, it's a secondhand item, so I wouldn't pay tax on that, right?
Depending on whether or not you're in business, so.
Yes.
Yeah, so if you're carrying on the enterprise, or you're in business of selling pink diamonds, then you'll pay tax on it according to your marginal rate, which could be 20%, could be 32, could be 34, could 47. So in the super fund, the maximum amount of tax you'll pay will be 15%.
Right, so I am gonna pay tax on that realised gain?
Yeah.
But if it was my own personal property, then I wouldn't actually pay that unless it was in the property market scenario.
Unless you're in the business, yeah, yeah.
Or in the property market. Sorry, I've switched from pink diamonds to property. I think you will pay capital gains if you don't live in that premises in the last 12 months, or something like that. You will pay capital gains, but if you sold it outside of that period, and it was your primary place of residence, you won't pay capital gains, is that right?
If it's primary residence, and you live in it, and sell it at a gain, assuming it's always been your primary residence, it's gonna be tax-free.
[Chris] Yeah.
If the property is in the super fund and held for longer than 12 months, and you make a gain, it'll be 10%. Now, on that question because that comes up often as well, people will say, "Well, I bought this property in the super fund. Can I live in it?" The answer: unless you're over retirement age, no. If you're over retirement age, and you wanna live in it, you've still gotta transfer it outta the super fund. So the only instance that you can utilise a property that's within that super environment is if it's business real property. So this property, for example, if this was owned in your super fund, you could utilise this property whilst you're still under retirement age, haven't met a condition of release. So the question does come up occasionally about holiday units. So people will purchase holiday units within self-managed super fund environment, and that's a bit of a grey area.
Grey area as in I can do it, but I can only use it for a certain amount of time per year, or just still grayer than that?
Grayer than that.
Okay. Yeah, yeah. Grayer than that, so yeah.
Right.
The way you'd probably wanna get around that is have another friend buy a holiday unit in the one next door.
Okay. Not advice.
Not advice, and be honest, that kinda went a little bit over my head, given the conversation. I was just swimming in information at the moment.
Back on the question about the collectibles, so sometimes, I said it's sometimes not the best option to put it into self-managed super. Now, if you've got collectibles, in most cases, those collectibles, if you sell them outside of super, it's not an enterprise. You're not in business, so it's all gonna be tax-free anyway, but there's always this money sitting in this super fund that's not doing anything, and I can buy this, so it's not always the best option. Sometimes the better option is to just do it outside of super anyway. So the collectibles, they're a bit of a novelty that were quite popular back sort of 15 years ago. Then they changed the rules around them. So they brought in all these rules about, you know, separate insurance policies and all these types of things. So when I first started in accounting, I remember we had a client that had an old Ferrari in the fund.
Sick.
Yeah.
Just sitting in his living room, or no, in a gallery.
[Darryl] Well, I'm pretty sure he used to drive it to our appointments, so.
Beautiful, 'course he did. What a champ. I wouldn't be able to help myself either.
No.
Well, okay, what do I have to know before getting into this? Is there something?
What do you have to know?
Yeah.
What do you have to know?
Other than everything we've already discussed.
Well, obviously, it's pretty clear that compliance is a big thing with self-managed supers. So there's a list of compliance rules as long as your arm, so you've gotta, as the trustee, you're legally responsible for that, for the operation of that super fund. You can get assistance from advisors and professionals, but ultimately, the responsibility rests with the trustee, and if the fund is deemed to be non-complying, then the fund's assets can be taxed at 47%. So that, if you have a non-complying fund, can be a very quick way to lose all of your super.
Well, yeah, at 47%. So that's the first thing. You've gotta have a good understanding of the compliance side of it. After that, it's seek some advice. So speak with your accountant. Speak with your financial planner. Speak with a specialist in the area that can give you the advice that you need around the structure, whether it's the best option for you and then whether it's gonna meet your needs and requirements, and then the assets. You have to look at the assets that you wanna invest in, so.
I think for me, like okay, self-employed forever, and didn't pay myself super for a lotta that. So fixed that up when I realised that was probably a stupid idea. I'm getting closer, closer to retirement than I was the other way, so now, 100% considering purchasing my own office for my business. What do I do? You know, it's not a lotta super there. What do I do?
Yeah, you got a couple of options for sure, and a lotta people are in similar situation. Love the idea, would love to buy my commercial property. Just can't 'cause I don't have enough money in super at the moment.
Yeah, I actually do, speaking with more and more business owners, so many of whom, no super.
Yeah, yeah, there was probably a generational thing as well, or if you've been self-employed for a long time, for most of your working life, then superannuation's probably, it was a discretional item, and most business owners would prefer to put the money back into the business, or you know, it goes to other costs. So superannuation, if you're self-employed and you're not taking or paying yourself wages on the payroll, then if you're a trust structure, for example, there's no obligation for you to pay super. So some self-employed people go through this gap of zero super. There's been some changes to the rules where you can catch up contributions now. So you can put your max contribution, the 27 1/2 thousand that it is currently. You can access unused contribution limits from prior years for a maximum of five years, so from '19, so if you hadn't put any money into super in the last couple of years, you could theoretically put in nearly 80,000 in one year. So as you're getting towards the end of your working life, you can catch up some of those contributions, but back to the question, property, there's a couple of options. So you could use, depending on the investment structure and whether or not you're gonna buy it 100% yourself or you're gonna buy it with other people, you could use, and this is using super, one option to use super if you have a smaller balance. So you can set up what they call a superannuation unit trust, superannuation unit investment trust or suit. So it's gotta be ungeared, though. So you can put the funds in, say you had $100,000, but you needed to buy a million-dollar asset, if you had some other investors, and you each contributed an amount of money, no unit-holder can have more than 50%, you can set up a unit trust, invest in that unit trust, and the unit trust can go on, purchase the commercial asset. So that's one option to do it within super still.
So that 100 grand, can that come from my SMSF?
[Darryl] And that can come from your SMSF, yes. So you only have a 10% interest in the property, but it's ungeared, so you're-
Ungeared, what does that mean?
[Darryl] No loan, so no lending attached to it.
Got it.
Yeah. So the other option is outside of super. There's some good products around at the moment where you can basically buy commercial property on residential home loan sorta terms. So 30-year term, 20% down, and that is a really attractive structure for someone that doesn't have enough money in super. That structure-
Is that through the unit trust?
No, that would be, you could buy that in your individual name. You could buy that in another entity that you set up. So that would be outside of super. You wouldn't have to set up a unit trust. You could if you wanted to, depends on complexity. Some people, if it's just a passive commercial property asset that they're using in their business, they might set it up in individual names. Sometimes, us accountants get criticised for overcomplicating things, but my preference is if you walked into our office and said, "I'm thinking about this," I would say set up a discretionary trust or a family trust with a corporate trustee, and purchase the commercial property through that. So that, at the moment, particularly of property prices around here, your principal place is probably gone up in value, so you may not necessarily have cash today, but you could draw down some of that equity, take that out against the principal place, lend that to your newly created trust, go and get a loan for the balance of 80%, and then go and purchase your commercial property.
Right, let's do it!
[Darryl] Wait until you see the cash flow forecast.
Okay. What?
So the problem at the moment is that commercial property prices are very high. You probably woulda seen the uplift in price.
Yes.
So the prices have gone up. The rents haven't necessarily gone up at the same rate. So what was costing 3 1/2 thousand a square metre to buy commercial property is now 5,000. So obviously, you have 30% increase. So it throws the numbers out a little bit. You gotta try and find the right property. Some of the returns are starting to get watered down a little bit in commercial property, but there was a property that's for sale in Burleigh. It's not build yet. It's a new property. So that was, I just did a really basic cash flow model on that. On a 30-year term at 4.75% interest rate.
Is that a realistic interest rate at the moment for commercial?
It is.
Okay.
But you can lock 'em in at that at the moment. The five-year fixed'll be around about that. Your variable's not far off it, and they're promoting, well, promoting, they're talking about another four interest rates, interest rate rises between now and end of year, so we'll probably see easy another 2% from what they are at the moment, so it's gonna be somewhere around that 4.75, 5% interest rate, but with the commercial property, and that was based on $300 a square metre. Rent on 180 metre property down at Pearl, one of the new ones that's getting built. So as you can see, you can't see it in the video, but the property is cash-flow positive from day one, including a principal and interest loan repayment, and this is one of the differences between commercial property versus residential property. The gap has probably closed a little bit because commercial property prices have gone up and residential rents have gone up because the rental market's so tight here at the moment, but if you have a business, and you're renting, you should really consider whether or not you can purchase a commercial property for yourself to operate your business from. If you're planning to operate your business for, you know, seven to 10 years, then this is something that you should really consider.
Yeah, I'll be honest, I wish I'd gotten this advice 10 years ago, been here in this premises for 11 years, and should've purchased it. Hindsight's 20/20 though, so yeah, now trying to fix those errors.
So with the rent that you paid over the years, the trick is that with this type of purchase, with this type of investment strategy, you ideally, because you don't wanna impact your cash outflow, do you? You wanna make sure that your cash outflow remains the same because-
Yeah, whatever I'm paying in rent now, I'm basically pay to a commercial, yeah, mortgage.
Yeah, so I reverse engineered this one a little bit. So I basically found a property. So I looked at the loan repayment, and then I found a property that was right in terms of the rent we could expect and then matched it with the loan repayment. So I've cheated a little bit in that I've reverse engineered that, but it's cash flow positive from day one, but if you're looking at buying something, you would do the same thing, wouldn't you, so okay, I'm paying $4,000 a month rent now. How much, what's my borrowing capacity based on a repayment principal and interest over 30 years, 4,000 a month?
I didn't think they did commercial ones that long.
No, not all of 'em. There's a few that go on. Do we name brands?
No.
Okay, so there's-
They're not paying to be sponsors on this podcast. Yeah, so there are some brands that would do it, so a good commercial broker would be able to tell you. There's only a handful.
Groovy. So that's one of the other things as well. One of the prohibitants to getting into commercial property was, "Oh, well, it's only a 15-year loan, and your repayments are 2 1/2 times your rent," so it's not feasible because the business can't support that type of outflow, so with these types of products, your rent, your outflow is largely the same, your costs are gonna be the same, so body corp, things like that, depending on your lease. The landlord has the ability to pass those on to you, including their own land tax bill. So if you can keep your outflow the same, and you can buy the commercial property, then it does. It's a bit of a no-brainer, so this here is the net equity position, so over a 20-year period, you can improve your position by about $1 million on an $880,000 purchase.
Sick. We'll pull that diagram up on the video just so everyone can see it, and if you're listening, you'll have to go to our YouTube channel to check it out, so that was a decent deep dive into SMSF, so I really appreciate your time. I mean, what's the best advice for people that if they're thinking about this, me, personally, I'm going, I'm picking up the phone to see you. So you said earlier that there's a few options on who to see?
Yeah, so there's your tax agent or tax accountant, and so there was a couple of years ago, the industry came out and said, "All tax agents needed to be registered, self-managed super fund advisors with a limited AFSL." We, disclosure, we are not licenced, but our interpretation of that rule is different. So there was a tax agent's exemption that has always been in place, and we still operate under that. So your tax agent, financial planner. So financial planner is a good place to start because they can do an overall review of your circumstances, including insurances, which we touched on briefly. Self-managed super fund can pay all of your life insurances, TPD, even income protection, right. So the policies vary between inside super versus outside super and the benefits of both and the ins and outs, but self-managed super fund can own your insurance policies, so if you're seriously considering a change to self-manage, I would recommend that you get a full review, and that can be done in conjunction with your financial planner and your financial accountant or tax agent.
Groovy. Sentrika.com.au is your business.
[Darryl] It is.
And you're on the socials. I think you're on Facebook, Instagram, and LinkedIn.
And LinkedIn, yeah.
Cool. We might put this one up on your YouTube channel, eh?
Thank you. That'd be great.
Good. Thanks for watching, guys. That's Chris Hogan and Darryl Dyson from Sentrika Accountants and Business Advisory on SMSFs. Thank you so much for your time, mate. I really appreciate it.
Thanks, Chris. It's been great. Thank you.
Yeah, I hope that was really informative. I know it was for me. I feel like I've broken through that barrier of not understanding what Smurfs, you know, is. That's what I call it. Obviously, you can check out all the episodes on Spotify and Apple Podcasts as well as YouTube. Just search for MeMedia. On the podcast, search for "PROACTIVE Podcast with Chris Hogan." Thanks for your time. Cheers.