EP 25: Self Managed Super Funds

In this episode of the Property Investors Handbook, host Adam Bell welcomes back accountant Tony Sutherland for an in-depth discussion on self-managed super funds (SMSFs) and their implications for property investment. Tony delves into the complexities involved, from the rules around Limited Recourse Borrowing Arrangements (LRBA) to the do's and don'ts of property improvements and rental within SMSFs. Whether you're considering setting up an SMSF or seeking to optimize your current investments, this episode provides valuable insights and practical advice for every property investor.

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  Hello and welcome back to the Property Investors Handbook. My name is Adam Bell and I'm your host. And today we've got a special guest in the studio for the second time, Mr. Tony Sutherland, who is an accountant and has been for many, many years and knows everything about property. Everything there is to know about taxation and accounting for investment properties.

Tony, welcome to the studio.

Thanks Adam. Thanks for having me back.

Excellent. Now today we're going to open up the can of worms that is self managed super funds and how that works for property investment. Because I know there's a lot of legislation and a lot of things to know, isn't there?

Oh, absolutely.

As soon as you, , join a property into a self managed superfund, you bring a whole new set of rules.

Yeah, I remember, look, I remember listening. You, you had that episode with Colleen, a few weeks back and there were things that you brought up there to do with self managed super funds that I just had no idea about.

Totally different set of rules. So look, let me first ask why have a self managed super fund, that you can then use for property investment?

A lot of people look down the road of a self managed super fund. I guess they look at what they're getting. In terms of returns and cost of administration using through a, like a master fund, your big industry funds.

And a lot of people do and think they can do a better job in terms of returns. Right. So they look to manage it themselves.

So it's generally about doing that and getting a better return than. Having it in a normal super fund itself. Yeah, exactly.

You get very little say through a master fund in how your investments are invested.

Your funds are invested. So people like to, some people like to be hands on and, and, and try and get better returns.

Okay. So talk me through buying in a self managed super fund, you know, getting a property and the ins and outs of that.

Yeah, look, it's, the main reason people go down that road, Generally through the self managed super fund is that they've got funds there to put into a property Sometimes if they've already got investment properties outside of super they've used the equity available equity that I have to borrow outside using their own home as additional security that the banks need So it's if they've got several hundred thousand dollars in super it gives them a kickstart in that's their equity start to buy the property.

Sure.

Okay. So how does it work? Okay. It's, the super fund bar, buys a property just like anyone else, whether it's the individual or a trust, it needs to borrow. To do the, settlement generally.

The entity itself borrows the money. Yes. Yeah. So it's the

super fund borrowing the money.

I'll come back to this. So I asked some rules and structures of how that happens with the borrowing, but we'll get to that. And, yeah, so the super fund buys and the super fund borrows.

Okay. All right. Talk me through those rules then.

Okay. So let's say you set up a self managed super fund, you've rolled your super money into it and you've got it in cash.

That's your equity component. Sure. Okay. Then you've Just like

saving for your deposit.

Exactly. Just like everyone else. So then you go down the road of having to borrow. Now there's a special rules around that. And it's called Limited Recourse Borrowing Arrangements, LRBA, for short. Where the banks, uh, whoever you're borrowing from have to comply with those, the rules around that.

Sure.

Okay. I'll start by, saying that when there is borrowing, the Superfund has to then set up a separate bear trust. Right. And that's to comply with the LRBA borrowing rules. It's a little separate trust that it's controlled by the, the fund and the trustees, the members, sits at the side. and does nothing.

You know, it doesn't lodge tax returns. It doesn't do anything. But it's got to be there. But it's got to be there. It's officially the, the holder of the property. Okay. Until the loan is repaid. Right. So it just sits there doing its nothingness, but it has to be, has to be there.

But it actually owns the property during that period.

Yeah, exactly. Exactly. Sure.

So the, yeah, so you'll find a lender, who, who will lend on the terms of the LRBA. Now they're a little stricter around those rules than a standard borrowing arrangement for an investment property. The ATL sort of really sort of forcing, more control of that. So, they tend to sort of say to the borrowers, you, a 60 40.

So a 40 percent equity, a 60 percent lend, LVR rules. Right. So it's a little bit more restrictive on residential property. Yep. Commercial property, they're allowed to push out a bit more to like a 70 30. 70 30. Okay. So it is a little tougher than just walking in to a normal bank, normal investment property where they might do 80, 20.

Sure. Now with this structure and the way it's set up and it's the fund that's purchasing the property and borrowing. Yes. How do the banks look at serviceability and your ability to Yeah,

it's again, it's a little bit different to, the normal borrowings because obviously, and what the limited recourse borrowing I should explain is that the banks technically only have recourse to that property and the superannuation fund.

if they need to call in the loan. So, they will still ask for guarantees from the fund members. But that's all they can't, then the bank can't go outside the super fund to collect the money if you default. So that's, why they look at serviceability quite strongly. And that's going to be around, the income of the property that's bringing in plus other, funds coming into the Superfund.

So if the Superfund has other monies invested. or it's receiving annual contributions from the members. Yep. They look to make sure that's going to sort of be a regular thing that's going to service the loan.

Sure. Okay. Now I believe one of the key differences with having an investment property in a self managed super fund to, you know, having it yourself is what you can do to the property.

Exactly. Exactly. Can

you talk us through this little, landmine?

Yeah. So it's a very big, landmine, you know, in terms of the property. So where, when there is a loan in place, an LRBA loan in place on that property, you're very restricted in terms of what you can do to the property in terms of improvements.

Okay. Let's say you buy a, an investment house. You rented it out, you can do your normal repairs that are required to keep it in a livable condition.

Yep.

But then you are prevented from improving the property. So, I mean, you can't then come along and say, I want to add a bedroom to it. Right. So, no.

Or do garages or carports or things like that. Right. Until that loan is repaid. Can I throw you a

curly one? Ask why? Yeah. Like it is what it is, I get that, but

why? Push it back to the ATO. That's their rules they brought in around limited recourse borrowing arrangements. That the property cannot be improved until that loan is gone.

Right, so. It's a strange rule. I don't know why. Because. If you could improve it and improve its rentability or its income producing ability, that would be a good thing. Yep. But, the ATO have these rules. All right. So to

Get this clear for everyone out there listening, I'm going to throw things at you about what you should do when you go.

Yes. No. Okay. Curtains. Yes. Okay. New shower.

Yes. Provided it's, it classes a repair, so if the old shower needs replacing, new shower.

New bathroom.

If it requires replacement. Yes.

Knock a wall down to open up the living room.

You would say no to that. It would be deemed as a capital improvement and that would forfeiture those rules.

Okay. Sun, add a sunroom out the back. No, definitely not. Okay. New carpets.

Yes, they're okay. They're just an ongoing maintenance item.

Sure. Sure. Let's say you wanted to extend a window. So make a longer sort of bay window area.

Again, that'll be a gray area one. I'm trying

to throw you some hard ones.

Yeah.

It'd be a gray area. One look more than likely that would be okay because it's not really, uh, sort of a structural improvement in any way it's, if it's just improving the livability or the rentability of the property would be okay.

Sure. Okay. So give me a few then overall do's and don'ts when investing, buying an investment property with a.

With a self managed super fund.

Okay. So firstly, do your research, do speak to your accountant, do speak to your lawyer, particularly around the rules of the, borrowing arrangements, because that's very important. So do that. Do your research on the type of property that you looking to buy. in there.

Do your homework on the rules around the, borrowing, like the 60, 40 lend on residential. Make sure that you can afford it, or the super fund can afford the arrangement that you're looking to enter. Don't buy a property and then start doing major improvements to it.

Without getting it checked out. Without getting it checked out first. Do not, rent it out to a relative. Or a, an associate what they call. Okay. It's, that's a definite no-no under any Superfund, renting a property, it cannot rent it to a Okay. So that a member, I, I was

gonna say, is that your advice or is that a No, that's a, that's a rule.

You cannot, rent it to yourself. or a relative or what they call a part aid associate. So you do, so it has to be everything in terms of the rental has to be very arm's

length. So,

you know, rent it through an agent, make sure that whoever they're renting it to is not associated or related to you.

Sure.

Okay. And what, What does a, somebody who gets an investment property through a self managed super fund need to really think about and consider coming tax time each year?

Again, the, well it's the super, the superannuation fund has to comply with all its tax rules. So, When you've got a property, in a super fund, Oh, let's, let me go back a step.

A super fund at the end of each financial year on the 30th of June has to value its assets at market value on the 30th of June. It's just one of the rules. So instead of a cost, it needs to be a market value. So that knows what the value of the fund is on that date. Now, and that includes the property. So just recently the ATO brought in or an upgraded their guidance rules in that property, needs to be valued like all other assets on an annual basis.

So that's the biggest issue around that. Firstly, is that the property has to have some sort of market appraisal by either real estate registered real estate agent or a registered valuer. to what its value is on that date. Okay. So that's the biggest issue. And of course, a self managed super fund or any super fund has to have an investment strategy.

And you need to review that each year, to make sure that investment strategy strategy aligns with your, superannuation ultimate retirement plans. Sure.

Okay. Great advice. Last question for you, Tony, what happens You know, you've got a property in your self managed super fund. What happens if it comes time to retire?

Yeah, this is where the issue you, ties up with your investment strategy. You've got to look at the availability of funds to fund your retirement. Now, if you've got a property, that's the majority asset of your super funds, that could be problematic in being, having enough. to fund your annual retirement.

For example, someone retires at 65, goes in, turns their, turns on the pension mode, or pension phase of their super funds, and says, I want to retire. So that person between 65 and, and 70 onwards has to take out 4% as a minimum of their pension balance or their member balance each year.

Right

now, if there's not enough cash, how do you, how do you fund that? 4 percent because that's a minimum. There's no maximums, a hundred percent, but you've got to do four. Now, if then you may get to the point where you may have to liquidate that asset into more cashable type investment to fund the retirement.

So you've got to plan ahead for that. So it's not like get to retirement. Oh, then what'll I do with the property? You might have to be selling it quickly. And that could push you into a sort of forced sale type scenario. So make sure you plan ahead, like five years ahead for that possible scenario.

Planning ahead, always key. Yes. Look, Tony, thanks so much for coming in today. It's been an Absolute pleasure having you here and the knowledge that you've got on these, you know, quite difficult and complex topics to do with accounting investment properties. I know is going to be very well received by our listeners.

So would you come in again and do another couple of episodes with us? Yeah,

of course. It would be my pleasure to come in and do some more.

Fantastic. Now remember, if you're looking for any type of, advice and services around, investment properties. Do see Colleen and her team at, what is it? It's spmg.

com. au. Head over there. Give them a call, send them an email. They're, the best property management agency in town. And of course, if you're looking for any, accounting, services and advice, Colleen and her team can definitely point in the right direction there as well. Tony, thanks once again. I really look forward to speaking to you again in future episodes.

Thank you very much, Adam. Thank you.