The Property and Finance Show
Welcome to the First Brick Property Podcast, Australia's newest property podcast show! The First Brick Property Podcast brings a casual conversation style show to your ears! Education is the key, with episodes ranging a wide variety of topics as well as constant guest hosts, to give you the edge when it comes to buying property! Delivering property beginners and experts insights to help you get into the market or grow your portfolio. The Key - Education to create wealth through Property.The show is hosted by the Director of First Brick Property Buyers Agency (www.firstbrick.com.au) Kyrillos Mansour (AKA KM) who is hugely passionate about property and education.
The Property and Finance Show
Why your retirement strategy needs a self-managed super fund (SMSF)
Financial advisor Kyrillos Ghaly (KG) explains how Self-Managed Super Funds work and their unique advantages for property investors. He breaks down the misconceptions, costs, and strategic benefits of SMSFs while highlighting their potential to dramatically increase your property portfolio.
• SMSFs allow investment in "exotic assets" like direct property ownership that retail super funds don't offer
• Setting up an SMSF typically costs over $2,000 with ongoing expenses for compliance, tax returns and financial advice
• Ideal candidates have at least $250,000-$500,000 in combined super balances
• Couples can combine their superannuation in an SMSF, making it more accessible for many Australians
• Properties in SMSFs must be genuine investments - you and family members cannot live in them
• SMSFs require specialized loans called Limited Recourse Borrowing Arrangements (LRBAs)
• Capital gains in an SMSF are taxed at just 10% after 12 months
• When you reach retirement and convert to pension mode, you pay 0% tax on everything
• Setting up requires SMSF-accredited professionals - either financial advisors or accountants
• Regular tax compliance is essential - non-compliant SMSFs face tax rates of 47%
If you'd like to learn more about setting up an SMSF or exploring whether it's right for you, visit Trinity Advice at trinityadvice.com.au or search for KG (Kyrillos Roman) or Joseph Meawad on LinkedIn.
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Hello and welcome back to the Property and Finance Show. Today we've got a very special guest joining us, my personal friend. His name is Carlos Gali, also known as KG. He's a financial advisor with Trinity Advice and, funnily enough, he used to be a podiatrist in his entire career before transitioning into the world of finance. We're going to be doing a deep dive into the topic. That's very important for a lot of investors and a lot of people don't know a lot about it Self-managed super funds, smsfs as they can be known as, and also sometimes known as SMRFs.
Speaker 1:I don't know if you've heard that one, kg, but I've heard it be called SMRFs before Now anyway. So if you've ever asked, can I buy a property through super? What is a super fund? What is SMSF? This is the episode for you, and I'm constantly surprised how many people don't know about SMSF and the power it can give you to increase your property portfolio dramatically.
Speaker 1:But first, kg, welcome to the show. Thank you for bearing with me through my technical difficulties on getting our podcast gear working. You can spend 300 million dollars on podcast gear, but if you don't know how to press on, there's a problem. Yeah, um, that's true now. Uh, kg, I've known you since kindergarten. We have been friends for a long time. We share the same name, um. Before we get into the fun stuff the fun, exciting, exhilarating world of super funds and self-managed super funds not just any super funds. Funds, not just any super funds I want to know a little bit. I mean, I know, but I want people to know a little bit about your journey. So you were a podiatrist and you've turned to financial advice no-transcript. How are you finding working in finance? It's very different to I mean I can imagine.
Speaker 1:It's very different. Obviously, I had a health background as well, a long time ago. Is it different?
Speaker 3:Is it the same or is it just different? In a different way. I think it's different and same but in a different way.
Speaker 3:Uh, you can really make a difference in people's lives and you can have two people, essentially a carbon copy of the situation, um, but their goals and they're willing to invest in their risk profile can completely make a biggest difference. What you're going to recommend, um, I guess in the same sense it'd be similar to clients who want to purchase a property for yield or growth. You're doing very different work and it just depends on, I guess, what the client wants. But I'm loving it.
Speaker 1:Yeah, that's cool. It's good that you had the opportunity to volunteer at Trinity Advice and very cool of your current boss to let you do that as well so that's very cool. Um, so, what kind of clients do you usually work with now? What? What is your actual role? What does a financial advisor do?
Speaker 3:um, so depends on if we're it's a new client or an existing client. But it's a lot of. Initially, what we do is finding out about the client, their current situation, their finances, kind of a bit of everything, and then kind of where they want to be, and then through that it's we create a plan in which we implement to help them achieve their goals.
Speaker 3:In terms of type of clients, we see we see young couples in their 20s 30s who are wealth accumulators um, we're in in this industry or in this environment, are looking to save for their first home.
Speaker 3:So we're giving a bit of advice on how to save for your first home. We also have other clients who in their mid to late 30s, who are business owners, then have family trusts and different type of trusts and have structures and want advice on how to accumulate wealth, but in the most tax effective way. And then we also have couples who are individuals, who are approaching retirement and want advice on I just really want to know am I going to be able to retire? Am I able to? Am I going to be able to, in retirement, go on that trip that I want to every second year? Can I leave money to my grandkid? What? What can I live on? Um, and in that sense, we also help them utilize different investments that we that are out there um, as well as giving them advice on whether it might be the age pension, might be home equity access scheme, different things available to them to really help them achieve their goal.
Speaker 1:Yeah, right, and I guess, speaking of retirement, this is a wonderful segue into SMSF Now a lot of people don't know what an SMSF is, and that's why we brought the experts onto the show. And so, before we get into the nitty grgritty, obviously like every episode when we have guests on.
Speaker 1:whatever they're discussing is based off their expertise and their knowledge, but none of this is advice or financial advice to anyone. Obviously, this can be different for every person's particular situation. So there is a major disclaimer Do not take anything you hear here and run away with it. You have to actually have a meeting with KG or the guys at Trinity Advice and actually they have to go through your personal situation and make sure it's applicable to you. This is very general commentary on SMSF and the like, so no one sue KG. I think the first thing we've got to understand is what is an SMSF self-managed super fund, and how is that different to a regular super fund?
Speaker 1:Because most people know that they have a super fund and most people know that part of their wage goes to that super fund. That's about it. Most people don't actually know what their super fund is called, who they're with, how much is going to it. People don't know what it is.
Speaker 3:All they know is that they've got this thing.
Speaker 1:their boss or their company pays X amount to that super fund and when they retire they get the access.
Speaker 3:So what is an SMSF? What is a?
Speaker 1:regular super fund.
Speaker 3:They get the access. So what is an SMSF, what is a regular super fund and how are they different? So, like you mentioned, an SMSF Innova's name is called a self-managed super fund. It's actually a special. If you want to get really technical. It's actually a special kind of trust, but it's obviously using superannuation funds. Now you obviously have to set up the SMSF and then move all your money across.
Speaker 3:Now the biggest difference between an SMSF and a retail fund, like your Australian super or rest super, is that the SMSF allows you to hold exotic investments that you can can't normally hold within a retail fund like tigers and lions.
Speaker 3:If only if, um, that more comes down to, like you mentioned, property. Um, the big flavor of the last few years is actually cryptocurrency, um, and then some of the times that might be like precious metals might be artwork, it might be collectibles, things like that, but there are still a lot of rules and regulations that surround what you can and can't do in the smsf. Just because, it's called a self-managed super fund doesn't mean you can do whatever you want. There are still rules, and regulations, laws that you can go by yeah, right, so okay.
Speaker 1:So it's a different sort of super fund. Um, it's different to a regular super fund because you own or you can hold exotic assets as you, um, as you put it, I guess what?
Speaker 3:what's the?
Speaker 1:benefit of of being able to have these, these assets, in your super fund, in your self-managed super fund, as opposed to not having one well, it allows you to access investment types that you normally can't um like in regular retail funds.
Speaker 3:You can buy property funds, but you can't buy property. You're buying a share of a big pool of funds, um, which has god knows how many assets in god knows how many locations, whereas through a self-managed super fund you can buy proper bricks and mortar.
Speaker 3:You or the SMSF owns it but it's, I guess, in a sense run by you or run by the state agents, and it allows you to have that flexibility in what you want to do. If you want to buy it and sell it in a few years and you're like, you know what I really want to get into crypto, it allows you to do that, whereas just retail funds don't. It gives you access to things that you normally don't. I think that's the biggest thing.
Speaker 1:Okay, so that seems like a pretty obvious benefit for me, or?
Speaker 3:for someone to have an SMSF.
Speaker 1:But what are some of the more common misconceptions about having an SMSF or about the people that have SMSFs? Are there common misconceptions it's a fancy word that not many people know about yeah, so there definitely are.
Speaker 3:I think some of the most common misconceptions are people like oh, it's going to be cheap, it's not. They're like it's going to be very easy to manage. It's not. You have to be very active and very on top of it, otherwise you can get into a lot of trouble by ASIC and the ATO. Um, misconceptions like people think oh, just because I control it, I can do whatever I want with the money. Like no, you can't, there are still laws and rules and regulations. Specifically, the funds have to relate to being used for the intention of to provide for your retirement. If it's not, then ATO and ASIC will come down hard on you. Another misconception and it's something that I think has become prevalent as of late is everyone wants one. This isn't a one-size-fits-all. It is something that you really do need to think and consider before opening.
Speaker 1:Yeah, okay. So there's a lot of good things that you've mentioned there that I want to get into in a moment. Um, some, some of the ones that we can knock off really easily, is that okay? So misconception is they're cheap. So when you say they're not cheap, do you mean setting them up is not cheap? Is there ongoing fees to having an SMSF. What does that mean? So?
Speaker 3:there's quite significant costs to actually setting it up. But, like I mentioned before, it's a special type of trust, so you actually have to set up the trust which is easily a few hundred dollars, then within the trust, you either need to have an individual or corporate trustee.
Speaker 3:Now if you're going to be doing an SMSF 99 times out of 100, you're going to be doing an smsf 99 times out of 100. You're going to be doing a corporate trustee which can range up to a thousand at least to set up. Then you've got to do compliance. You've got to do a trust deed. Essentially, the trust deed is the rules of the self-managed super fund in what it can and can't invest and and actually you have to provide percentages. So you will have like 40 to 80% of the money will be invested in property and you actually have to stay within that.
Speaker 3:It's something you need to update regularly. That's easily also a few hundred dollars Like just for the initial setup costs you're looking at easily well over $2,000. Then there's the ongoing cost. There's the actuarial report, there's compliance. You also need to do a tax return for it, which I've seen some and this is on the cheaper end at two hundred dollars a month for an accountant to run the accounting and actually do the tax return and then, depending on the money you have in there you might need constant financial advice, which can also be a few hundred dollars, so it's it's not cheap.
Speaker 3:It's something you really gotta like think about, and you gotta really gotta have a good base of capital for it before you actually decide to go in yeah, okay.
Speaker 1:So so it's. It's not cheap and just by the way you've described it there, um it doesn't seem like it's overly um easy to manage either, which was one of your mistakes that you said. People think it's easy to manage now.
Speaker 1:Okay, so if it's complicated, then it's expensive or it's not cheap to start and you've got this trust deed and someone else has got to do this and someone's got to do that. Who's actually eligible to set one up? Is it? And who is doing? Is it every day? Random australians, is it? You know, random tom dick and harry? Is it super rich people, super wealthy people? Who's actually eligible to set one up and who are the main people that are actually setting up smsfs? Because it seems like there's quite a lot of work involved and might seem like an overly arduous activity for no reason.
Speaker 3:It definitely can be. I think you have to really be prepared to do the work. In regards to like, who's eligible, as long as you're above, as long as you're above, as long as you're an australian tax resident above the age of 18, you're eligible to set one up. But again, that doesn't mean you should. Um also comes back to you do have kind of people from all walks of life who want to set up an smsf um but honestly, depending on the situation, someone wants to come into the office and we don't think they're appropriate.
Speaker 1:It's appropriate for them we will tell them.
Speaker 3:I think the ideal candidate is someone who's a bit more on the wealthier side, who's got a bit more of a nice starting superannuation balance, probably a little bit more clued in on investments and what they need to like they're a bit more aware of what's actually going on. Um and just yeah, having just having the knowledge that if we contact them and ask them a question about some investment or their accountant needs something, they're not completely clueless as to what's going on because you can get overwhelmed with the amount of stuff you need yeah right, okay, so you mentioned typically people potentially maybe a little bit more well-off, um the ones that are typically setting these these things up, um, are we talking certain account balance level, um certain income levels, um where does it?
Speaker 1:become viable? Are you talking, just you know, a professional that has a white collar job, blue collar job, or is it an income level criteria? Where? Where do you find? Where do you define that that mark? Where, it would say to this person hey, by the way.
Speaker 2:Uh, you should really think about smsf, you're in a good position um.
Speaker 3:How would you assess?
Speaker 3:that um so I think it's definitely based on account balance. Income really isn't the deciding factor, although it can help, because someone who's on a higher income has a higher amount of super guarantee, which is the 11.5% your employer has to put into superannuation, which is actually going to go up to 12% first of July. So obviously if you're on a larger income, you've got more money in so you can build your account balance quicker. Now there isn't a hard and fast rule on the account balance that you need. There used to be, but they got rid of it. General consensus is minimum 250,000, either individually or as a couple is when you can start to think about it. Even then, personally, I don't think that's enough. I think once you're approaching that $500,000 mark is when you can really start to make use of money. The reason I say that is, for example, if, example, if you have 250 000 and you're looking to buy a property uh, let's say for example 700 000 um.
Speaker 3:Typically self-managed super funds need 20 to 30 as a deposit.
Speaker 3:So if let's say we're going to use 30, that's 210 000 that you need to, which leaves you 40 000 to stamp duty for costs for lawyers and everything has to come out of the self-management. You can't pay for things personally because then there's a crossover and that would be considered a breach, but it has to come out of the self-management. So I would say yes, 250. That mark where you can start to be like okay, maybe in depending on how much money you've got going in, or if you're a couple, is maximizing and they have 60 000 going in a year, you could be like you know what in two, three years we can really start to think about it. Um, but personally I wouldn't be recommending for that 500 okay, so quickly.
Speaker 1:when you're saying 250 or 500k account balance, you're talking about account balance in the existing super fund. Yes, not in the bank account. In the super fund yes, correct, not their personal account.
Speaker 3:No, so anything in their superannuation fund, whether it be across an individual or across a couple.
Speaker 1:Okay, and that's the second point I was actually going to bring up, is you mentioned could be combined? Yes, so can you combine super funds with your partner?
Speaker 3:yes, so only can in a self-managed fund, and that's when it becomes a pooled investment. So, um, it might be. Let's say you have four hundred thousand dollars going in. Each person will have their own individual starting account balance and I'm just going to make up numbers. Let's say one of the couple have 250 and the other one has 150,000. Now, over time, over, through growth and income and this is why you have to do tax returns each year that account balance will actually grow and move. So when it comes to retirement time and let's say there's an age discrepancy and one gets to go into pension mode quicker, you actually know what their balance is, because the law is that you have to take a certain percentage of your whole account balance as a pension each year in retirement. Um, but if you don't have that number, then you don't know what the percentage is.
Speaker 1:So they actually keep track of this over time yeah, right, but this is a very interesting point because I think when you're talking 250, and even saying 250 is probably not enough and saying 500 as a balance people listening, probably getting really scared and saying, oh, this thing is not for me about to turn off the turn off the pod.
Speaker 1:But having a combined account all of a sudden makes this much more attainable, much more achievable, Because I think people would be surprised. If you've been in the workforce for 10, 15 years, you've probably accumulated a significant amount of money in your super fund without even knowing about it. And if your partner has been doing so too.
Speaker 1:All of a sudden, you're pretty close to that threshold that you've been talking about. So it's very interesting. And I think it's a lot of people probably don't know that they can combine super funds. They and I think it's a lot of people probably don't know that they can combine super funds.
Speaker 3:They can have a combined SMSF, so something to note for sure, actually you can have up to six people in one self-management.
Speaker 1:Okay. Does that matter who it is? Do they have to be family? No, Can it be business partners?
Speaker 3:It can but then it's very easy for things to get mud. Yeah, because let's say you've got.
Speaker 1:Good to know that it can go up to six people. Okay, cool. Now obviously this is a property and finance podcast, so we've spoken a bit about the finance part of it and you did mention some things there about the property, so I'm going to ask some questions about the property side to an SMSF. So obviously we've established that you can buy a property in an SMSF. How does that actually work? You mentioned 20% to 30% deposit, so does that mean you can still get a loan, so you don't obviously have to buy these properties cash? How does the process work?
Speaker 1:How does buying a property in an smsf work and then um?
Speaker 3:what can you do with that property? Yeah, so, as we've already established, yes, you can buy a property, um. If by some way you can buy the property outright, then perfect, um, just on the title. It'll actually be. The trustee will be on the title, not your name. It'll be the self-managed super fund. Now we mentioned previously that you can borrow money, um, and that has to be done through a special structure. So the self-managed super fund will have to set up a bear trust, and that bear trust is actually the one that loans the money and holds the property bear as in.
Speaker 1:Yeah, no b-a-r-e.
Speaker 3:Okay, yeah, as in, naked yes, so as yeah, bear naked um. And the reason that actually happens, um, is for actually quite a smart reason, so that if, knock on wood, things don't go away and you can't afford to pay the property back and the bank has to take the property, all they can do is take the property. They actually can't take any other money. That's in the self-managed super fund, but they're trying to preserve something for retirement if there is extra money. So it's a kind of different entity that's related to the smsf, but the money is separate. It's protected. So all it does is it holds the property until you pay it off and then the title deed actually gets transferred to the self-management.
Speaker 1:Okay, okay. And then so, during that time where you own or do bear trust for the SMSF, or Simplicity, you've purchased a property in the SMSF. For simplicity, you've purchased a property in your.
Speaker 3:SMSF yes.
Speaker 1:In this time, before you've paid off the debt, or even after you pay off the debt, can you live in it? Can you rent it out to anyone? Can you rent it out to family? Are there rules around what you can and can't buy and how?
Speaker 3:you can and cannot use it. Yes, um. So when you're coming to buy the property initially, you can't buy it from anyone you know um you. Also, when you do purchase the property, you're not allowed to live in it. Anyone related to you is not allowed to live in it and it's something called the arm's length test. So it's if no, someone within arm's length.
Speaker 3:So family or things like that they actually can't live in it. Because then it's likely to be that you're going to lower the rent, or if you're buying it from someone you know they might lower the price to give you a better deal. Um, it's against the law, um, so no, you can't. Something that's quite common is that if people have struggled to purchase the property in their own name to live in, what they'll do is they'll establish an smsf and they'll actually pay it off through the smsf, and then, when they come to retire, they'll turn superannuation into pension mode and at that point you can actually withdraw as much money as you want.
Speaker 3:Only when you've met a condition of releasing in pension mode, and so they'll transfer the property to their own name, pay stamp duty and live in it. But while it's in the SMSF, no, no one you or anyone you know or anyone you're related to can't live in it, so it has to be an investment.
Speaker 1:Yes.
Speaker 3:It has to be for investment purposes, and then they're going to check your LinkedIn see if you've got first connection.
Speaker 1:Second connection yeah, okay, so it has to be a genuine investment property with the purpose of it to be an investment. Only, you're not there to live in it or give it to family or whatnot. Um, okay, during the time that you own this property, could you renovate it if you wanted to? Would you do work to the property. Is it normal in that regard, like if I have a regular investment property in my name or my trust or?
Speaker 3:whatever, and I need to renovate.
Speaker 1:I renovate as per normal, or if there's maintenance requests, I fix the property when maintenance requests come up. Are there rules around that, or is that normal?
Speaker 3:It's normal, so you can still renovate. It's still like you said if there's maintenance requests, you can do all of that. I think the biggest difference, especially with regards to in your smsf, versus your own name, especially when it comes to regard with regards to loan, is you can't withdraw equity to purchase a new property, for example, when you can't take out extra money to like renovate the property. If you're going to renovate it, it has to be from the funds within the SMSF. You can't take out extra money from the LRBA to do that.
Speaker 1:Okay, so any works, any expenditure on the property, the money has to come from the SMSF, yes, within the SMSF. Okay, so is there a rule around cash flow when it comes to buying these properties, or does the SMSF have to be positive overall in terms of your income plus rent, minus loan, for example?
Speaker 3:Essentially, at the end of the day, you still have to service the loan and if the bank deems that you can't even with your contribution, then they won't give you the loan. Even with your contribution, then they won't give you the loan. Um, I think the biggest difference, and the reason why I think there's been such a big push for properties in sfs as of late, is that I think people have realized I've got 25, 30 years that I'm gonna, during that time, money is going to going to be forced to go into this entity now that, plus rental income, plus potential contributions from another person, can really accelerate how quickly we can really accelerate the investments that we want now. Obviously, being property podcast, it's always about timing. If I'm forced to have this 30 years and I can't touch it, what better way to grow than 30 years in the market?
Speaker 1:yeah, but the the overall fund has to be self-sufficient. Yes, now, when they're calculating if you can service or not, are they only looking at your super fund, at your contributions as servicing, or do they look at your, your income?
Speaker 3:so they look at your super contributions. Obviously your guaranteed money that has to go in um as well as the rentally okay they won't look at can say, oh yeah, we'll contribute x amount, but that's not a guarantee so they won't really. They might consider it, but it's not, it won't be a determining.
Speaker 1:And can you sell the property? Yes, but before retirement or whatever yeah, okay, and what happens if okay? Let's say we bought a property for 500 cash, not alone and then I sold it for 800, so there's a 300 000. Uh, let's call it a million. There's a $500,000 profit there. Do I pay tax on that, as per normal CGT?
Speaker 3:Yeah, so pretty much a lot of the main rules apply. So if you've held it for longer than 12 months, you'll get an exemption. The biggest difference on it is that you won't pay. It won't get added to your marginal tax rate. After that, Within the self-managed super fund, you'll pay 10% on the capital.
Speaker 1:Okay, so it's a lot lower then.
Speaker 3:It's a lot lower, but the biggest determining factor and why we tell people hold it to pension is that when your fund is in pension mode it's 0% tax on everything.
Speaker 1:I was going to tell you to look at the camera and say that again, but it seems the camera has turned off. Not sure why, but can you slowly say that again into the microphone, because that's going to make people very interested.
Speaker 3:So the biggest thing about superannuation and the biggest factor or determining reason why, especially if you've ever interacted with financial advisors is, as you approach 50 and get closer to retirement, there's a big push to move money into renewal. Biggest reason is that after 60, once you've met a condition of release and turn it into pension mode, you pay zero percent tax on everything this is unbelievable man.
Speaker 1:If that camera was still on, I would have clipped that up and baited everyone into watching our videos. That's crazy. So let me get this straight. I buy this property for 500 grand. Yes, I've now come to retirement. I can go into pension mode, as you call it. Yes, I sell my property pension mode, as you call it. Yes, I sell my property for $2 million. Yes, I'm paying 0% tax on it.
Speaker 3:Yes, you'll have and this is technicalities you'll have issue because there's a transfer balance cap on what you can actually put into pension mode In an ideal world. Let's say I think it's currently $1.9 million. Let's say you sold it for $1.8 million. $1.8 million will end up in the SMSF bank. That's amazing.
Speaker 1:Okay, follow-up questions Okay so let's say I buy a property for $500,000.
Speaker 3:I sell it for a million before I'm still 35,.
Speaker 1:whatever I pay the CGT at the smsf rate. Yep, what happens to that money? Is it a stay in the smsf or can I take it?
Speaker 3:no, that has to stay in yes, okay, you can't touch it.
Speaker 1:Whether or not, whether you sell the property or not, you can't touch those funds till 60, 60 and you've met a condition of release if not at 60. Okay now let's say I've got all these properties and assets in my, in my name, and we make it to 60 65. Do I automatically just get all of this stuff? Now I can access it. I can do whatever the hell I want with it. Yes, so I could now live in it. I could sell it.
Speaker 3:No so even if you're still in pension mode, you still can't live. Okay, as long as it's on the title, it's the smsf and not your personal name, you can't live okay, you can't live in it, no, but you can sell, yep.
Speaker 1:You can put the money in your pocket, yep. It doesn't have to go back into the SMSF. No, amazing, very good, very good, very good information, very interesting, so essentially right. Like you said, the biggest thing when it comes to real estate is we say buy the property, hold it for longer, longer, longer, longer, the longer. The more you hold it, the longer you hold it, the more money you're going to make. Smsf is forcing you to hold it because you can't do anything with the money anyway.
Speaker 1:So you might as well, just let it do its thing. And then when you get to 60, 65, you have this amazing tax break where you're not going to pay give or take tax on. It Depends on your circumstance but zero to very small amount, whereas obviously, if that was in your name or trust and you sell it, you're going to pay ridiculous amounts of cgt um and it's going to add to your marginal income tax rate and you're going to get screwed over from tax because they like to take to tax us. So all these things. So essentially'm so upset about this camera, because here's another clickbait.
Speaker 1:Smsf is like a free property Obviously you have to pay for it, but it doesn't affect your servicing in terms of your personal name.
Speaker 3:It doesn't affect your debt on your personal or your trust. It's a separate. It's a separate in its entirety that's crazy so how does borrowing?
Speaker 1:work and you mentioned um an lrba. What is another va? Uh?
Speaker 3:so the lrba is stands for limited recourse borrowing authority. Yeah, I'm authority, yeah, I'm authority. Uh, arrangement, sorry, um, and what it does is essentially it borrows the money with the sole purpose of purchasing the property. The bare trust name, um, and that's all it can be used. It can only be used for purchasing a singular investment. It can't be, and, like I mentioned before, you can't. Sometimes people might take a little bit extra and use some of that money to renovate, but can't do it. It's simply just to purchase the property and that's it okay, and so how does the borrowing work?
Speaker 1:you just go to the bank as per normal and say hey, I've got X amount in my SMSF, give me some money.
Speaker 3:So obviously it'd probably be best to use a broker, because Sorry, Phil. Yeah, definitely speak to power loans, but it's also because very few banks are now doing it. Banks don't like it. They think it's a bit more risky. You're more likely to get a higher interest rate potentially probably another percent, on what an investment property might be, um if you're going to do it through an smsf, um, and it's the same thing as if you're going to buy one of you so do you?
Speaker 1:are there specialized lenders for smsf if the banks are not doing it?
Speaker 3:yes, uh, definitely, brokers will know. I know one is mortgageeasy that does it, or mezzi. Um, I know latrobe do it, but latrobe have laws in their contracts that saying if you try and refinance or leave in the first five years you have to pay four months of repayments, and I've seen that be close to like 15 20 000. Um. Speak to your mortgage brokers, yes, definitely like. Speak to your mortgage brokers, um, because they will know who does it and who does it well, um, a lot of lenders actually also include offsets as well. Um, and it's probably better to have an offset because, again, there's no redraw, so if you put extra money into the loan, you can't pull it out. Um, so it's obviously better to have that offset. Build that cash buffer and then it might be a discussion of we have this cash buffer in the smsf. We still have 20 years of investing. Instead of leaving it there, how about we invest in something? And then that's where we can look at a share portfolio okay, interesting.
Speaker 1:Can you buy both residential and commercial property in an smsf?
Speaker 3:yes, so funnily enough, that was actually the main purpose initially for smsfs um, it was actually to help business owners, um, have a little bit more freedom. And then it quickly got turned into people would buy their business premises and then rent it out to their business. So that's the only time you can occupy a property that's invested or that's been, that's been bought through the SMS staff and that's only through a business arrangement.
Speaker 1:Okay, cool, that's interesting. Now final few questions. Going back to something at the beginning you mentioned, it seemed very complicated, let's say me and my wife, or me and my partner, whatever, uh whoever's listening to this, whatever whoever's listening to this, they're like yeah, we got, we're stacked, we got big cash, we got 500k in our supers combined. How do they actually set up an smsf? Do they do it themselves? Is there a website, or do you need certain professionals to actually do this for them?
Speaker 3:um. So if you wanted to do it yourself, um risk is you can do it wrong um. There are definitely services out there. I know there are companies that do it um, but also financial planners and accountants can also do it. So, as I mentioned before, you actually have to set up the sms itself, which is essentially a trust, then there's the type of trustee, then you have to set up the SMSL itself, which is essentially a trust, then there's the type of trustee, then you have to draft a trustee, which you have to do through an accountant.
Speaker 3:You can't just do it on your own. It's either an accountant or a financial planner have to do it. 95% of the time the accountant that does it. And then if you're going to buy a property, you might as well set up the bear trust as well at the same time. So it can be quite a complex scenario or process you have to go through. That's probably if you're going to do it.
Speaker 1:Go to someone and do it properly, otherwise it can get quite costly and so accountants and financial planners are the people that can set this up. Yes, and do you find that's what most people are doing?
Speaker 3:Yeah, it's quite funny because sometimes a lot of clients will come in to a financial advisor and they're like, oh, our accountant said we really should open up SMSF. And then it becomes a conversation of well, if your accountant told you, go do it with them, come to us once it's set up and then we'll give you the on how to invest the fund or what's good with the money, but the financial planners or financial advisors can set up. Smsf, so you can go to either one.
Speaker 1:Yes, Okay, and do all accountants know how to do this, or is this a?
Speaker 3:specialized thing. So it definitely is a bit more of a specialized thing. Right, you would have to find an SMSF accredited accountant, and then it's probably also, if they're going to set it up, probably also best to keep your business with them and let them do your tax returns and keep on top of it as well.
Speaker 1:But do all financial planners know how to do it? Again, you also have to have smsf accreditation, right? Just trinity advice? Yes, excellent, that would be an awkward if they didn't. So if you're looking to set up your smsf after this conversation, uh, definitely contact trinity advice. Now we'll wrap up KG. What's one piece of advice you'd give someone who's thinking about an SMSF for the first time?
Speaker 3:I think, listen to this podcast, take down some notes about what we've spoken about. I don't think it's a decision you should make on a whim. I definitely think it's something you probably should think about. Put some thought into it, um, and then kind of take your time, think about it. Speak to a professional, speak to a financial advisor, speak to an accountant. Just take your time and think about it, because a lot goes in. A lot of time, a lot of effort, a lot of planning needs to go into it. So just take your time and really think cool.
Speaker 1:Is there anything else you wanted to? Like you, you're burning. You really want to talk about? Uh, when it comes to smsf, or or? Have we covered most of the basics for a pretty for an introductory episode on this myself?
Speaker 3:no, I think we've pretty much covered most of them. I think the one thing I would probably say is make sure, if you're going to do it, make sure you actually stay on top of doing your tax returns for your smsf, because if you don't, then the smsf can become non-compliant and then everything gets taxed, gets taxed at 47. So it's a big commitment.
Speaker 3:You've got to do your personal tax returns and then your self-managed super fund tax returns, and if you're dealing with two different accountants, it might they've got to communicate with each other. Things can take time. So, just yeah, really think about, think about it a word of caution there Now.
Speaker 1:Thank you very much, kg. Just for you, we're in the live studio People have listened to this episode and if they've made it to the end of this 35, 40-minute episode. They're probably really excited about smsf. They're probably listening. They're probably thinking, yeah, I've got 250 to 500k combined, or in my, in my super I want to buy a free property.
Speaker 1:I want to do all of this. Where can people find you? Where can they reach you if they want to get in contact to discuss more about smsf or if they just want to talk to a financial planner about whatever that's going on in their situation? Where can people find you?
Speaker 3:and trinity advice um, so you can find us at trinityadvicecomau. Uh, or you can search my name in linkedin, or you can search boss's name, joseph mewatt, in on linkedin as well. Google us, we'll come up. Uh, we've got links online on our website in a chat with us.
Speaker 1:We'd be more than happy to have a chat with you and just see what we can do to help amazing and we'll put this, we'll put um all the links uh to trinity, bias, kg and joseph in in the show notes um, we will have to figure out what happened to the video recording because it looks like we lost that halfway.
Speaker 1:Apologies for that, um, otherwise, thank you very much and, uh, hopefully we'll see you again on a more advanced part two version, or. I'm sure we're gonna get a a bucket load of questions after this episode about smsf, so we'll probably have to get you back on um and maybe charge the battery, but I'm pretty sure the camera was charged before, so I don't know what happened there.
Speaker 3:Um but yeah, thank you for coming, my pleasure, thank you for having me.
