The Guru’s Guide to Self-Managed Super Funds: The $700 Billion (And Growing) Super Powerhouse Explained

By Grant Abbott

Whether you have or are considering a self-managed super fund (SMSF), are advising on a SMSF as an accountant, financial planner, auditor or product developer, or simply have an interest in Australia’s $700 billion super powerhouse, The Guru’s Guide to SMSFs will become your “Go-To Guide” and SMSF pathway for years to come.

Written by Australia’s leading SMSF expert and adviser, Grant Abbott, The Guru’s Guide to SMSFs will take you through:

- The “What”, the “Why” and the benefits of creating a SMSF and a Family SMSF,
- Strategically benefiting from the SMSF law and how you can set your own rules to manage your Fund,
- Making the most of contribution and investment rules to help you become a SMSF millionaire,
- The investment rules of a SMSF and running multiple investment strategies at once,
- Making the most of borrowing rules with your Fund,
- The Pension Transfer Balance Cap rules and setting up the new and improved SMSF Version 2.0 – what it is and how it works,
- Using a SMSF as a strong, secure estate planning vehicle, and
- When and where to combine various trust vehicles with a SMSF.

• Language: English
• Publisher: BookBaby
• Release date: Jan 10, 2018
• ISBN: 9781925681307

Book preview

Funds?

Introduction

How to Best Use The Guru’s Guide to SMSFs

Self-Managed Super Funds, SMSFs for short, have transformed so many Australian families financially and also provided the rock for the Australian share market in troubled times. With more than 700,000 Funds holding on average $1.2M, it is a great success story. With little or no tax, flexible investment choices from property to gold, shares and start-ups, those who have broken away from industry and retail super funds to start a SMSF, don’t look back. – Grant Abbott

1. Introduction

Let’s face it, most of us here in Australia have superannuation somewhere. At last count, there were 14.8 million Australians with superannuation accounts amounting to more than $2.3 trillion. For many innocent employees, unaware of their power to change, it is probably tucked away in two or three superannuation accounts. In fact, I am so, so surprised when I do presentations, and I have done more than 1,500 on superannuation and Self-Managed Super Funds (SMSFs) over the years, that couples in their 20’s and 30’s, and embarrassingly in their 40’s, do not know where all their super is or how much they have. But with a little investigation they find, particularly those in the mid-30’s up that they have $100,000+ in their superannuation and when combined with their spouse this tidies up into a nice little amount of capital. Yet, like the GST, it is hidden and most people don’t take responsibility for it – even though it is a forced direct deduction from their salary and wages. And the banks, fund managers and industry funds love ripping the fees from the accounts of members that don’t take that responsibility. As they say – use it or lose it.

So at talks, to inspire a little passion in super ownership, I play the following game and you might want to play along with me.

And if you already have a SMSF then still play the game to see how you would go with some freewheeling monopoly ideas - but don’t use the figures shown in the game - use the total amount sitting in your own SMSF for all members which may include your spouse. As Trustee of your Fund and investment controller, you have complete control of where to invest – so let’s see how you go.

2. The Super Monopoly Game

Game One: Let’s say that I handed over $150,000 to you right now and told you that you could only invest this money, and that it was not for general spending purposes.

But I gave you only one minute to choose no more than 1 to 3 investments – what would they be?

Game Two: Let’s say that each month your employer deducts 9.5% of your salary and places it into the same investment account – again to be untouched and used only for investment. But because of these employer contributions, your local bank will lend you $300,000 to buy a property – enabling you to buy a $450,000 investment property. Where would you buy right now if I gave you one minute to choose the location of your investment property?

How did you go and did your mind start racing around all of the possibilities? There is nothing like being free minded on investing money – having all the choices in the world.

Game Three: I am going to give you the same $150,000 plus deduct 9.5% of your salary each month – but you have to immediately give all of it to a bank or union controlled institution to invest it for you. Well not exactly for you, they take your money and place it in a pool of millions of others like you – some very old, some younger – the they choose a portfolio of investments in shares here and around the world, plus some big property conglomerates. And for the last ten years, on average, the returns that they make for you have been around 5% per annum – depending on the institution – some more and some less. Now sometimes they win and sometimes they lose, but it doesn’t matter, because they are going to take 1% or more of all the money you have invested each year as a fee for investing on your behalf.

You have one minute to choose which Fund your hard-earned salary goes into – what are your three choices?

3. Don’t have a SMSF? – Read this...

I make no bones about it – I Love SMSFs and have seen them change so many people’s lives. In fact I love them so much that I named my company after them – www.ilovesmsf.com and Facebook: I Love SMSF. But I do admit they are not for everybody – have a look at the videos on the ATO website – www.ato.gov.au and to be truthful they can scare the living daylights out of you when it comes to choosing what to do with your investment (sorry I mean your super) money. But if you are remotely curious in what a SMSF can do, then devour this book and make a choice – don’t just stay with the faceless establishment - make your own decision whether a SMSF is for you. I will be covering the basics – like how to set up a Fund, receive wise advice from SMSF professionals and experts on how much you need to set up a Fund, what you can and cannot invest in, the tax benefits of a Fund and much more.

4. For those with a SMSF

Now this is not called "The Guru’s Guide to SMSFs" for nothing. By the time you have finished reading this book you will be a SMSF Guru amongst your friends. And don’t stop at one reading – underline the key bits and continue to improve and learn – it is your financial destiny. I love this comment by Tony Robbins and it has always stood me in good stead throughout my life and will do for you as well:

Now the game above about investing your super was to get the, hopefully 14.8 million Australians with super, but not a SMSF, to consider the full breadth of what is possible with a SMSF. And to be brutally honest, if you have a SMSF, I would bet you $100 you don’t even know 25% of the treasure trove of opportunities, strategies and possibilities you are sitting on. For me, I see, a SMSF as a long-term, family wealth creation and transfer vehicle that is tailored to the needs of your family. This is why I call a well-structured, planned and strategic SMSF, a Family Super Fund. And with the broad changes to SMSFs and superannuation on 1 July 2017 – the need for a Family Super Fund over the basic DIY Super Fund and the SMSF has increased tenfold.

From all of the research undertaken by the Australian SMSF Members Association, 90% of SMSF members and Trustees get into a SMSF to control their investments. Particularly when their super funds are going backwards because of investment markets. And that’s what the Super Monopoly game is all about – it’s your super money after all. What do you really want to do with it? But really that is the tip of the iceberg and if it is the sole reason you have gotten into a SMSF, it is a great start but there is so much you are missing out on – so, so much.

That is why I am writing this book, and don’t think of it as just a book, look at it as an experiential journey – one we are on together. Now if you have a SMSF, I will be throwing a lot of strategies, ideas, short cuts and knowledge at you, but – words without action mean nothing. So get involved!

As we go through the book and you see a strategy that might suit you, go to your adviser, accountant or a SMSF specialist to see whether there are any technical or legal issues, and more importantly how to put it together. Believe me, there are no dumb questions and only you know your family – like how do I keep my super away from my daughter in law when I die, or can I invest in my mate’s new invention that is going to be the next Facebook. And when it comes to questions, I have seen them all – including investing in ostriches, abalone, New York apartments and well so much more. Please don’t get years down the track and then remember reading about the strategy knowing that you should have put it in place when you saw it here first. Particularly with the new way of looking at super and SMSFs post July 2017 – the new SMSF Version 2.0.

5. Testing your SMSF Knowledge

For the past twenty years I have been the Adviser to the Advisers, some have even called me the Grandfather of SMSFs. And I have loved the opportunity. There have been so many great SMSF specialists who I have trained and helped with developing ideas and strategies for their clients. In May 2017 I had the opportunity of training more than 500 on the latest changes to the SMSF and superannuation laws post July 2017, giving my opinions on where strategies will go over the next five years, and the big switch from super to SMSFs for those under 50 when the share market and big super fund returns dive. For many of you, you are lucky to have received this book from an experienced professional who wants you to increase your knowledge and understanding of your SMSF – because the more you know, the more strategies you can create for your own Fund and for your family, with their specialist help.

Design, build, change and deliver are the constant themes running through Family SMSFs. Your goal – read, get expert advice and tailor the Fund to your family’s circumstances. And that, my friends, is why no two SMSFs are ever the same – ever. That I can guarantee. But pity the Trustees of a SMSF without a great adviser and more importantly, who haven’t read this book.

Anyway, before we get into the ideas, strategies and SMSF knowledge, I thought I would start with another test so you can objectively assess your SMSF strategy level. And even for those that do not have a SMSF, it is important to complete this assessment – it will show you what you know and what you should or must know. And for those advisers reading this book, it is just as important for you to complete it also – you don’t want your client SMSF Trustees to outshine you.

6. The SMSF Knowledge Test

This is a simple test and all you have to do is tick the True or False box.

As part of the I Love SMSF mentorship programs, I run regular webinars addressing the answers to these questions - visit www.ilovesmsf.com to learn more.

7. For the SMSF Professionals

As a SMSF professional, whether you are an accountant, financial planner, administrator, auditor, SMSF specialist or new to the game, this book is for you. I have written the book in a conversational style as the next generations – Generation X, Gen Y and the Millennials, are the next group to enjoy the love we have for SMSFs. It is my goal to get this book distributed widely so that more and more people see the light and take responsibility for their super with their SMSF. As you know, SMSFs are not suited for everyone, but with a good adviser – and I use that term to cover all professionals working in the SMSF field – the task of building a strong, strategic and lasting SMSF is a given. It is an impossibility for the SMSF Trustee – except for perhaps 1,000 out of 1 million + members (most of them professionals) to understand, and more importantly, implement the range of strategies contained in this book.

But I have not left you out. Although the book is written in conversational tones, there are lots and lots of strategies and plenty of case studies that cover the four generations plus, lots of section references, taxation rulings, tax determinations and cases. Educational for all reading this and more importantly, great learning for all advisers on how I review facts, build strategies and put them into play.

It is my hope that you will send this book to your clients, friends, family and also your colleagues. I am passionate about SMSFs and in fact I Love SMSFs – it is in all of our interests and also for Australia, that more and more super members get great SMSF advice – whether starting out or moving along the natural strategy time line of a SMSF.

Chapter One

Setting the SMSF Scene

Introduction

How I know whether you are SMSF suitable

Change and Missed Opportunity

Why a SMSF – What’s your Story?

Are there Risks with a SMSF?

How much do you need to set up a SMSF?

Are you likely to start a SMSF?

What do SMSF Members think

So who is Grant Abbott?

My Promise to You

Working through The Guru’s Guide to SMSFs – for Professionals and advanced Trustees

My Dad left work at age 55 with $400,000 in super, lived off $80,000 a year for the next 28 years, travelled the world and at age 83 has $800,000 left – hasn’t paid tax for 25 years, gets a tax refund and a Government health care card. How is that possible? Four words my friend – self managed super fund – the greatest wealth creation vehicle in the world – period. So let me ask you – are you in or out?

1.1 Introduction

Hi! I’m Grant Abbott, SMSF lover, teacher and author and I’d like to introduce you to the world of self-managed superannuation funds (SMSFs). Now that is a mouthful so we are going to shorten it to SMSFs – roll that around your tongue a few times because you are about to have a life -long love affair with them. So get used to saying it – SMSF, SMSF, SMSF. Sometimes in the Guru’s Guide we will use the word Fund when discussing a member’s SMSF or if you are lucky – your SMSF. This is different to a retail or industry superannuation fund.

Now let me go out on a limb here – I have seen more people using SMSFs to become millionaires than any property, share or other investment scheme anywhere in the world. So, humour me for a while and I am going to show you that choosing a SMSF is the best financial decision of your life for those with one and those not yet with one, why and how you are missing out.

Anyway, at this point are you in or out? For those already with a SMSF, then I am going to show you strategies that will take your excitement and passion meter to a 10 out of 10. Particularly with the new stuff – the laws creating the new SMSF Version 2.0 post June 2017. For those without a SMSF – I hope that I shake up your system so you wonder why you have missed out on it for so long.

1.2 How I know whether you are SMSF suitable

First off let me confess – I have been called many things when it comes to SMSFs. From the SMSF Guru, the Grandfather of SMSFs, Australia’s top SMSF Adviser and so it goes on, but one of the ones I love is that I am too far out there. And why do I love that? Well let me show you something, something that will tell you and me together where you are someone who takes opportunities in life and you are SMSF suitable. It’s called – dramatic pause here – The Change Chart.

Diagram One – The Change Chart

So what is the Change Chart? Well I’ve been around the block a few times and have lots of experience in the ups and downs in life - as we all have. Even my 15 year old daughter tells me life is too hard when her favourite fashion brand – which happens to be from the US, does not ship to Australia – love her but what a first world problem! Anyway, one thing I’ve seen in life is how people adapt to change or take on new ideas. This can be products, services, strategies, knowledge, and really anything that challenges us and or is new to us.

For example, the Apple iPhone came out in June 2007 in the US – so how long did it take you to get one? Look at the Change Chart - where were you on the Change Chart when it comes to an iPhone or smart phone? Were you an early adopter or did you wait for everyone else to get one before you did. It’s funny, a good friend of mine who runs several publications in the financial services industry still has a Blackberry he got in 2004 and is very, very proud of it. Have a look at the Change Chart – where would he be? LAGGARD!

I got my iPhone in 2008 when it first came to Australia so I was an early adopter and for many things, particularly technology, I always will be. I don’t want to be like my mum who at age 79 used the ATM for the first time. It gets too hard to keep up. Even now with some things technological wise my head spins but here’s the deal, if it is important to me I get the best person to teach or advise me. Anyway, what I have found is that the early adopters usually get all the opportunities because they are in front of the pack – particularly when it comes to wealth.

Getting back to the Change Chart. Where are you with SMSFs? Are you an Early Adopter – part of the Early Majority or even Late Majority and I know that you are not a Laggard, as Laggards would not be reading this book. To find out where you are - the easiest way is to look at 100 people in your age group. Of those, you would expect 10 or so to have a SMSF if you are under age 40 – they are the Early Adopters. However, people under 40 aren’t ripe and ready for SMSFs just yet so that demographic is not fully into the Early Majority stage yet, maybe just starting from my research. For those between 40-55, there would be a full complement of Early Adopters – 15 and another 15 to 20 from the Early Majority. Over 55 and well, all the Early Adopters and Early Majority have been in for more than a decade and made some great money and wealth. That demographic is well into the Late Majority, but here’s the problem. The Late Majority generally don’t like change and move only when they are forced to or when everyone else is doing it. With 14.8 million Australians with super, according to the Australian Taxation Office website, and only 1 million SMSF members, the Late Majority will never make it to SMSFs.

1.3 Change and Missed Opportunity

Can I tell you a funny story? You are going to think I am so dumb because I flinched at a big opportunity. So big that if I had followed it through, these words would not be on this page because I would be hanging out with Richard Branson on his private island.

Well the year was 1999 and I was preparing a key note opening presentation for the Financial Planning Association of Australia’s Sydney conference which was to be attended by 3,000 financial planners, fund managers and accountants. I was doing my usual thing and crystal ball gazing on what financial services would be like in 2020. Part of my brief was to go the US and interview key people in the industry and find out their views on the impact of the internet on financial services – this was the era of the Dot Com. Great gig and very interesting. Well I thought why not go to the heart of innovation and see what the views were of the venture capitalists in Silicon Valley and who better to predict trends. Anyway I was lucky to get 15 minutes with Michael Moritz a partner with famed venture capitalist Sequoia Capital. He was very frank and saw a vision of artificial intelligence helping us with all our financial services needs – dealing with banks, loans, wealth products and so much more.

As we were packing up, I asked him what were the best investments his company made - and remember they are start-up investors so they get in at the best valuation – the real money makers. By the time a stock gets to list there is not a huge upside like there is in the start-up space anymore – but of course there is also not the potential of a major flop. So here we go – picture young Grant sitting with one of the world’s top start up investors:

Just out of curiosity Mr Moritz what are some of the latest investments that you have got into? I asked. As he took the microphone from his lapel and gave it to the cameraman, he looked me in the eyes and said, Well six weeks ago we invested in some new technology that is going to change searching on the internet and we are pretty excited about it.

Of course I followed up with What is the name of the company? He stood up, paused and said Google. Firsts investor in Google – can you hear my screams from where you are?

I should have grabbed his leg and begged him to let me invest – can you imagine what that initial investment would be worth now? Oh well that was me being a dumb laggard when it comes to investing. Now I am more savvy – well sometimes.

1.4 Why a SMSF – What’s your Story?

The industry leading market survey firm CoreData puts out a lot of information on SMSFs and why people make a change to an SMSF. So what are some of the reasons given?

Grant’s Note: My experience shows that when the markets crash, because retail and industry super funds are generally well invested in shares, super fund returns take a real hiding. And when a member of a super fund sees their account balance going down – even when their employer contributions are being made into the fund the overarching comment is Well if I am going to lose money, I may as well do it myself. Watch what happens with the next stock market rout – for three years after that the number of SMSFs set up will reach record proportions and more importantly introduce a new generation to SMSFs.

Diagram Two: SMSF Trustee Survey - Why a SMSF?

1.5 Are there Risks with a SMSF?

If I am out and about telling everyone how good SMSFs are, why isn’t everyone doing it? Well this is the only time I am going to say this in relation to SMSFs – they are not set and forget like a retail or industry based super fund. You have to own them and work them and be responsible for them. It is like having your own special little investment bank and believe me that is not for everyone – consider some of the risks.

You are the controller of the Fund – legally, and so you must abide by all the rules that apply to controllers, who are called Trustees of the Fund. I suggest that once you have read this book or if you are the Late Majority, go the ATO website and see the videos on Thinking about a self-managed super. As the ATO video says – You are the person in control and, if you make a mistake there can be serious penalties. Don’t jump in without considering the risks and if you ask me get in touch with a good accountant, financial planner or SMSF specialist to help you.

Time Involved – Like anything, this is not a fly by night decision – once you are in, you are in for life so make sure that you have the time to spend on choosing your investments, liaising with your accountant to get your income and compliance returns done on time, listening to the ATO and of course viewing my videos on the latest laws and strategies. Time is usually one of the reasons that the Late Majority never make it into a SMSF – it is easier to give it to an Industry or Retail super fund.

Costs – For some, running a SMSF can be done on a shoestring – the so-called DIY Funds, but for many, outsourcing the stuff you are not good at to an accountant or professional SMSF administrator saves time, prevents stuff ups but of course costs money. I can only tell you whenever I need help I research and look for the best of the best. It will cost more but at the end of the day, you will make more money and have a lot less headaches.

Investments – You cannot use the investments in the Fund for your own use – the only exception is property used in your own business. A SMSF is not a play thing and people have been imprisoned for not abiding by the laws So when you invest you should stick to property, shares, cash, fixed interest and other stuff that we will talk about along the way. The good thing with SMSFs is, you are not out to get rich quick, as you can’t touch it until preservation age anyway, so as I say – become a SMSF Millionaire slowly.

1.6 How much do you need to set up a SMSF?

This is the typical question everyone asks – particularly when motivated to move. Let’s start at the start and make sure you read all of this.

The Australian and Securities Investment Commission (ASIC) has released guidelines for financial planners and other licensed persons - INFO201 that states:

"In many cases, a recommendation for a retail client to