Tax and legal advice
Dominique Bergel-Grant

The 6 biggest SMSF myths - busted

By Dominique Bergel-Grant

More and more property investors are turning to self-managed super funds to realise their property investment goals, but the myths and misconception surrounding these complex financial arrangements continue to catch people out. 

Blogger: Dominique Bergel-Grant, founder, Leapfrog Financial 

The dream of putting your feet up, retiring and living with financial security is one that we all aspire to. For many people, a crucial step in this process is taking control of what will one day be your biggest asset – superannuation. But is taking control of your super and setting up a self-managed super fund (SMSF) the same thing? Or are you just falling for the marketing and allure?

As a financial adviser, I spend just as much time unwinding self-managed super funds as I do establishing them. This leads me to think: why do so many people choose to set up a self-managed super fund and where are people going wrong?

Gone are the days where, as a trustee of your own self-managed super fund, you could invest in questionable assets, take little or no responsibility for your investment decisions, or benefit from tax breaks not available to those in normal super funds.

However, these myths and many more still exist when it comes to SMSFs.

It is time to bust these myths so you can be confident you are making an independent decision that is right for you, rather than just following the crowd and joining the one million Australians who have an SMSF.

1. Cash is king
I hear many trustees speak of stories about how they saved their super during the global financial crisis by having it invested in cash. In many cases, when I drill down it turns out to be it was more luck than technical ability.

The biggest concern, however, is that with nearly 50 per cent of assets in SMSFs still invested in cash, people are continuing to believe their own stories, or simply do not have the time or technical expertise to know where to start investing.

In reality, if they had just left their money in a balanced portfolio of investments, they would have more money in their account today than they currently do. Cash may provide stability, but it will not deliver you the growth you need to be financially secure in the long term.

2. Structure and responsibilities
Many of the super funds that need to be closed down have reached this point because they were not set up correctly in the first place. I have even come across funds that do not have a trust deed. This trust deed is required by law as it governs the rules of the SMSF. I have also seen attempts by trustees to change these rules to make it more flexible than the superannuation legislation itself!

Remember, no matter what you put into your trust deed, you still have to comply with the legislation that the Australian Taxation Office (ATO) enforces – and they will always be looking over your shoulder.

If the ATO finds that you have breached the super legislation, there are very high penalties – sometimes including hundreds of thousands of dollars in fines, or even imprisonment.

The ATO won’t accept any excuses. If you decide to set up a self-managed super fund, you take on not only the role of being a member, but also a trustee. Your sole responsibility is to act in the member’s best interest. In theory, you are the same person, but not legally. What you may want as a member may not be legal for you to do as a trustee and vice versa.

3. Access your super
One of the most common mistakes made by trustees is to access superannuation money for personal reasons before they are allowed to. You cannot take money from your fund to pay off your mortgage or invest into your own business venture, and you can’t put artwork you have purchased in the fund on your wall for your enjoyment.

Until you reach your preservation age you are unable to access or benefit from the investments that you have created. The preservation age for anyone born after 30 June 1964 is 60. If you were born before this you will have an earlier preservation age.

4. When can you borrow?
Gearing, or borrowing, in superannuation was introduced in September 2007 and opened the floodgates to people borrowing to buy property and other investments.

A loan in an SMSF is not a normal loan and it must meet certain rules. For example, the action the lender can take in the event of your SMSF defaulting must be limited to only the asset you borrowed for.

With the maximum tax rate in super at just 15 per cent, there is little point having a negative gearing strategy in place since the tax benefits are extremely limited.

You also need to ensure that your fund’s assets are diversified and that you do not have all your eggs in one basket. This is called your ‘SMSF investment strategy’. This has to be recorded, regularly reviewed, and will be checked by your auditor. You also need to make sure your trust deed allows you to borrow in the first place.

The legislation may say you can do something, but if your trust deed has more strict rules, you must comply with your trust deed.

Importantly, if you borrow, you must also consider the insurance cover your SMSF needs as part of your investment strategy. Otherwise, as trustee, you could personally face penalties from the ATO. You may also need to make amendments to your trust deed to protect the fund’s assets should one of your members die or become totally and permanently disabled.

If this occurred, the fund would need to pay out the member’s benefit, which without insurance and correct wording in the trust deed would result in the geared investment (such as property) needing to be sold because the SMSF must meet its obligations to the member and their beneficiaries.

5. DIY super
Just because you run a self-managed super fund does not mean it is DIY super. Building a team around you will without a doubt leave you better off financially in the long run, even after you pay the necessary fees. So who do you need?

A financial adviser will be able to assess whether or not you should be considering setting up an SMSF. I would confidently say that six out of 10 people I meet who want an SMSF can achieve their investment requirements through a normal super fund. In the process, they will save themselves thousands in fees, as well as the compliance headache of being a fund trustee.

If they do recommend an SMSF, the financial adviser will also help to ensure your fund is established in a way that meets the legislative requirements. In addition, they will be able to establish your fund’s investment stratey and consider any insurance you and your SMSF will require. They will also be able to keep you up to date with legislative changes and continue to work with you on your fund’s investment strategy.

An accountant is key. They will ensure your tax returns are compliant, that a good independent auditor is sourced, and they will keep you on the straight and narrow. The key here, however, is to ensure you are dealing with an accountant who is a specialist in SMSFs.

A specialist SMSF solicitor is also vital. They are few and far between, but will ensure you end up with a strong and compliant trust deed, and will also be able to assist you with any amendments you need to make to tailor it to your specific needs.

6. Winding up
As you get older, or as your investment needs change, do not be afraid to shut down your SMSF and convert back to a public super fund. Typically, the key reasons people should be holding an SMSF these days are for direct property investment, borrowing to invest in shares through installment warrants, or if they have complex estate planning affairs and want certainty on whom their super money will go to.

If you are just investing in a combination of shares, managed funds and term deposits, then a good quality public offer fund may be lower in cost, provide consolidated reporting, take over the trustee responsibility and importantly, give you your time back.

You should of course seek financial advice about which fund will suit you, since every fund has its pros and cons. It is also important to know that there are many wholesale platforms and funds that are only available through financial advisers, so you can actually save money with the right set up and enjoy the benefit of full advice.

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About the Blogger

Dominique Bergel-Grant

Dominique Bergel-Grant

Dominique Bergel-Grant is the founder and principal financial adviser of Leapfrog Financial – a firm which offers financial planning, investment advice, personal insurance advice, cash flow and budgeting, mortgage broking, self-managed superannuation and investment property advice. 

 

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Tune in to the latest episode of Property Showcase, the podcast with the inside track on the products and businesses that will help turbocharge your portfolio, maximise returns and make your overall investment experience seamless and stress-free!

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To hear more about these services, make sure to tune in to this episode of Property Showcase!

 Make sure you never miss an episode by subscribing to us now on iTunes!

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Son Pham is the accredited Head of Mortgages at Rethink Financing\/Rethink Investing. He has over 6 years\u2019 experience writing loans, over 12 years in the wealth management industry working for the likes of CBA, AMP and private practice and he is also a licenced financial planner (AFSL 326450). He has multiple investment properties that are cash flow positive which help pay his mortgage on his home and fund his lifestyle.<\/p>\r\n

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    In this episode of Property Showcase, director of investment services for Open Corp Michael Beresford,\u00a0joins\u00a0editor of Real Estate, Tim Neary to share why he disagrees that the cooling market means that the best times are behind us.<\/p>\r\n

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Mortgages in a tighter lending economy and why Brisbane is a good option
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  string(82) "Stories of success: The migrants that became Australia’s renowned Property Twins"
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Sana and Mona Ali moved to Australia from Pakistan at the age of 15. Years later, the once-struggling migrants successfully turned their $40,000 savings into a $5 million-portfolio, earning the moniker “The Property Twins” — all before the age of 30. How did these millennials make their way to the top?

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The Ali sisters lived in low socioeconomic conditions for years since arriving in Australia in 2000, but instead of accepting their fate, they used their circumstance as motivation to work hard and achieve financial security.

According to Sana: “Moving countries was a huge personal challenge. We were living in a low socioeconomic area of Sydney and we just saw people around us living really good lives. It really pushed us and made us wonder, ‘What if we could buy more than one house?’”

They initially wanted just a strong financial foundation for themselves and their family and the sense of security brought about by owning a home. In less than a decade, they got all of it and more.

Aside from being able to build a 10-property portfolio, the Ali sisters were also successful in establishing a mortgage business that aims to help investors make the best decisions for their own wealth-creation journeys.

“We just want to feel that Australia is really home and to have our roots here,” Mona highlighted.

How it all started

What they lacked in funds, the Ali sisters made up for continuous education, training and mentorship.

In 2009, they have both spent years in the Information Technology and Project Management fields before progressing through finance roles. The high-net worth individuals that they constantly work made them realise that there’s more they can aspire for than corporate jobs.

They started doing research and eventually bought their first property in Parramatta through their combined savings of $40,000 and the aid of the First Home Owners Grant. Seven months later, they bought their second property in Blacktown.

Mona shared: “I personally wasn’t a good saver, because I loved shopping and shoes. Nothing wrong with that, but looking back, it's like a ‘need it versus want it’ question. Obviously, I did buy a lot of shoes but we didn’t go travelling and all of that. So, we did have some savings.”

The Ali sisters opted for cheap properties in the lower end of the market to jumpstart their investment journey for low-entry prices.

“The cash flow meant when we did rent the properties out, they could look after themselves,” Mona highlighted.

Sana and Mona advise investors to avoid being afraid of starting small. Being realistic instead of aiming for a dream home on their first shot at investing helped them enter the market sooner than later.

After all, property investment is a long-term commitment and, essentially, a kind of “delayed gratification”.

The twin’s property portfolio grew to consist of eight more properties spread across Western Sydney and Brisbane, including units, villas and townhouses.

Strategies

Not long after they started investing in properties, the Ali sisters sold their first two properties in Sydney to take advantage of the property boom that happened in the city. Prior to selling, they did cosmetic renovations on these properties to add value and eventually extracted equity from them.

The first property returned around $330,000 while the second property returned around $190,000.

Mona and Sana used the extracted equity to make their third and fourth property purchase, which are strata properties located in Blacktown. Less than 10 years later, the same properties have increased in value by 90 to 100 per cent.

As the market went more stagnant, Mona and Sana continued increasing their savings to improve the buffer for their portfolio. They saved 20 to 30 per cent of their salary, sacrificed travels, minimised eating out and drove a Kia Rio for years to save as much as they could.

For years, they carefully weighed their needs and wants to determine the things they could live without as they are building their portfolio.

Where to buy

The Ali sisters deliberately chose to buy most of their properties in the Western Sydney region, between Parramatta and Penrith.

According to them, having properties in such good locations, as in close to transport and other valuable infrastructure and establishments, helped them maintain good cash flow and minimise the impact of property investment on their finances and lifestyle.

While they have implemented different strategies throughout their investment journey, good location is one of their non-negotiables.

Sana explained: “We wanted to make sure the properties were well-located. That’s formed the foundation of our property strategy, where we make sure that properties are close to the train station, or a big shopping centre, because that’s what’s going to drive the demand down the track.”

Who to work with

Unlike many investors, the Ali sisters didn’t recognise the value added by property professionals to their portfolio in the beginning. In fact, it took them four purchases to seek the guidance of experts. Needless to say, it turned out to be among their more costly decisions.

According to Sana: “You don’t know what you don’t know, and we didn’t know any better. In hindsight, it would have been good to work with a broker for our initial couple of purchases.” 

Through online forums, they found out about the benefits of working with a mortgage broker and has since worked with a few throughout their investment journey. They taught them not only what they needed to know about mortgage broking, but also what they want to be done differently.

Eventually, Mona and Sana grew to love the “numbers side of property” and went on to establish their own mortgage business, The Property Twins. The business aims to empower investors by offering different services, including building portfolio roadmaps and finding better loans.

According to them, their personal experiences as investors consistently help them provide the best customer service and most effective advice even amidst changing broking spaces.

Mona said: “We really look at building road maps for our clients upfront. On paper, we really put the options down — lender A, B, C, D, in that order — so you continue maximising what's really possible for you."

“Whilst you have no control over the lending policies or where your interest rates go, if you’re making that strategic choice, you’re keeping a lot of doors open for later investment," she added.

Helping investors

As investors-turned-mortgage brokers, Mona and Sana seek to improve the knowledge of Australian investors and ultimately help them achieve their financial goals. Their experiences as investors who, quite literally, started from the bottom allow them to provide realistic and well-rounded advice to different types of investors.

Instead of acting as mere intermediaries who bring borrowers and lenders together, they take on a holistic approach and help budding investors establish a good foundation for their investment journey.

The most important advice they give to their clients is to always implement long-term strategies, but also be flexible enough to alter plans accordingly along the way.

Sana explained: “You need to look at the big picture rather than just one product or one rate focus, because it's a long-term strategy for you.” 

“We are taking our clients on a journey. It’s not about one transaction at a time, it’s about the big picture and really educating them through the process, through the decisions that they are going to be making — just talking through the pros and cons, the rates and how it's impacting them and what their plans are in the next six to 12 months," Mona highlighted.

Finding the right mentors is critical to success in property investment, according to them. Finding the ones who will be willing to understand your goals, capabilities and limitations as an investor and give you tailored advice will certainly help you fast track your wealth-creation journey.

In fact, Mona and Sana themselves have made it a point to stay in contact with their mentors even after they have successfully crossed the $5 million-line.

As mortgage brokers, the Ali sisters go above and beyond their responsibilities to serve as lessons and inspirations to budding investors.

Mona said: “It’s been really rewarding to see the changes that people have had or the smart decisions our clients have made over the last couple of months. Whilst we’re not property coaches or mentors, that naturally comes to us.

“We pretty much hold their hand and say, ‘Look, this is what we would buy, this is what would make a good property and this is what you should be looking for, and where you should be looking.’ When you’re working with someone who’s been there, where you want to go, you cut down 10 years’ worth of effort,” she concluded.

 

The information has been sourced from propertytwins.com.au, realestate.com.au, Daily Mail and the Smart Property Investment website.

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Stories of success: The migrants that became Australia’s renowned Property Twins
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Will Magee has had ambitions to enter into the Australian property market for quite some time, but it has been more than just finances holding him back.  Having been granted permanent residency just two weeks ago, Will is wasting no time and is now in the process of signing papers and finding his first investment property.

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In this episode of the Smart Property Investment Show, Will joins host Phil Tarrant to share why he is purchasing his first property in partnership with his brother, discuss the complications that can arise from such a strategy, and unpack the ongoing plan for building a joint property portfolio with his brother.

Will will also share how they approached saving for their first property, why he is taking out the mortgage in his name exclusively, and share their savings plan for the year ahead.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

From property in Australia to a ski lodge in Japan
Mortgage Trusts, an alternative first step for property investors
Should a real estate title be in one person’s name only?

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A property investment plan years in the making

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