It's naive to think that because all one's assets are in shares, then the portfolio should grow faster. Photo: Reuters
My wife and I are 52 and 48. We both contribute the current maximum to super but are concerned our fund is not building fast enough, even though the lion's share is in shares. We own our own property worth about $1 million. We were considering purchasing an investment property through a self-managed fund, but the fees and compliance work give me pause. The upside is that I could convert some of the shares in our industry super to cash and put a good deposit (20 per cent plus) on a property via the SMSF and boost the asset base without going over the super caps. What are the pros and cons of investing via an SMSF compared to outside super? B.M.
With all due respect (which usually means something disrespectful is about to be said), it's naive to think that because all one's assets are in shares, then the portfolio should grow faster. Or that property is a more successful growth asset. That hasn't been true for five years and is unlikely to be true for a while longer, given the current forecasts.
Buying assets within a super fund has only one benefit, which is a lower tax rate. Everything else is difficult as a result of tight regulations and higher operating costs. An SMSF offers a chance to lower costs vis-a-vis a public offer fund, but if you invest in the wrong product and/or don't match the returns of the professional managers, then the cost savings can be irrelevant.
That said, you can buy property with the intention of having it end up in your super fund in one of two ways. The newest is the use of a "limited recourse borrowing arrangement" (LRBA), a long-winded name for what is basically an instalment warrant. You can use an LRBA to buy a residential property, but the interest rate on the loan is usually higher than a standard home-loan rate as the lender has no recourse other than to your property; that is, it can repossess the property but cannot pursue the super fund to make up any losses.
The ATO is continually issuing new and complex rules regarding LRBAs. To find out more, your best approach is to Google "ATO LRBA".
An older approach is to set up a unit trust that can buy a commercial property, defined as "business real property" under section 13.22C of the SIS Regulations. The trust can even buy such a property from the trustees, such as a factory or a doctor's practice. You and your SMSF can both buy units and you can borrow money to fund your share of the units, usually using your home as security. The fund can employ its ongoing income to gradually buy all your shares without contravening the in-house asset rules. It is a generally simpler approach and you can borrow at standard investment-loan rates.
My general suggestion right now is to stick to term deposits.
If you have a question for George Cochrane, send it to Personal Investment, PO Box 3001, Tamarama, NSW 2026. Help lines: Financial Ombudsman, 1300 780 808; pensions, 13 23 00.