Ian Rodrigues from Bishop Collins adds his thoughts to the pros and cons of putting property into self-managed superannuation fund (SMSF).
In this 14-minute video, you will learn just how big the funds are, the average size of a fund and the ideal size a fund needs to be to be worthwhile considering.
With thanks to Real Estate Talk – the only place where you hear all Australasia’s leading property experts.
Kevin Turner: We look continually at self-managed superannuation funds, this number three in the series that we’re doing for Your Investment Property. This time we’re going to look at the pros and cons, the actual facts behind the funds, what’s involved in them, how many people are involved in them, and whether or not you should become involved. Ian Rodrigues from Bishop Collins joins me. Ian, thanks again for your time.
Ian Rodrigues: Great to be here, Kevin.
Kevin Turner: I want to talk to you about the pros and cons of putting property into super specifically, but can you give me an overview, the latest data on how the funds work, how big they are?
Ian Rodrigues: Well, Kevin, I’ve been watching the industry with self-managed super funds for over 20 years now, and it really has become quite a big industry. There’s a lot of people voting with their feet, and setting these funds up. My overall view is that they’re not for everybody, but if they do suit you, they can be really great.
Kevin Turner: Okay.
Ian Rodrigues: So, the latest data from the ATO shows that there are 591,981 funds. That won’t be as at today, because they’re growing at a monthly rate. So, it’s around about 30% of all superannuation money held in these funds.
Kevin Turner: In property?
Ian Rodrigues: No, no. They’ve got some very specific percentages and data on where these assets are held, but they’re not all in property. In fact, one of the interesting things, which we might come to some detail on, is how much is actually in residential property? I think a lot of our viewers may be surprised at how little that is.
Kevin Turner: Is there much of a difference between residential and commercial? Have you got those stats as well?
Ian Rodrigues: Quite a big difference actually, yes. Yes.
Kevin Turner: Okay. I think you said, in rounding it out, round figure is about 600,000. How many members are there?
Ian Rodrigues: It’s around about double that. It’s around just over 1.1 million members. So, the minimum number of members for a self-managed super fund is of course, one. Pretty hard to have one without any members. The maximum at the moment is four.
Kevin Turner: Okay.
Ian Rodrigues: So, that’s something that there’s been some pressure and requests from the ATO to reconsider that, whether there could be more, if they’re all from the same family. Then, you know, there’s hopefully some change coming in that.
Kevin Turner: You mentioned at the outset there that it’s growing all the time. I think the figure was 600,000 now. What’s the inflow and outflow? In other words, how many people are closing them down each year?
Ian Rodrigues: Well, the numbers that the ATO put out every year are showing in the last 12 months to June 17, there was 24,500 was the net new establishments, and that was net of 6,000 funds being wound up. But in each of the prior four years, it was 11 or 12,000 founds being wound up. I think, in my experience, we see the people that wind them up, and they are generally the people that these shoes are a bit too big for. They’re not ready for it, they don’t have enough money to set one up, and they do it, and then they find that it probably wasn’t for them, and they decide to wind it up and go back to where they came from.
Kevin Turner: Well, I want to ask you who needs these, who runs them as well. To help us understand that, how big are the funds? What’s the average size of a fund?
Ian Rodrigues: The average size of a fund … I have some numbers here, but you’re talking around about a million dollars in a fund, is a typical size.
Kevin Turner: So, would you say from that, that under a million dollars it’s probably not worthwhile doing one? Is that a fair assumption?
Ian Rodrigues: No, I wouldn’t say that. I wouldn’t say that. In fact, quite a lot lower can still be worthwhile. Now, in order to tell someone whether they should set up a self-managed super fund, that is financial advice. You need to go to a licensed person, and they need to provide your personal advice, but there’s some rules of thumb floating around the industry. I don’t even like those, because that isn’t personal. But if someone is typically a high network person, or they are a business person, and looking to grow their asset base, self-managed super funds can be great, and particularly for acquiring your business premises. that’s where using even super borrowing is something that can be available to those people.
Ian Rodrigues: So, it really depends on what your plan is. Even though the fund may start out small, it may escalate rather quickly. But if you want a fund that’s sitting at a few hundred thousand dollars with one asset, and with no real agenda to grow, it’s going to be a very expensive proposition. It costs the same to run the fund whether it has a dollar in it, or whether it has a million dollars in it. All the costs are largely fixed.
Kevin Turner: Okay. I want to get onto the advantages and disadvantages of having a fund, but before we do, we promised we’d look at the breakup between residential and commercial. Have you got those figures there for me that you can share with us?
Ian Rodrigues: Now, let me have a quick look through. In terms of asset classes, there’s so much data. For people who like numbers, the ATO does put these out every year.
Kevin Turner: Just while you’re looking there, too, I can see a sheet on your table there which is an interesting fact sheet, we spoke off air about that. What we’ll do … that’s probably got a lot of information on it itself. We’ll provide that as a download, so inside this commentary, we’ll give you a download link, so you can actually pull that down and have a look at it, just while Ian is looking for those stats. Sorry to do that without notice, mate.
Ian Rodrigues: That’s all right. There’s so many tables here. In fact, what we may do, Kevin, is put a link to these tables for the people who like numbers, I think that might be easier. I’ve got pages and pages.
Kevin Turner: Good.
Ian Rodrigues: As I’ve found the one that I want, which is a page full of numbers. Residential property, they give it to me across nine sizes of fund, but if with go to the most relevant, the highest percentage of residential real estate across any size of fund, is less than six percent.
Kevin Turner: Okay, yeah. What about commercial? Can you get to that for me?
Ian Rodrigues: When we get commercial property, I think that’s tied up with a few other things. They have non-residential, it’s up in the generally around the greater than 10, into the 12’s.
Kevin Turner: Yeah. And see, there’d be a reason for that too, because commercial property in a super fund is a lot more flexible. In a residential fund, as we know, you can’t reside in it, you can’t have a family member in there, but a business can actually purchase in their self-managed superannuation fund, and then run their business from there.
Ian Rodrigues: Yep. There’s a lot of excitement about super funds, and the ability to borrow, which came in quite a number of years ago. The rules have changes over the last, say, eight year, quite a bit. They’re actually clearer now than they’ve ever been, which is good, but the number of funds are around … it varies across the size of the fund. Obviously the small funds have done hardly any, but the largest funds are up around that four or five percent of their asset base is in borrowing.
Kevin Turner: Oh, okay. Is in borrowing, yep.
Ian Rodrigues: Which is incredibly low.
Kevin Turner: It is very, very low. I wouldn’t have thought it’d be much higher.
Ian Rodrigues: [crosstalk 00:07:28] percent of all superannuation money.
Kevin Turner: Wow.
Ian Rodrigues: With basically five or six percent tied up in residential real estate, with hardly any funds that are done borrowing, so I look at that data, and I really wonder when people start talking about super funds impacting the residential property market by being able to borrow, those numbers don’t play out.
Kevin Turner: No. They don’t play out at all, do they?
Ian Rodrigues: No.
Kevin Turner: Who runs these?
Ian Rodrigues: Look, in our experience, the people that run these that are most suited are people with a high net worth, business people, they want to put their commercial property in super, where it’s asset protected, the taxes are lower. But really, it’s about people who want to control super themselves, and where they invest it. So, for most people, they don’t want to have to pick a shared portfolio. They don’t want to have to pick property investments. They’re quite happy with a master fund run by one of our friendly banks, or friendly unions, which is the vast majority of our super funds.
Ian Rodrigues: So, other than that, it’s either do it yourself, which is self-managed, but you take all the responsibility. The ATO have some wonderful resources for people thinking about it, about all your responsibilities are. If you read the trustees handbook and guidebook for self-managed super funds, no one would set one up, would be my opinion.
Kevin Turner: Is it because they’ve made it sound too complicated, or is it really complicated?
Ian Rodrigues: Well, they sort of set out all the penalties, which start at probably debt and work their way down. But it is complicated, right? It is, no question mark about it. For advisors trying to tell people how these run, you wouldn’t do it. It’s sort of like going to your brain surgeon and saying, “Tell me what you’re going to do.” Ultimately, the outcome you want is you’ve got a fund that you’re running, and you really must have a good advisor behind you, looking after all the detail.
Kevin Turner: Okay. Ian, wrap it up for me, mate. Pros and cons, what are they?
Ian Rodrigues: Well, the big ones are control and choice. That is number one. People want to be able to pick. If you want to pick your assets, this is your only choice. So, if you want to decide what property, or what shares, this is your only choice.
Kevin Turner: The alternative is you go to one of the bigger funds where they make the choices for you.
Ian Rodrigues: That’s right. If you don’t care where your money’s being invested, then you can pick any fund you want. It surprises me that some people get self-managed super funds for control of choice, but then outsource the investing to someone else, and you wonder why.
Kevin Turner: Yeah. No point.
Ian Rodrigues: That is the number one reason or advantage with having a self-managed fund, is you’re control and choice over your investments. There are basically fees. There’s no hidden fees, because the fees are very clear and upfront of what it costs to run. No doubt, my view is that the cost of running the fund is more expensive when it’s small, because it’s fixed. But as the fund gets bigger, that cost becomes less relevant, because the cost is fixed again. The cost doesn’t double with the size of the fund. But if you are looking for the cheapest fund to run and have the cheapest cost, it won’t be self-managed super. It won’t be. There are other cheaper options, but you also get what you pay for.
Kevin Turner: Yeah. When you go to one of the other funds that’s not self-managed, I guess you also have the opportunity to calculate your risk, don’t you? Because they have different risk portfolios.
Ian Rodrigues: Yeah, but they’re very much herd mentality. You know? Everyone’s sort of herded through in various broad bands of risk, and I’m sure if you got into those groups of conservative, there’d be ultra conservative and more modestly conservative. So, very much, it’s a herd thing. I think people with decent super balances have far more interest in what’s happening with that money. I’ve heard someone put it to me as well, I like the right to lose my own money. That’s one way of looking at it.
Kevin Turner: That’s control, isn’t it? Hey, Ian, can I just ask you this, then, as someone watching this who is interested in doing this, what discovery should they do before they come and ask you the question, “Should I be doing this? Should I have my own self-managed superannuation fund?” What can they do to get some cut through?
Ian Rodrigues: Well, I think there’s plenty of information about these self-managed funds, and I’m wary of that information and where it’s coming from, and who’s got a vested interest in telling you how great they are, so I think it really is a personal decision. The ATO website is probably the best place to get factual data about self-managed super, but really, you need to go to advisors that people have a high degree of trust in to talk to about is it suitable for them. You know, setting up a small fund and then … you know, we just went through an 11,000 a year windup, I’d say a big chunk of those weren’t suitable for people. Then, I’m very careful of there are providers out there that will set you up a fund for free, or it’s all part of a package, and you don’t actually know what they’re selling you. You know? So if we set up a fund, it costs money, but someone else will do it for little or nothing, because they’re about to sell you something else that you don’t understand yet.
Ian Rodrigues: It’s this whole financial advice market where you’re not sure whether they’re acting in your interests or their own, and we’ve had legislation that was there to tell them they have to act in the client’s best interests and all that. So, see your accountant, where it’s very clear we only act in your interest, and see what they think, and get good personal advice, but read up at the ATO’s website.
Kevin Turner: Yeah, really good advice, and we always get that from Ian. Ian’s a regular on our show, of course, Ian Rodrigues from Bishop Collins. Mate, looks like you’ve got a nice day there, too, in the background there.
Ian Rodrigues: Yeah, it will be. It’s coming up to the weekend, too, for filming day here. But, yeah, we’re looking forward to it.
Kevin Turner: Good on you, mate. All the best, and thanks for your time, Ian Rodrigues. Pleasure talking to you, mate.
Ian Rodrigues: Thanks, Kevin. Bye now.