EPISODE 14: Self-Managed Super Funds: The Good, The Bad, and The Profitable - Property Inc
album-art

[ Podcast Transcription ]

This is the Commercial Property Investing Explained Series brought to you by Steve Polisi. Find out how commercial property really works and start investing like the pros. Your education starts now.

Welcome to the Commercial Property Investing Explained Series. I’m your host, Andrew Bean, and I’m here with the man, the myth, and the legend, Steve Polisi. And we’ve also got a special. Special guest today, Steve, how you doing mate? I’m really good mate, my partner’s three days overdue from our first bub, so we’re just in waiting zone.

So we thought we’d do a podcast while we’re in waiting. Yeah, it’s unbelievable what you were due on the 28th and we’re recording this on the 30th. So very, very fun times ahead for you. Yeah, you might, I might be MIA for a little while. And today is a momentous occasion because this is the first time on the Investing Explained series that we’ve actually had a third party on the show.

Jeremy Yanzuli. How are you, mate? I love it, Andrew. You got it right, mate. Well done. I’ll give you a, I’ll give you a nine and a half out of 10, mate. Well done. That’s a real tough one. That’s probably the hardest name I’ve had to pronounce on the podcast so far. Yeah. And it was, it was a tough one as well.

Spelling it when you’re a young kid, it’s a pleasure to be here with you today, mate, really excited to get through a lot of this content and the questions that you’ve come up with a fantastic, great mate. I’m going to be challenged and have to pull things out of my own personal brain. Encyclopedia to hopefully answer a lot of these juicy nuggets and questions.

What are you talking about? Questions we come up with, this isn’t pre scripted or anything. This is all off the cuff. We’re just asking you questions that we can go on top of our head, you know? So. Jeremy, do you want to give them, maybe the listeners a quick run through of what you do for work and how long you’ve been in business and things like that?

Yeah, lovely mate, so I’ve been an accountant now in the small business and medium business tax advisory space for the last nearly 16 years. We manage nearly 16, 000 clients across Australia and now internationally. Majority of my clients are in small business, medium business and property investment. And I’m very lucky that probably with inside our client base, our clients own over 7, 000 properties.

So not only do I love what I do, but I get paid to learn every day. So it’s a very exciting times and very different times for many investors out there going through an interest rate cycle, which for the last 12 to 13 years they haven’t seen. So it is very new territory. And at the same time, there’s lots of opportunities around.

So where are you based mate? What are location in Australia? So our locations at the moment are based in Sydney predominantly and we’ve just recently expanded out to the Gold Coast with plans over the next 12 months to move forward to Melbourne and then from there Australia and London is the next port of call.

And I believe you have a super duper client, Steve Polisi, as well. You’ve been an accountant for him for a very long time. I have, mate. Pre bid. I’ve seen those pictures. I didn’t know who it was. Pre bid for the last year. Last 10 to 11 years, I’ve been helping Steve along with his journey from his humble beginnings as an engineer and property investor.

Yeah. Until today, where he’s obviously probably one of the premier buyers agents in the commercial space and upcoming in the residential space as well. Yeah, no doubt. Man, who’s the, is it Hamish or Andy Steve looks like without that beard? Who is it Steve? Who do you usually get? Yeah, it’s Andy. Andy is my best guy.

But I like the pre beard. It’s like BC PB for Steve, pre beard. Pre beard and post beard. That’s it. I’ve had the chat with Jeremy many times how people go to buyer’s agents. Thinking they’ve got experience because they’ve done 300 deals and things like that. But you’ve got to remember someone like Jeremy, who’s got 15, 000 clients.

Think about how many portfolios he’s seen versus what people earn as an income. So he can actually say what works is growing a portfolio and what doesn’t. Cause he’s actually getting the data every single year. It’s not just a social media dribble of people gone. I’ve got a 10 mil portfolio when they really don’t.

Jeremy can actually say what works and what doesn’t work moving forward. Yeah, we might get him to delve into what actually works and things to avoid later on in the podcast, because as he said, like, I’m sure he sees a lot of good investments. There’s probably a lot of bad investments as well, so that’ll be interesting to talk about later, but we’ve actually got you here today because we want to actually talk about investing in your SMSF.

So, mate, can you just explain to us exactly what that is? So an SMSF or self managed super fund is a controlled entity where you make the decisions of how you cherry pick your investments with inside your own structure. So you’ve got absolute control for the benefit of your retirement as opposed to putting it in a APRA regulated fund, otherwise known as a retail or industry fund, controlled by a handful or many advisors where they’re trying to make the investment that they think is right for a collective group, as opposed.

to your appetite and you’ve generally got different strategies with inside their fund to make the best decision that you possibly can. But a self managed super fund gives you the ability to control that and really be able to purchase property predominantly. That’s why people do it. And also to cherry pick some shares if they wish to invest in shares.

And recently I’ve seen lots of people going to cryptocurrency. Some have done very well. Majority have not, and many other people then utilize super fund to buy other assets for the benefit of retirement. I’ve. I’ve seen people go as far as buying vintage cars, which they deem and believe as an investment held offsite, not in their garage, because you can’t get any immediate benefit until your retirement.

It does breach the rules around self managed super fund, but seen many people buy artwork, gold, silver, and other precious metals, diamonds as well. Again, not for the use of today, but for the use of the future, but predominantly self managed super fund. The rise of it was to utilize to purchase property.

Under a LRBA, a limited recourse borrowing arrangement, and I’ll share a lot more about that after, but that was really brought in so people initially could actually purchase the premise that they were working from in their self managed super fund and then over time, it’s, it’s banded out and stretched out to incorporate investments.

So that’s really the purpose of a self managed super fund for you to take ultimate control to invest in the things that you believe will take you through well into retirement. So Jeremy, I want to unpack that a little bit. So you can actually buy crypto in a self managed super fund. Gee, that sounds irresponsible.

As long as the deed allows it, you know, during the crypto phase, the crypto boom of 2021, when everything was going up in value, if you bought flowers in a pot, it was up in value. You bought kibble for your cat up in value. Obviously a lot of people investing in it, looking for those big gains. But the challenge is, is that it is an unregulated environment.

Lots of people, I did see. Lose a lot of money. They were just unable to exit it. I saw some people actually lose the entire value of their cryptocurrency with the exchange folding due to the unregulated nature of the investment and also many people breaking the rules of the CIS Act, which they weren’t correctly owning the cryptocurrency in the Super fund, rather utilizing the Superfund’s money and having the ownership of the account in their own name.

So it’s one of those things you really gotta get right, and you gotta make sure that the investment is not speculative in nature. There’s a portion of speculation involved, but in the end, you’ve got to make sure you’ve got control of what you’re doing and control of the investment. So what’s the legislation with crypto and things like that, Jeremy, like, where’s the line of what you can buy and can’t buy?

Like I imagine it’s got to be in your name, but the whole purpose of crypto is because it’s unregulated. Yeah, and that’s the challenge. So the whole goal of a self managed super fund or super in general is to benefit the members in their retirement. They can’t obtain a benefit prior to retirement.

They’ve got to invest according to the sys act or to the deed itself. And they’ve got to make sure that the fund owns the assets. Many people were just creating a cryptocurrency account on the exchange in their own name and utilizing the self managed super fund money. To invest and we would have to go through and fix these issues, create new exchanges.

And some people would just said, sorry, we just really can’t help you at all because you’ve done too many bad things. So it’s a bit challenging. And I’m a big believer that you want to be in a regulated environment when it comes to those assets, because in the end it needs to be there so you can use it for your retirement later on down the track.

Jeremy, there’s no different to pulling out money than going down the racetrack and betting on a horse. Same effective thing. You’re gambling odds trying to make money, but obviously the race one goes to zero very easily as well. Yeah. And that’s the challenge. And a lot of people were doing it because their best mate down the road was doing it.

They knew someone who was driving a Maserati because of cryptocurrency. And again, that FOMO came into the market. We saw how it increased quite substantially very quickly. And when you start building skyscrapers that quickly without the right foundations, they tend to crumble very quickly. Very fast, and in this case a lot of people got burned.

So it’s always good when you’re investing with your self-managed super fund. And again, you should seek the advice of financial planners. They’re very good in this space, but nevertheless, it’s always good to invest in the something you can see investment where it can’t be taken away from you overnight.

You really wanna make sure that it’s there again for the long-term benefit of your retirement. So something like crypto where there’s no immediate like reoccurring returns how does that work with like paying the fees and stuff of like your self managed super fund because obviously the investor must be having to dip into their own pocket or like getting the total of their SMSF like reduced because of the fees that are going in there’s no investment returns.

Absolutely, Andrew. Yeah. So a lot of people, it’s an absolute speculation on growth. There’s very little cash flow and many people will tell you that you can get your air drops or have your staking and all those other things. But we all saw how that went down with many of the exchanges, FTX and Celsius and other ones.

But yeah, many people who were investing in, um, Cash flow negative assets, when I say even cashless assets, they were having to utilize the capital that they’d built up in their super fund to fund the costs. And what they were seeing was a diminishing value of the capital base with inside their super to utilize for future assets and purely banking on growth, which in many circumstances did not come.

So again, it comes back to that statement I made earlier. You’ve got to have sometimes a boring investment, which tends just to move and tick along nice and smoothly without any hiccups. You tend to want to be able to track the growth from a long term perspective and ideally get some cashflow because the taxing environment with inside super being 15 percent on earnings and 10 percent on capital gains, if held for longer than 12 months, there’s no better tax rate in the country than super.

So mate, what are actually the steps that you need to take? So say I’ve got my normal super fund with Australian super or whatever. What are the steps that we need to take to start the ball rolling to transfer it or to change it into a self managed super fund? Yeah. So ideally creating your goals and objectives and strategies with your team around you is very important.

You need to understand that the balance that you have can equate to the right asset that you want to be purchasing for your retirement. If you’ve got 40, 000 in super, but you want to be investing in a 1 million commercial. Commercial or residential property, it’s just not going to have enough. So it needs to be attentive to the needs of what you require for the asset you’re wishing to purchase.

That’s number one. So a balance and I think, and by memory, I believe ASIC do state that anywhere between 250 to 300, 000 is a suitable balance based on many of the investment goals or the investment opportunities that are out there. I have seen people invest in via a self managed super fund at a much smaller amount, but they are guided by a financial planner who provides them a statement of advice.

So So generally, the first course of action is you do have that chat with the professionals, get an understanding of what you want to invest in. Ideally, chat with an accountant to understand the pros and cons of a super fund, understand the costs involved of establishing a super fund, understand the running costs involved of maintaining that super fund, and then ultimately seeking some guidance from a registered financial planner who can provide you a statement of advice.

To give you an understanding of the different types of assets that you can invest in, what limited recourse borrowing arrangement means, what the Sysact means, what the goals are of that particular individual, because many people say they want to retire with 10 million in super as we all do, but simply the earnings and the contributions that they’re making at present and potentially guided into the future just won’t get there.

So it needs to be realistic for what the person can achieve. Once that’s all done, then you can come back to your accountant. Predominantly, some people choose to use solicitors, but they do charge a lot more, but generally accountants are the one to establish the right structure, which would include Andrew and Steve, as you know, a custodian company.

A trustee company and a self managed super fund, and that’s the typical structure to provide the provision to buy property under a limited recourse borrowing arrangement. And that gives the infrastructure for a bear trust to be created upon the inception or pre purchase of the property itself. So, that’s generally the setup of the self managed super fund.

And then you’ve got your normal maintenance and running costs, which include the financial set of accounts, tax returns, as well as the auditing. Very many people don’t understand that the Self Managed Superfund needs to be externally audited, which means an external person comes in, reviews and checks what the accountant and the individual have done are correct and according to the CIS Act.

Jeremy, do you want to explain what limited recourse borrowing is for some of the listeners? Yeah. So limited recourse borrowing, they say it was brought in and grandfathered by the Telstra and Telecom demerger and it was an installment warrant that was brought into place. But essentially limited recourse borrowing comes in from also the United States and the bank lends for the investment and asset only.

So the bank security is purely against the asset and it’s not. Unlimited, which means they can start to come after all the other assets at your own. So it is one of the most safest and most secured way to borrow money from a bank. And hence the reason why banks do come up with these covenants, like 20 percent or 30 percent or even 40%.

Deposits that have been required to purchase these properties. There are covenants involved with some banks such as liquidity requirements, meaning there must be a certain amount of cash left in the self managed super fund to maintain it. It’s a safe way to borrow. Negatives of it, a little bit costly from a financing perspective.

The rates are traditionally a little bit higher than personal or structured lending outside the limited recourse borrowing arrangement. But again, if you do things right, it can become a very profitable way to grow your wealth well into the future again for your retirement. I’ve heard rumors as well about people saying, Oh, if you’ve got less than 250 K, you can just get a letter from your accountant and therefore set up a self managed super fund.

Do you want to kind of shed some light on that? Yeah, so we’re guided by the Australian Securities Investment Commission as an accountant. We’re not licensed financial planners. Most accountants don’t have an Australian financial securities license. So we really push back on the clients as a firm here at KHI Partners for the client to actually pay.

Go get a statement of advice from a registered financial planner. And the reason why we do that is to make sure there’s enough roadblocks involved So the client does not get spruked into a self managed super fund Over the years andrew and steve and steve. We’ve had many conversations around this. I’ve seen sprukers come and go I’ve seen poor people going into a self managed super fund being rushed from a property spruikers office straight into either an accountant or a financial planner’s office and have a self managed super fund established within a cyberspace of 48 hours with the client actually not knowing what they’re doing or what they’re getting themselves into.

So the roadblocks that ASIC are trying to create are to stop people spruiking these smaller, less knowledgeable clients about what they’re doing. And I’m a big fan of it. A big fan of making sure that there’s enough professionals involved with different opinions to ensure that the client is getting the right product and the right advice moving forward.

In short, the letter from the accountant mate, we personally don’t do it and I don’t think many accountants out there would be endorsing that as well. I’m all for that as well, because like a self managed super fund is a lifetime decision. It’s not a short little, even a property, like I know shares you can flick and sell property.

You can sell very easily in that, but a self managed super fund is a lifetime commitment. Absolutely. And I wouldn’t say the privilege is not the right word, but I’ve seen clients who have just been rushed into SMSFs and they’ve come to us two years later and, and the numbers are terrible. They’ve bought crappy properties and I’ll put it quite fairly, absolute crappy properties that I wouldn’t even purchase outside of a self managed superfund where a project marketer or the spruikers have received a 40, 000 to 80, 000 commission purely because they’ve rushed someone into an off the plan property in a heavily overdeveloped unit market.

So it is a big decision, Steve, and it needs to be the right property for the appetite of the client based on what they’re really wanting to achieve, again, well into their future and retirement. Sounds good. Learning about how commercial property really works has never been easier with so many great resources around like this podcast and Steve’s book.

And he’s giving it away for free if you use discount code PODCAST on his website. So go to www. policeyproperty. com. Use discount code PODCAST to get the book free. All you have to pay for

So, Steve, I’m interested to find out, mate, do a lot of your clients actually talk to you or ask you about investing in their SMSF? Yeah, quite a lot, Andrew. I’d say 50 percent of my phone calls, people will have the outside the self managed super fund conversation and inside the self managed super fund conversation.

We might as well have a bit of a chat about this now. We’re going to talk about Normally with the properties we go after, like Jeremy said, I have that long term mindset. I never try to do anything creative. I tell my clients, I’m going to buy you a boring property. Just literally one that ticks the fundamentals.

Good area, good population growth, good infrastructure spending, short days on market, solid build, not going to try to do anything too fancy with value add and things like that. Just get something where you know the property will be in more demand in 20, 30 years time or however long your retirement is.

It’s not a get rich quick scheme. It is a long, slow, steady play and it’s a bricks and mortar bank account. So I always just keep it simple. Whether you go resi or commercial, the fundamentals still need to apply. Yeah, a hundred percent. I mean, with the resi piece, getting a really good return from a resi property, depending on what your outgoings are, and you don’t really know that going into the property, I’d imagine that, like, there’s no reason why you wouldn’t be buying a commercial property because it’s so much more positively geared and guaranteed with a good, strong lease.

It is, but as we’ve discussed, there’s a lot more moving parts with commercial. So everyday investors don’t understand it. So that means there comes with risks if they don’t know what they’re doing. Obviously, if you go speak to someone who knows what they’re talking about, you can mitigate those risks, but residential there’s risks to make.

So even though you might be putting some money out of pocket, but as Jeremy will attest to. There’s some really good tax benefits as well, and they’re going to be putting their money into self managed super fund anyway, so that can make up the difference and they can still get a good return like on average, like capital cities get 7 percent growth year on year on year over 30 year period.

So you can still make that money back. And then as we know, rents will increase as well. So if it’s a hundred dollars a week negative in five years time, it’s probably not, it’s probably going to be a couple hundred dollars a week positive. So with that long term mindset, both asset classes will do really well, but one of them is going to give you a bigger passive income at the end of it, if you can get it right.

Yeah. I mean, a few years ago, you used to hear of a lot of people doing residential developments in their super fund. Jeremy, do you still hear of that a lot, mate? Well, I hope not because with self managed super fund and I look I’ve seen some people who just weren’t aware of the rules But within self managed super fund you can’t borrow for development again limited recourse borrowing arrangement It’s supposed to be very safe for the individual and obviously developing property comes with its own risk from a borrowing perspective if you’ve bought land and then you wish to borrow to Build a property you can’t do it You can buy an off the plan property with Super, and that could be a house and land package, which is a one contract, or it could be a unit off the plan, but you can’t actually buy a vacant block of land, wait three, four years, and then borrow for construction.

You can utilize the, your own cash in Super to do it. So, for instance, if you’ve bought land and you’ve got a substantial cash balance left over, and you wish to utilize the Super Fund’s cash for construction, and require no lending from the bank, then that’s fine. I’ve seen many people, Andrew, successfully buy property in super, build up the cash balance over the next three, five, six, seven, 10 years, and then put a granny flat on the back of it cash.

And that’s been a way for them to really supercharge their cashflow from the property that they’re generating. I’ve seen it with commercial. They’re able to utilize the cash in the super fund to be able to put a mezzanine. And increase the net leadable space. Steve, you know all about it, what that does from a cashflow perspective for a self managed super fund or commercial property, just supercharges it.

And that’s a way under this low taxing environment of 15 percent during the accumulation phase of super. It’s a great way to build up, again, a passive income well into your retirement. But yeah, borrowing for construction and development, Andrew, there are significant limitations from a lending perspective, even as far as being able to subdivide a property when you’ve got a loan on it.

Because the Self Managed Superfund Limited Recourse Borrowing Arrangement, LRBA or LBRA, depending on which way you want to say it, because it’s title specific, once you subdivide a property with a loan in it, then all of a sudden it breaches the SIS Act. So people really need to make sure that they’re speaking with their professionals when they’re doing things outside the box.

Traditionally, buy a property. Hold it long term. Work towards paying it off through the contributions or the passive income. You can ideally sell it if you want to cash in on the equity that it’s grown by and then use that capital less tax to purchase two or three. And I’ve seen that happen quite a bit, Andrew.

I’ve seen people over 15 years go from one property in super to five properties in super, simply recycling the profit that they’ve made from selling. Paying the low tax rate of 10 percent and now having a deposit for two. And then obviously with the cycle continuing, repeating the process and now turning two into four or five.

So it’s a great way to really expand. And then you’ve got your pivoting, especially that starts to come into when you reach retirement age. A lot of people do pivot into more cashflow assets. And that’s where I’ve seen people get quite creative with some good professionals to produce a very solid and stable annuity for the rest of their retirement.

So it’s so many things you can do, mate. It’s just a wonderful structure. And it’s in a very good taxing environment, even with all the changes that are happening around super, it still is one of the best environments to grow your wealth net after tax. So, Jeremy, one of the things that Spruik has always pushed and why they get people into new properties is depreciation.

Do you want to explain, does the depreciation change any form in the Self Managed Superfund as opposed to outside the Self Managed Superfund? Yeah, well, depreciation still nevertheless, if it’s there, it’s good. But depreciation is not a reason why we should be buying a property. It’s a benefit that arises from buying that property, but not the sole decision of why we do it.

I’ve seen many people buy off the plan properties, off the plan. Units because of the depreciation benefit that they get spruced on, but the property not moved for 10 years. So depreciation is a benefit. We take it of course, but it shouldn’t be the sole decision and reason of why we buy property. Now in super depreciation only really gives 15 percent tax benefit as opposed to a higher tax benefit, whether it’s in your own name, a corporate entity or a structure like a trust, if it’s a positive geared investment.

So. It’s not a huge or major decision, ideally what we’re after and I’d forego depreciation any day of the week for a super fund investment if it was providing me a substantial cash flow and capital growth. It’s a big decision to make when you’re getting pushed on depreciation benefits within super because it doesn’t provide you a real significant net tax benefit, although if it’s there, we do take it.

You’re actually the one person about 10 years ago who pointed out that depreciation is because the value of property is actually going down. People say, Oh, look, I made 10 grand on tax. That’s because your property is going down in value. It’s like buying a brand new car. You drive it off worth 10 grand less.

Yeah, you might get 5 grand back, but you’ve still lost an additional 5 grand. So at some point you’re going to have to upgrade the kitchen, the bathroom, etc. And that’s what depreciation was designed for Andrew and Steve. It was a provision for the diminishing value of the property. It would be an allowance of tax that you would get back year on year that really you should bank.

So you look at all the big listed entities, the big listed commercial companies, their depreciation as a deduction sits in the bank account as cash at bank. And it’s a provision to replace those assets well into the future. It’s just a lot of people then utilize that depreciation tax refund or benefit from the depreciation.

to go and spend or to potentially put in their bank account for a different thing rather than actually creating a bank account for a provision of when those assets need to be replaced in the future, like a kitchen, say once every 10 or 15 years, depending on the dilapidation of it. So many times I see people get caught out with a 15 grand renovation that they may have actually received the benefit from tax for all the years of the depreciation that they’ve claimed.

But rather than going to a provision account, they spent it, you know, on a fancy holiday or a new bag or for boys toys. So people need to understand that the provision was created for the items that need to be replaced in the future. Yeah. So it’s the plant and equipment items that are depreciating in value, not like the overall actual value of the property.

Yeah, plant and equipment and the building itself, the bricks and mortar. So depreciation has been split into two items, building allowance and plant and equipment. And in saying that a roof forms under the building allowance, but nevertheless, a roof doesn’t last forever. That’s a major cost of 40 or 50 or 60 or 70, 000 depending on the size of the property.

And that’s a deduction that you are allowed to get. Over say 40 years, which gives you hopefully the cash benefit to be able to replace that roof well into the future. So depreciation for me when I’m assessing a property, it needs to stand up on its own two feet without the benefit of depreciation coming into account.

Depreciation while it’s a benefit and we love it, no doubt about it, and I’ve got lots of quantity surveys as clients and I know the important use of a quantity survey for everyone’s property portfolio. But you should not be sold on a property because of the depreciation benefits. It’s just an outcome.

Jeremy, I’ll give you a scenario if you don’t mind. So say I’ve got a million dollar warehouse in my self managed super fund and the roof needs replacing and it’s 50, 000. If I didn’t have that 50, 000 spare in my self managed super fund, I imagine you’d do some extra contributions outside of that or come up with some form of saving plan.

What are the options there? Okay. Yeah, so it does happen and I do see it quite often. People have utilized the capital inside their self managed super funds for other investments. They may have put the money into a managed fund or they may have wanted to pay down the loan a little bit quicker and have left themselves a bit short.

So there are opportunities to bring money into super through additional superannuation contributions as long as you haven’t exceeded any of the concessional contribution caps. And I’ll talk about concessional, concessional deductible contribution and non concessional is a non deductible contribution, essentially moving wealth from your personal name into inside your super.

There are caps around the non concessional contribution limit as well. But Steve, to answer your question, yes, first we want to try to identify where we can get a concessional contribution into super to plug that gap and where we’ve exceeded that threshold of concessional contributions, we then can look at the non concessional contribution, Moving money, as I said, from our own personal wealth into super, there is a limit involved, but there are ways to do it and keep in mind my wealthiest clients, their aim, regardless of any legislative changes that are happening is to move as much wealth as I can from their personal name to their super over time.

And the reason why they’re doing that is because of the low taxing environment with inside super as opposed to the higher taxing environment outside super. All right. So, I think we need to start getting into the nitty gritty about how we actually do this, the costs, do we need an accountant? So, mate, how much does it cost and do we actually really need an accountant to do this?

I know this is a, obviously, you have an incentive to tell people, yes, we do, but let’s just, uh, keep it honest here. Yeah. So, you know, costs vary depending on the service that you get or the service that you want. I’ve seen so many super funds cost as low as two to three thousand. I’ve seen super funds cost as high as 12, 000, and I think that’s quite exorbitant given where the environment is and obviously the structure that people are creating.

But nevertheless, I think if you’re spending anywhere between about say 4, 000 to 6, 000, that’s pretty much the going market when you’ve got professionals involved to help you establish it. The goal is of the professional is to make it easy for you, give you a turnkey structure, assist you with all the little things around it, like the electronic service addresses, like all the registrations, assistance with any bank letters that you may require, general assistance with any questions that you have on pros and cons of it.

So there are reasons as to why people go with professionals and some people have the knowledge to do it by themselves, but I’ve seen them cost as low as two to 3, 000 from many of the internet sites. The only challenge is, is that if you make a mistake. The professionals make a hell of a lot more money to fix it for you.

And if you don’t know and haven’t been part of that process in the past, it can become quite daunting, especially when you have to structure things the right way and ensure that you’ve got all the surrounding services around setting up a self managed super fund done correctly. As far as an accountant is concerned, no, you do not need an accountant to establish it.

Solicitors can establish it. Financial planners can establish it. They outsource a lot of the services in doing it, and you can establish it yourself. There’s a lot of online providers that you can utilize to do it. It’s just knowing the legal entity that you’re establishing and all the requirements around it.

But I’ve seen some people do it successfully and most people do it unsuccessfully where they’ve had to come back to a professional to fix it because things need to be done according to the CIS Act and according to the Corporations Act and legislation involved as well. Most of the time, Jeremy, they’re going to have to go to you for end of tax time anyway.

So they’re going to have to pass that off to the accountant to do all the tax and extra contributions and things like that. So they’re just trying to shave off a thousand dollars here and there. So it’s probably not really worth it in the grand scheme of things. In most cases, it’s not always where you possibly can.

You want to make sure you’ve got the right advice, the right professional assisting you with the service. And also with this key moment, which is establishing the structure because you really get one chance to do it right. And yes, you can get fixed, but it does become quite costly to do it and you may need the services of a solicitor and an accountant to be able to resolve the issues that people have created.

I just think sometimes it’s a big investment into your. Entire wealth creation strategy. And you look back and it’s such a minute cost over the scheme of things. Yeah. So you mentioned the set up costs. What about ongoing costs per year tax time? So the good thing about self managed super funds is the ongoing cost is not tied to a management fee of the funds wealth.

So you’ll see many retail funds out there. They’ll charge a one and a half or a 2 percent fee as the funds balance grows or as the capital in the fund grows. So does their fee. We’re the self managed super fund accountants generally charged for the time that it’s involved to complete the financial accounts, the tax return, all of the subsidiary work that’s involved any minutes, and also the time with the auditor.

But generally speaking, the going rate for most super funds will probably sit anywhere between a couple grand upwards of four or five more complex super funds that have an extreme amount of assets and asset allocation. I do see those go into the sixes and sevens and eights and plus the only costly thing about.

Self managed super fund moving forward is during retirement phase when you may have segregated. Now getting into some real technical stuff, James, but segregated accounting, you know, you might have some accumulation phase or you might have some pension phase accounts for the numerous members involved, but it really depends on.

If you’re getting the level of service that you require, you’ve got peace of mind and things are getting done correctly. It’s really a cost that you need to feel comfortable with. Is there someone always cheaper that can do it? Yes. Is there someone always more expensive that can do it? Yes. I think as long as you’ve got a good relationship and you’re getting a level of service that you’re comfortable with, sometimes the cost is the cost.

But yeah, mentioning those things anywhere between two to eight is where we see generally a lot of super funds for as far as a cost of compliance is concerned. So, say that I’ve set up my own self managed superfund and I’ve obviously got the entities created with an accountant or a solicitor, that’s all done and dusted, but then there’s still that management piece, like someone has to manage it, you said, how much does that cost and who is the person that should be managing these accounts?

Well, a lot of my clients manage it themselves. And that’s the whole point of a self managed super fund. You’re managing it yourself, but you can outsource the management. You know, there’s many financial planners out there. There’s many in house accountants who will manage the self managed super fund, bills, compliance that’s involved.

And look, it comes with cost. I feel that for many people, it’s no different to managing, say, for instance, a trust or a company or their own personal affairs where things may get significantly more complex. Yes, you might want to get some good professionals involved who know what they’re doing to help you assist it.

But like anything, Andrew, it’s what you want from it. If you want to absolutely complicate things and create some new beauty investments. Then you may need some more sophisticated professionals to help you with it. But for many people, many of my clients, Andrew, who have bought an investment property and may cherry pick a couple shares, they’re managing it just fine.

And they’re people from all walks of life don’t necessarily need a university degree in self-managed super funds to be able to manage it effectively. Yeah, especially if you’ve just got one or two properties as well. Like, that’s it. That’s going to do you for 5, 10, 15 years. So, once you’ve got your head around how to manage year on year, it is just a rinse and repeat process.

Correct. And having good professionals around you to ask some questions here or there, bonus, there will be times you need to reach out and hopefully your accountant, financial plan, or even maybe solicitor is there to help you with the questions. Yeah. And that’s the difference between a good accountant and a bad accountant.

So like I, no offense, Jeremy, if I don’t mind saying this, like I could find a cheaper accountant if I wanted to, but I love that we catch up every few months for an hour, plan out the next three months and two years, five years time. And that’s going to pay me dividends in the long run. Absolutely. And don’t forget the nine o’clock text messages as well, Steve.

On Sunday, 9 PM text messages. That’s it. But like, like anyone, as I said, there’s always cheaper professionals than someone, than what you have in, and there’s always more expensive. It’s just making sure that the professional you’re using, you’re aligned, and they’re giving you that peace of mind that things are getting done correctly.

So mate, you’ve mentioned a couple of times the, the SISAC, and I’m imagining that’s the rule book for your SMSF. So can you just tell us where we would find that? Is that easy to read and just explain what that is? So the superannuation industry. Supervision Act, generally referenced back to 1993. It’s an act to make the provision for more prudent management of certain superannuation funds.

It is the rule book, essentially. And this is what we as accountants, when we’re preparing or providing any tax advice to clients, we are bound by the Sys Act. We need to make sure that we’re following the rules. The auditor is also bound by the Sys Act. So when they’re auditing the super fund, they’re ensuring that all the rules have been met.

So essentially, you know, people and it’s self explanatory rules do the right thing. You never get caught or never get in trouble, I should say, but you know, you don’t take money out prior to retirement. You don’t get a benefit of the super fund prior to retirement or transition phase. The assets have been documented correctly.

You’re following the accounting rules around it. You’re not going to learn absolutely everything as an individual regarding the CIS Act. You’re really relying on the professionals that you’re hiring to ensuring that they’re giving you prudent governance or prudent guidance around what’s involved in making sure things are getting done correctly in your superfund, according to the CIS Act.

But I always encourage any of my clients, you know, put it into Google. It’ll take you about six years to read everything about it, but nevertheless. By the end of it, you’ll have to start again because all the changes start to come into place, but nevertheless, it’s still good just to do a little bit of reading.

So it gives you an understanding or contact or reference back to your professional who can help you along the way, but tend not to tell people get too worried about it. If it doesn’t sound right, ask your accountant, I’m sure they’ll give you all the right knowledge around what you can and can’t do.

Well, you can tell your clients now to put it into chat GPT to summarize for you, cause it’ll do it in an incident. Yeah, that’s it. As accountants been utilizing ChatGPT and testing its parameters, I can definitely say our jobs are safe for the time being because some of the crap that it’s coming up with, I definitely wouldn’t be putting that on any advisory pieces for clients, but I can definitely see that something like ChatGPT is great for many people to ask questions to.

Stay up to date with all the hints, tips, and tricks in commercial property by following Policy Property on Facebook. Go to Policy Property, hit that follow button, and never miss a beat with Policy Property. I just want to circle back for a second. So when we use the example of having like say a warehouse and we need to replace the roof for 50, 000.

What would happen if I’ve got a million dollar commercial property, my self managed super fund, and it actually goes vacant for a couple of years. So say I’ve bought a bad one with a long vacancy period and it goes vacant is obviously when you’ve got it way outside the self managed super fund, you have to pay the mortgage.

And that comes out of your own pocket. What changes when the property’s in your self managed super fund? Yeah, well, touch wood, hopefully that doesn’t happen to many people out there, but if it does, the Self Managed Superfund needs to carry that cost, the cost of the loan, whether it’s principal and interest, whether it’s interest only, Self Managed Superfund has to carry the cost of potentially broader corporate fees or any freehold expenses, and if it doesn’t have the capital to do that, that’s when the members are required to pay.

As mentioned prior, inject capital via concessional or non concessional means. And it’s something that you do need to weigh up and obviously picking the right property is important because these things are a risk. And hopefully again, you’ve got the right professionals around you that can mitigate that or have mitigated that as part of the purchasing journey.

And so, mate, like, if you have a balance in your self management fund, say, like, half a million bucks, that doesn’t actually mean that you can go and use that half a million dollars to go out and put a deposit on a property, can you? Like, there’s a percentage that you’re only allowed to use, right? Yeah, some circumstances.

I’m not gonna… Blanketly say I know all the rules around the covenants that the banks put in place, but in some circumstances, you’ll find that the banks will put a covenant in there that they may require 10 percent liquidity of the fund, 20 percent liquidity of the fund. I’ve seen some banks require 30 percent of the liquidity of the fund.

And that liquidity to the fund is there to carry on any of those mishaps that might happen with inside super, whether it’s residential or commercial property, whether it’s shares, or you may have thought you’re going to get a dividend or something or a unit trust distribution and you didn’t and the super funds required to carry that cost.

So there are covenants in each bank and there’s only a handful now of lenders out there which have the appetite for self managed super fund lending, but they’ll have their covenants, their rules essentially. That they want people to abide by for them to provide a loan to an SMSF or a member of an SMSF to go ahead and purchase assets are generally speaking though, it’s, it’s good governance to keep a portion of side look of liquidity cash to be able to meet those costs as they arise.

For anything that may be incurred by the super. And it could be management fees, accounting fees could be that 50, 000 roof that Steve has been mentioning now a couple of times. So you definitely don’t go in with absolutely every single cent and penny you’ve got in super to one asset. You want to make sure you are keeping some funds available for other opportunities.

And those opportunities could be other properties or other investments that may arise. Yeah, when I was doing some research a little while ago, I believe that it was like you’re allowed to use like 90 percent of your balance or something. But I guess that does change with bank to bank. And when I was looking, I noticed that there were only a handful of banks that were really open with an appetite to actually lend on self managed supers.

I know that Latrobe was one of them. Have you ever had any dealings with Latrobe at all? Yeah, many clients have used La Trobe in the past to be able to fund their self managed superfund properties. I’m seeing smaller non deposit taking institutions, people like First Mac or banks like First Mac, institutions like Blue Bay and Think Tank.

These are non deposit taking institutions. People reference them to third tier lenders. They’re the ones that have the appetite for the self managed superfund loans. In the past, all the majors used to do it, A and Z. CBA, St. George were prominent in the space and I’m so sad to see St. George exit the self managed super fund lending space because without a doubt they were one of the best.

I’m still seeing some people utilize Liberty although now it’s a space now SMSF lending is a space for the non deposit taking institutions and definitely consult with your broker on the different lenders that are out there. Each have a different appetite in terms of interest rates and the type of properties as well.

We’ll try to get a broker on, Andrew, in the coming weeks, but the ones I commonly see are Liberty, Think Tank, La Trobe, one called Granite is popping up a little bit, and First Mac are probably the major five that I’m seeing. All right, Steve. So you obviously have a fair bit of knowledge on which banks are available for your SMSF.

What are the rates you’re actually seeing? So this is mostly on the shock factor for people because the interest rates are higher. So like for Liberty at the moment, so we’re end of May 2023. You can get up to 80 percent loan surprisingly. So up to an 80 percent loan, you’re talking about an 8. 5 percent interest rate.

Whereas if you come down to say 50%, you’re at about a 7. 75. So, so we are quite higher and you can go principal and interest or interest only. Interest only generally is about 0. 15 percent higher than the, the principal and interest repayments, but the loan terms are anywhere up to 30 years, obviously depending on how long your retirement is and how long you want to take the pad off, but you’ll generally be looking in that 7.

percent interest rate zone. Yeah, I mean, it’s not like ridiculous. I mean, I’ve been looking at bank lending and talking to a few banks myself recently, and they’re all quoting, you know, 7s, 6s, 8s. I had a bank quote 11 percent the other day for a business loan, but obviously, that’s a different type of loan.

But yeah, like, it’s just a wild, wild west now of what they want to charge you really. Yeah, sometimes people get shocked as well. There’s some establishment fees as well. So that can be two to three grand or even one percent of the purchase price. So that’s something you need to budget for as well when you’re doing your calculations, because you’ll have like application fees, the lender’s fee, settlement fees, self managed super fund review fees, uh, and then obviously accounting costs as well.

So budget for a little bit more, it’s not the stock standard. You pay your stamp duty, you pay your conveyancing, you get your valuation and that’s it. There are some more fees with self managed super funds. And one more thing I wanted to ask Jeremy as well, because basically, I’m not relying on my self managed super fund or my super fund for my retirement.

I like, I feel like if you’re relying on your super for your retirement, you’re almost relying basically setting yourself up to be pretty much poor. So I’m actually obviously doing things outside of their super to fund my retirement. But what I actually really use it for For is basically like my life insurance and like, you know, loss of disability insurance.

If you’re setting up an SMSF, can you still get the insurances through it? Or do you have to then get it outside of your super Andrew? I like that you said loss of disability, which is quite funny. You got a couple of insurances people generally do through super like income protection, TPD disabilities, certain disability insurance, life insurance, you can get them through self managed super.

You don’t need to retain them with inside industry fund or have them externally. You can get them done, but again, good to speak with an insurance broker on that or financial planner because they weigh up the costs. Some circumstances, my clients have been left with a portion of balance inside their industry or retail funds because the insurance that they currently have is much cheaper inside those industry and retails compared to self managed super.

Some clients have had substantially larger discounts by moving their insurances from retail industry to the rest of myself. So, you can do it inside SMSF, you just got to do that cost versus benefit analysis. Only thing I will say, Andrew, and I’m hopefully you get this little bit of learning out of it today.

You mentioned that I’m not relying on my super to fund my retirement. I tend to tell people and change that metric in the way that they think. I agree, you’re not relying on your contributions that go into super. to fund your retirement. But what you should look at is superannuation being a large portion of your retirement strategy because it’s far better to earn income with inside super at either accumulation phase or pension phase because that means you’re running not as fast to gain the same level of return net after tax.

So anybody out there is listening to this, you hear that all the time. I’m not relying or you shouldn’t rely on your super to fund your retirement and I agree. But I changed the wording to say, you should not rely on your contributions into super to fund your retirement. Because again, my wealthiest clients utilize super and utilize it very well.

And they’re trying to cram as much wealth as they can into super. They’re maxing out contribution limits. They’re maxing out non concessional contribution limits. And the reason why they do that is the taxing environment being 15 percent on earnings, although changing with a lot of the labor changes that are due to come in by 2025.

But nevertheless, Taxing environment still within super promotionally is much cheaper than it is outside super because of, again, they still want people to be able to, to provide for themselves in retirement. So hopefully that’s a little, uh, little takeaway for you. And I completely agree, mate. And what I actually probably should have elaborated, I’m not relying on my Australian super that’s, you know, can be.

Wiped in half from the change in the stock market. Like, you know, that’s what I’m not relying on. So, in an SMSF, when it’s only got property involved and I’m in control, I actually would rely on that because I’m in control. So, that’s the reason why I said that. We better actually wrap this up, mate, because you have somewhere important you need to be.

So, if you could just give us a blow by blow bullet point kind of list on the flow and effects of When we should start a super, when we should look to buy a property, when we should engage Steve to get that property for us, just start to wrap it all up for us. I suppose the standard process from my end is, you know, client will have a bit of a think at whether or not super is the right thing for them.

And they’ll generally come to me and say, Jeremy, been looking at super. We want to know if it’s the right thing. 200 to 250 gets you into the discussion. Anything less than that and really push back on the client to make sure that they understand, they know where their strategy is, but 200 to 250 gets you in the discussion.

Then I like to go through the pros and cons with the client so they know absolutely everything there is to know about Super. What they can do, what they can’t do, what typical people utilize super for, where I’ve seen people fall into traps. After they’ve got their pros and cons summary, depending on the circumstances, I will still encourage them to get a statement of advice from a financial planner.

That statement of advice will, the financial planner will review their insurances, will review their strategy, help them create a strategy, will look at possible ways of diversification. Yes, they want to look at property, but yes, there’s other things they can do, the retention of money after they’ve bought that property.

So, once that statement of advice has been done, generally the clients will come back to me and they’ll say, Jeremy, we’ve got our statement of advice. We’re ready to rock and roll. Then I’ll start to establish the self managed super fund for them after they’ve gone through that process. What they want. to do within super will dictate the type of establishment that I’ll create for them or the structure.

If they’re looking to purchase property, we go with an LRBA approved structure. And if they’re looking at purely to invest their own money, we’ll go with just as a normal trustee company and self managed super fund itself. And that will determine again, as I mentioned prior to the type of investment they want to make.

Once that’s happened, generally takes anywhere between two to three weeks to get done. Bank accounts, ESAs, they’ve got their insurance all getting done through hopefully a financial planner if that’s the case they’re going. I tend to tell people it could be anywhere between a two to three month process to have absolutely everything turnkey, ready to get all your approvals and ready to start buying property with a buyers agent.

And then it’s up to the property advocate or the professional that they’re using to make sure that the investment is in line with what they’re aiming to achieve for their retirement in the future. That’s you, Steve. Hopefully. Awesome, mate. Well, this has been an absolutely fantastic chat. I can really hear and obviously see the passion in your voice when you’re talking about self managed super.

And that’s very unusual. Usually, like, this is a bit of a boring discussion about these things, but I can really hear the passion in your voice. And I see your face light up when you’re talking about these things. So, that’s absolutely cool to see. So, mate, where can the listeners go to find some more of that passion and connect with you?

Yeah. So, definitely visit our website, KHIPartners. com. au. It’s got a whole list of services that we provide, the lovely group of partners that will assist you with all your accounting or general professional needs. And you’re more than happy to reach us via our contact page on the KHIPartners. com. au website.

Yeah, Andrew, Jeremy is one of those few guys I’ve actually met who absolutely loves property, like, talks about all the time, like, I enjoy property and I love it as a vehicle to get me to where I want to be, but he loves it, he literally dreams about it every single night, he’s one of the very few that just loves it, and to be honest, he’s one of the best property accountants in Australia.

Yeah, no doubt, I can see that. He’s beating my drum for me, Andrew, thanks buddy. That’s it. All right, Stevie, do you want to take us out, mate? I suppose so. Thanks for listening, guys. It’s been a great episode and we’ll try to get a broker on next time to go more into the finance side of things, but yeah, thanks for checking it out.

If you’re interested in any of my services, just look me up on Facebook, LinkedIn, socials and yeah, get a free copy of the book. Just type in the word podcast on my website. All right, this has been Steve Pellissi and Jeremy Yannuzoli and I’m Andrew Bean and this has been the Commercial Property Investing Explained Series.

Thanks, guys. Thanks, guys. Thank you. Thanks for listening to the Commercial Property Investing Explained Series. This show has been produced. By the Commercial Property Show Network.

Responses