Do you have confidence in your current superannuation manager? If not, do you have confidence in your own ability to administer your retirement capital?
If so, are you confident of not falling prey to a con(fidence) artist, such as property spruikers, quick buck merchants et al.?
Do you trust yourself to manage your superannuation money? If so, you’ll need your own Trust Deed.
Do you trust the Government to not change the legislation governing SMSFs?
These are tricky questions to answer.
On a number of levels, confidence and trust are synonymous with Self Managed Superannuation Funds (SMSF).
If the burgeoning numbers of SMSFs are any indication, then clearly confidence and trust (on all levels) are in abundant supply. But it wasn’t always so.
There was a time when personal superannuation funds were in decline.
The resurgence in confidence and trust started on 1 July 1994 – the day the Superannuation Industry Supervision Act 1993 (SISA) came into effect.
Prior to SISA, small personal super funds were lumped in with industry, employer and commercial funds for prudential regulation. The onerous administration demands made it uneconomical for small funds to justify their existence. Accountants had long been recommending their clients wind up the personal super funds and rollover the proceeds to retail superannuation funds.
Oh how the investment institutions would love for this to be the case today.
SISA recognized that smaller super funds were different to the much larger public offer funds. Small funds (fewer than five members) tended to be for family members and therefore needed less prudential oversight.
SISA was a game changer for SMSFs. Accountants changed their tune and the rest, as they say, is history.
In 1994 there were approximately 70,000 small super funds with assets totaling $12 Billion.
The fortunes of SMSFs were turned around in 1994, but 2007 gave the sector a real turbo boost.
In September 2007, S.67(4A) was inserted into SISA. Under this new section, SMSFs are allowed to borrow to acquire property providing they comply with certain conditions.
Australians love of property + the 2007 SISA amendment = Increased SMSF attractiveness.
In 2007 there were approximately 330,000 SMSFs.
The latest count from the ATO tells us there are over 500,000 SMSFs (this is a 50% increase from the 2007 numbers) with a combined asset base of $500 Billion.
This kind of growth is bound to attract the attention of the authorities, industry players and a gaggle of smarties.
SMSFs account for nearly 1/3 of all monies in super. Faced with this threat, it’s little wonder the public offer funds (industry and retail) are lobbying hard for tighter regulations to apply to SMSFs.
Recent press articles quoting the RBA’s concern about SMSFs being the driver behind the ‘property bubble‘ would be music to the ears of the public offer funds.
As far as the major super funds are concerned, the more negative press about the SMSF sector, the better.
Nothing focuses the attention of government agencies – ATO, ASIC, RBA and APRA – like the perception the public is abusing the government’s goodwill.
The official ATO data indicates (on the surface) that the majority is actually doing the right thing – using the tax effective structure to accumulate funds for their retirement.
According to the latest ATO data, 76% of SMSF assets are invested as follows:
Australian shares: 32%
Cash: 29%
Direct Property: 15%
The other 24% is invested in international shares, collectibles, unlisted trusts etc.
Contrary to popular press, only ¼ of the direct property is in residential property. The majority is invested in commercial property.
The attraction for business owners to establish an SMSF has long been the ability to purchase (with the existing balance or with borrowings) commercial property to be used by a business they own or control.
There are a number of benefits to having a business premise owned by your SMSF:
- Pay market based rent to your fund instead of a landlord
- Not having to fret about whether your lease will be renewed or not
- The business does not have to lock up a large amount of capital in the acquisition of its own premises.
- The ability to transfer an existing business premise to the fund as an in-specie contribution OR to extract cash from the fund.
- Any capital gains on the commercial property are potentially tax free (if the SMSF is in pension phase).
Members can also sell or transfer other business real property investments to their SMSF.
The significant acquisition of commercial property by SMSFs is not attracting any adverse headlines. Commercial property is boring.
Australians love houses. Therefore it is the ‘borrowing to invest’ in residential property that’s capturing the various government agencies’ and the media’s attention.
The real problem is not SMSFs investing in residential property.
The real problem is the con artists and spiv operators who have been quick to exploit the gullible investors’ ‘hot’ buttons of: save tax, take control of your money, buy ‘bricks and mortar’, own an investment property for only a few dollars a week, etc.
Once seduced by the smooth sales delivery, these ‘lambs to the slaughter’ establish an SMSF with modest savings and gear up (courtesy of the spiv’s mortgage lending mates) to buy an over-priced property. This type of two-tiered marketing has been going on for ages; it’s just that now, courtesy of the 2007 SISA amendments, the spruikers have a whole new deposit base to tap.
These slick promoters largely operate outside of system – direct property investment does not come under ASICs jurisdiction.
Unfortunately a few rotten apples spoil it for the vast majority of responsible SMSF trustees and advisers.
The combination of heightened government scrutiny, public offer fund lobbying and the actions of a very small percentage of unscrupulous trustees and operators, means SMSFs are certain to come under further regulatory control.
It’s unlikely we’ll revert to pre-1994 legislation. However trustees should be prepared for a more onerous compliance regime.
If you have an SMSF prepare yourself for more form filling.
For those thinking about an SMSF, be aware that an SMSF is not for everyone, in spite of what the zealous SMSF promoters may tell you.
The investment freedom offered by an SMSF does come with responsibility, extra administration and additional regulatory scrutiny. Understand this before you commit to switching your super funds.
An SMSF is an excellent tax-effective investment vehicle, provided you possess the following minimum requirements:
- Sufficient capital ($300,000+) to justify the establishment of the fund and to make the annual fees/charges economical.
- Good record keeping skills
- A desire and aptitude to take ownership of your investment strategy
And finally, listen to your gut.
You must have confidence and trust in the people advising you in all aspects of your SMSF. That includes administration, accounting, tax planning and investment strategy.
Vern Gowdie+
Chairman, Gowdie Family Wealth
