Why SMSFs May Be Australia's Most Underrated Wealth Tool

The world of SMSF has never been popular, but things could be changing if certain taxes, certain laws come into effect. And the thing is, not many people know what's going to happen. But today's episode, we have a guest who knows a lot about what could happen, the impact it could make, and how SMSFs could drastically change. Not only will we cover that, but we'll also go into some of the misconceptions about SMSFs, how you can consider SMSF from a residential or a commercial property investing perspective, and we'll also be deep diving into who shouldn't be investing using an SMSF. So for today's episode, we're getting specialized into the world of self-managed super funds.

We've got John from C2 Financial Group, who's a returning guest on the show. Many people loved his insights and the depth he went into to unpack the world of self-managed super funds before. Looking forward to having him on again on the Property Nerds podcast. Let's get straight into it. Nerd alert!

Property Nerds, the home for data-driven property investors, where we uncover Australia's hot and cold markets, latest headlines and trends. John, welcome to the Property Nerds. Second time around, if I'm not mistaken. That's right. Thanks for having me.

Mate, your episode actually in particular from the space of SMSF was actually one of our most popular on that angle. We had done at least half a dozen on the topic of SMSF. So as soon as we saw the stats, we're like, got to get John back into the house. Well, thanks. I remember when he asked me, he's like, do you know anyone in SMSF?

And I was like, John does my SMSF. He just speaks to me. Well, actually, John, I was speaking to the team at AFR just earlier this week on this. And the topic here was around that. And what people don't recognize is like, you know, this will impact so many families and the control they get on their own assets and the decisions they make.

Because the more and more we penalize the investor or the mom and dad investor, two things end up happening. You're going to continue to play a shock on rental housing because you have more and more, less and less people supplying that if you have less people actively using the SMSF with housing as a key part. But then secondly, you have less people now going to actually want to take control because things are too hard. There's too many things I have to think about, things I can't leverage with anymore. Do I really want that control?

So I think when people think they're trying to help the mom and dad, policies like this are actually not trying to help them. They're making control go away from the household and taking it to higher levels. And I think that's just sad to see the more and more these things come out. But I mean, John, for those people who are now in a position where they do want to set up an SMSF and are considering it, taxes and things aside that are in talks and in works, what are some of the biggest misconceptions you see in the time of setting it up or thinking of setting it up? Probably one of the big ones is that people would think that self-managed super funds are only for the very wealthy.

The fees on an SMSF have come down a lot in the last five to 10 years. Improvements in technology, improvements in administration systems, generally competition in the space. They haven't moved much. The average industry super fund fees are roughly about 1%. You add up everything, you roughly pay around 1% per annum.

So if you've got, say, $200,000 in super, 1% of that's about $2,000, which is probably slightly less than the average SMSF admin fee per year. So the other point is that when a lot of people with those sort of balances is often setting a self-managed super fund up because they've got a particular strategy in mind, such as buying property and gearing it. So most SMSF admin providers and accountants would just be charging a flat fee. If you've got $200,000 and you've geared it up to $600,000, you've effectively got $600,000 of asset exposure in your fund and you're still only paying $2,000 on the fund. So your actual MER, if you like, is much less than that 1%.

In saying that, though, you own a property, you've got real estate agents to pay, you've got rates to pay, you've got everything else that goes with property, as you would normally have in your own name as an expense as well. So as a trustee of the fund, they are the sort of things you need to be thinking about when you go to set up a fund. And that's probably the number one misconception I see. And the other one is that SMSFs are very risky. You can make the SMSF as risky as you like if that's what your strategy is, but you can also make it extremely conservative if that's what you want to do as well.

It's almost like if the SMSF is risky, no, you're risky because it's your decision. It's a self-managed super fund, right? The self is the key part. That's spot on. Yeah, that's exactly right.

So that'd be probably the biggest two misconceptions that I'm seeing at the moment. So can you buy any type of property in SMSF? Is there any restrictions? There are a lot of rules depending on what type of property you're looking at doing. The typical properties that we see are commercial and residential.

And then the third being rural industrial style properties. Rural properties, I'll just touch on them briefly, are complicated. They can be done. There are rules even that can allow you to live in the property as a rural property. Gearing to buy rural properties is almost impossible unless you're going to self-lend it to a self-managed super fund, which you can do.

You can lend money to your own fund at what's called the ATO safe harbor rates. You can do that. You don't see much of that because of the difficulties in obtaining finance and sticking to all the rules that need to be done. What you often see the most of in my sphere of SMSFs is residential and commercial. Probably the big difference between the two, not on an investment thesis side of things, but on a rules and compliance point of view, is with a commercial property, you can actually buy your own commercial property.

Your self-managed super fund can actually buy a commercial property from a related party. You see also doctors and dentists and others in that field do that quite often, right? That's correct. Because if it's classified as business real property, such as a dentist or a doctor's place of work, you can actually purchase that property at market value from yourself. So effectively, if you had 500 grand in your fund or 500 grand of spare cash in your fund and the office that the dentistry was run out of was worth 500, you can actually pay yourself 500 grand and have the property owned by the self-managed super fund and your dentistry business would pay market rate of rent to your self-managed super fund.

You can do that also with a loan. There are lenders out there that lend for commercial properties. Residential, there is no such thing as being able to buy a residential property from a related party. So you can't buy a residential property from your mom or yourself. Back to Div 296, potentially passing the parliament, I think you'll find valuations are going to become a massive part of self-managed super funds.

I think they'll be very scrutinized. I think, I mean, I'd hate to say it, but I reckon there'll be a lot of valuers getting chased and criticized for their valuations a lot more, particularly when there's real money on the table that the investors are going to have to pay. Might be brown paper bags flying around as well. When you say three mil cap, it's per person, right? And that's net asset, like after the loan?

It is on that one. The transfer balance cap, which is about 1. 8 at the moment, I should know that a bit closer, but it just got moved, is different to this new Div 296 cap, which will only look at the net asset value. So it won't include the LRBA. So if you bought a property for a million, you had a hundred grand and you put 800 grand alone in and 200 grand of your own cash, they'll look at the 200, not the 1 million for that purpose of the calculation.

Do you think the pool of people this will affect then from that is going to be much smaller than what we think? Or do you think it's going to hit a large pool, but just at a certain age when they're all getting close to that timing? Yeah. I mean, AMP released some research a couple of days ago. They believe that everyone aged, I think it's over the age of 22 or 23, I can't quite remember, by the time they hit retirement, if you earn an average wage throughout and assumed a rate of growth, everyone will be in that gap.

Because remember, they're not capping that. At the moment, they're not indexing that 3 million either. So I think it'll creep up. There'll be that bracket creep, if you like to call it that. I mean, the government will change hands like eight times before that.

And the Liberals have come out and said that they would crush it, but you never know if they will once they get in and the gravy's flowing from the tax receipts. I'm not sure. It's pretty hard to turn it off. So we'll wait and see. It is a massive, it incredibly disadvantages an SMSF with illiquid assets.

Such as, there's some big investments out there that have farms where it's, how do you get the cash to fund it? The other way where it traps you is if you're a successful accumulator, so you're not at a retirement phase, you're stuck. You can't even pull the money out to bring your balance down. Because you're early before the game, right? They'd want you to pay the tax from your super, right?

Not from your personal funds. So you'd pretty much have to liquidate an asset to do it? Yeah, unless you've got room in your contributions caps to put more money into the fund to pay it. It's just so frustrating, man, because it's the people that it affects. It is just mum and dad investors.

It hits close to me because my parents, their whole retirement strategy was their super. And it was really successful. But for the amount of people I see change their lives through just investing with super, if they can't get any lending within their fund, mate, they're just... It comes down to a trust in the system as well. It went through a pretty unchanged sort of period up until about now for a while, for a good five years, which is a long time in the super space.

But now a lot of people are just really losing faith in the system. Paul Keating came out swinging the other day against the policy. I don't know if you saw that. He's been pretty against it. And he was obviously Labor, but founder of, arguably the founder of the superannuation system in Australia.

And he's hell-bent against it. So it is an interesting one. It'll be interesting to see where it goes over the next month or two. It will impact a lot of people. Hey, John, if we're being a little bit more, let's call it optimistic about the future and thinking about when it comes to super, let's call it the current rules in place as of right now.

I think we've talked about some benefits when it comes to SMSF and investing. What would you kind of say are the easy, obvious flags of, hey, maybe it's not right for this person? It's hard to say. A lot of our clients are self-directed. So what that means is that they've come in knowing what they want to do.

They want someone just to set it up, to execute it, to make sure it stays compliant, do all their ongoing compliance obligations, but they make the calls on the investment strategies. But you do speak to people and they often just don't grasp the concept of a self-managed super fund. For example, every now and then you get a client that calls up and they say, hey, I heard you do self-managed super funds. How do your funds, how do your SMSFs compare to Australian super? You probably shouldn't have a self-managed super fund.

If that's a question you're asking. And then obviously you explain them through it and you walk them through it, but still that's coming from a pretty green base. I mean, there's a lot, and then let's say that you get their head around that concept. There are so many more concepts that need to get their head around. The compliance side of it, the ongoing administration, the accounting audit, those sort of people probably shouldn't.

If that's the question they're asking off the bat, you'd probably let them go. Maybe explain to them that's probably not the right thing for you, but it is a funny one when that question comes through. But anyway. It's definitely that education piece. It's an education piece.

People who have just heard about it and go, oh, that sounds pretty cool. Let me give it a go. Maybe not for them. I think if you're looking to set one up, you really should speak to someone first. Whether you're getting full financial planning advice, whether you're getting general advice, whether you're getting no advice, but you're getting good education somewhere, you really need to get your head around what it is you're doing and work out your strategy, work out what you need to work out before you set up the fund.

I think you see a lot of problems with the online setups where no one speaks to them to give them the heads up, hey, just watch out for this or don't do it that way. Don't go and buy a property. Don't go and sign a contract to buy a property in the fund if you haven't got the ABN yet. Because you see that. As soon as the fund is set up, the fund is in existence and you can go and do what you like.

But if your ABN doesn't get approved from the ATO a couple of weeks later and you've gone and signed a contract to sell and you're on the hook for settlement, it's a massive issue for that investor because they're on the hook to settle that property. And as you guys know in the property world, they're not very lenient, the vendors, when it comes to settlement and getting their money. So that's just simple things like that that you get from actually speaking to somebody first. And then for more complex strategies and for people that are seeking more personalized advice, they should definitely just speak to a financial planner about it as well. Mate, I'd love to finish up on this particular question because this is close to us with the clients that we all work on mutually.

The speed at which your team operates at from a perspective of the support to give a customer and get them ready and or if they need certain states where they need bear trust set up and other entities and the guidance of that is miles ahead of so many others that we work closely with. And we've seen people impacted negatively because of speed not being prioritized, losing property deals, non-compliance as well because that speed hasn't been right and they've signed things they shouldn't have or they jumped onto things or just like a bit of turn off from the process because they're like, man, there's so many things to do. Maybe more from a business angle, we'd love to know what makes your process and journey so different where we continually see people like just get that kind of result. And obviously trade secrets, there might be stuff you don't need to go through. But I guess the main thing is just more so to understand from that common person view to go, hey, why is it that much better and easier with your team?

We've got a very experienced team there in-house as in not the very intelligent accountants that we hide behind the scenes. We've got about five or six front office, key front office specialists in SMSF. So someone's always there on the end of the phone. I know there's plenty of online providers out there and other service providers that just don't answer the phone and you can't get in touch with anyone, you don't know what's going on. Playing golf?

Playing golf, yeah. Well, they're just a computer, you know. Yeah, the bigger online companies, I see a lot of clients go to them just because it's like a lot cheaper, but you really don't get the same level of service. We pick up a lot of clients from those because they get stuck and then you've got to unwind it all and redo it all. We've just built up, I mean, I've been in this space for 15 years, more than 2009, so 16 years or so.

And I know it sounds boring, but you build up all these administrative processes. You've got all your systems, your CRM. I love this stuff, right? And you've got dedicated staff that know how to upload a document properly. I know this sounds simple, but if you're not doing your document management properly at our end and it comes to the audit, every single transaction needs to be audited.

And if you can't provide the proper documents and don't have the systems in place to quickly talk to auditors online through your channels, through your accounting software, a general suburban accountant will get bogged down in the detail of it.