While Self Managed Superannuation Funds (SMSF’s) were once a wealth creation structure afforded only to high net worth individuals, legislation changes permitting SMSF’s to borrow money in order to acquire property has seen them gain favour with a broader investor audience in recent years.
In fact, some might say that establishing an SMSF these days is almost akin to wearing the latest designer label, with this particular method of asset accumulation becoming increasingly fashionable among investors. Here, I talk to financial planner and Intralink Wealth Solutions Director Paul Sharkey about the benefits of establishing an SMSF, as well as some of the more sophisticated asset management strategies that can be employed within this self-governed structure.
A growth industry
During his fifteen years in the industry, Paul has witnessed a meteoric rise in the popularity of SMSF’s, with growing numbers of clients wanting to “take control of their future” by assuming complete ownership of their retirement fund.
He says clients are drawn to SMSF’s primarily for the control they can gain over their nest egg, but also because they are afforded greater flexibility, a wider range of investment choices and more strategic tax planning. And if you happen to be a small business owner, the numerous benefits of establishing an SMSF are even more apparent.
Small business benefits
“Small business benefits are enormous for our client base,” says Paul. “For a lot of our small business clients, we are actually working with people like yourself Andrew, to borrow money in order to buy property within their fund, that they are then able to rent back to themselves.”
Paul reasons that small business owners are forced to pay rent to a landlord in one form or another, so why not use their SMSF to invest in a commercial asset where they can effectively become the tenants and pay their own rent at market rates?
“So at a point in the future when they sell the business, they also have an asset in the form of commercial property,” reasons Paul.
Indeed, whilst residential property is still the preferred option for most SMSF investors due to its greater rental reliability, there has ben an undeniable surge in the number of “owner occupier” investors snapping up commercial space within this structure.[sam id=43 codes=’true’]
In doing so, small business owners enjoy the security of premises they can lease and run their venture from without fear of paying higher than market rents, whilst enjoying the benefits of growing their retirement fund via annual contributions in the form of rental payments and an asset that is attracting capital growth, at the same time as the associated debt is reduced.
Paul says this strategy is being adopted more since the government cut back SMSF contributions from $100k per member to $25k per member, with small business owners using the extra rental income to grow their wealth beyond the allowable $25k contribution, thereby maximising their retirement savings.
Getting the balance right
Success within the SMSF structure depends largely on investors establishing and maintaining a well-rounded portfolio. Paul says that, as with any investment approach, it’s all about getting the balance right.
“Each client is a little bit different with regard to their goals, but in getting that balance right shares should form a good part of the self managed super fund. Not only from an investment perspective, but for the franking credits (as well).”
Paul explains, “So an Australian company pays these franking credits to the tax office on your behalf. Inside (an SMSF), your tax rate is either 15 per cent or zero per cent, depending on the phase of your superannuation.
“Those franking credits get refunded back in to the client and for retirees that adds an extra 2 to 2.5 per cent to their return on income levels alone, just by having those franking credits refunded back at the end of the year. So it is quite a powerful strategy.”
Consider the banking sector for instance, where enticing dividends are promised to shareholders due to the large annual turnovers posted in the Australian finance sector (by the Big 4 in particular), whereas the real return on investment is not all that impressive without the addition of franking credit refunds.
“At the moment you are getting say 7 per cent for the banks (shares) in terms of pre tax (returns),” says Paul.
“But when you add the franking credit, that takes it up to roughly a 10 per cent return in simple terms.”
Striking a harmonious and profitable balance also means accounting for the fact that different markets experience different cyclical movements at any given time.
“Property, shares, bonds, they all have different cycles and it’s being a little bit structured and consistent about that,” says Paul.
“At different times, different markets will run and you will make profits. For us it’s about harvesting some of those profits, putting that back into, say, cash, and waiting for the next opportunity to come up. So it’s about being disciplined, and that asset allocation mix is really important.”
Your future, your fund
Paul says that investors keen to maximise the benefits of an SMSF structure should consider their fund as another member of the family. While this might seem slightly odd, the fact is if you nurture it in the right way, your SMSF can become an incredibly strong addition to your wealth creation arsenal.
“Particularly for small business owners and executives looking to sell their business, it (an SMSF) becomes quite powerful for ensuring very little or no capital gains tax is payed once you sell the business just by using the self managed super fund,” says Paul.
He reasons that if you, the investor, work closely with an experienced accountant, financial adviser and mortgage broker in the establishment and evolution of a well balanced SMSF, you will have a fantastic resource at hand for directing your own retirement fund and most importantly, your optimal post-work lifestyle.