More And More Australians Embracing SMSFs

Australians are increasingly turning to self-managed superannuation funds (SMSFs) to build wealth, with data from the Australian Prudential Regulation Authority (APRA) showing a 7.5% increase in total SMSF assets over the year to June 2024. This brings total SMSF assets to a record $990.4 billion.

So, why are so many investors choosing to manage their own super?

The rise in SMSF popularity is driven by factors, such as the desire for more control over retirement savings and dissatisfaction with traditional super funds.

Research from APRA has identified a dramatic underperformance among some super funds, with one in five flagged for poor performance.

What can SMSFs be used for?

 So it’s unsurprising that more people are turning to SMSFs, which offer a broad range of investment options. This allows members to tailor their portfolios to meet individual goals and risk preferences. Popular choices include residential, property, commercial property, Australian shares, international equities and fixed-interest investments like bonds.

SMSFs as a tool for property investment

One of the most attractive features of SMSFs is the option to invest directly in property. According to the Australian Taxation Office (ATO), between the June quarters of 2021 and 2024, SMSF asset allocation for property grew 26.4% to $55.2 billion for residential and 25.0% to $102 billion for non-residential property.

One of the advantages of buying property through an SMSF is that you can own a physical asset, as opposed to less tangible investments such as stocks or managed funds.

SMSF property investment offers several other benefits, including the ability to earn rental income, long-term capital growth and potential tax advantages.

Property versus other assets

When comparing SMSF property investment to purchasing other assets, each asset class has its own set of risks and rewards. But, the numbers show that over an extended period, property can deliver large capital growth and the ability to earn income off the asset throughout ownership.

Residential property values rose 382% between 1992 and 2022, averaging 5.4% growth, according to CoreLogic. There was a further 8.1% annual increase in 2023 and 6.0% thus far in 2024. While there have been downturns, such as a 7.5% drop during the 2008 GFC, the long-term trend has been upward.

Commercial property can also be a good option, though more sensitive to interest rate changes. As the table below shows, prices fell in the period immediately following each rate hike cycle of the last three decades.

Despite occasional downturns, commercial property can offer stable rental income, strong yields and long-term value, especially with high-quality tenants.

Meanwhile, Australian shares have delivered 9.9% annual returns (including dividends) over 30 years, while international shares have averaged 9.4%, but both with higher volatility, according to the Vanguard Index. Fixed-interest investments returned 5.8% annually.

Long-term benefits of investment property

Both residential and commercial property can offer favourable returns. But, the benefits offered by investment property extend beyond just long-term capital growth.

First, the asset can generate an income throughout the period you own it in the form of rent. For a residential property, as long as it falls within the ATO’s rules, the rent earned from your investment property can be put back into your retirement savings.

Commercial property offers different rental benefits as the ATO rules are slightly different. Unlike a residential SMSF property, which can’t be leased to a fund member or member’s relative, commercial property can be, as long as the rent charged is within market value.

For a business owner, this means you can own your business premises in your SMSF and then pay rent from your business into your retirement savings.

Owning property through your SMSF also allows you to diversify your wealth portfolio. This means you can take advantage of the varying growth profiles among asset classes, which also helps spread your risk.

Additionally, as your SMSF home loan is an investment, the interest is tax-deductible.

What sets SMSF home loans apart?

Taking out an SMSF home loan is different from taking out a regular home loan.

1. Limited-recourse borrowing arrangement (LRBA): With an LRBA, if the SMSF defaults on the loan, the lender’s recourse is limited to the property in question. This means the rest of the SMSF’s assets are protected, providing an extra layer of security for your retirement savings.
2. Eligibility: To be eligible for an SMSF mortgage, you must meet specific criteria, including having a compliant SMSF and adhering to borrowing limits.
3. Property: According to the sole purpose test, any property you buy can be used only to grow members’ retirement savings – not to live in or for any other purpose.

Key considerations for SMSF property investment

While SMSF property investment offers several advantages, it’s important to remember the following:

• Compliance: You must adhere to the ATO regulations with regard to sole purpose, who you rent to and what expenses you can claim.
• Risk management: Property investment involves risks such as market fluctuations and possible issues with tenants.
• Professional advice: It is recommended you consult with a qualified financial adviser, to set up your SMSF, and an experienced mortgage broker, to guide you through the home loan process.

Are you interested in buying property through your SMSF? Speak to Shore Financial about your finance options. Call us on 1300 416 700, email us on info@shorefinancial.com.au or fill in this online form.