In 2007 legislation was amended allowing self managed super funds (SMSF) to borrow for property purchases. Following this, many people rushed out and set up an SMSF. However, over time, many of those people have found the burden of strictly enforced rules and the costs of compliance have outweighed the taxation benefit of having the SMSF.
Whether you should establish an SMSF depends on your circumstances. At the time of writing this article, large industry and retail super funds are posting solid returns for their members. In many cases, these returns are higher than what most people could accrue using their own investment strategies. So why bother with an SMSF? Usually SMSFs are recommended by accountants for the taxation benefits. There certainly are some taxation benefits, however our view is that SMSFs are generally for those who fit the following criteria:
- At least $500,000 in superannuation savings;
- Experienced in investing over a variety of mediums including shares and property;
- Must have time to analyse investments and ensure compliance;
- Access to experienced advisors (legal, accounting and SMSF compliance);
- Have a good understanding of the fundamental regulations that govern SMSFs;
- Have experience with operating a trust;
- Have ability to purchase investments without resorting to lending.
If you don’t fit this criteria, our advice would be to think twice before setting up an SMSF. The costs involved in set up and ongoing compliance are significant.
In more recent times, banks have become reluctant to lend to SMSFs to the point where very few of them will finance such transactions. SMSF lending has become incredibly complex and expensive. We would tend to discourage it.
It’s not all doom and gloom. SMSFs have a place for those with the knowledge and resources to use them properly. If you are thinking of setting up an SMSF, speak to your accountant or a specialist SMSF advisor first, then speak to us to get a full overview of the pros and cons.