Keep it simple and let your wealth grow over time

Based in Albury, Simon is a financial planner who has advised his clients on SMSFs for over 20 years. He is a director of privately owned, fee-for-service company Armstrongs Financial Advisers. www.betteradvice.com.au

An SMSF can be a great way to purchase a rural property and grow your assets, providing you with a better sense of control over your retirement goals. The difficulty today is whether Scott and Casey can borrow to fund this purchase using an SMSF?

Since the financial services royal commission our four major banks, AMP and St.George have pulled out of the lending game for SMSFs, leaving few lenders available.

Richie Kasai, from Acceptance Finance in Melbourne, says at present there are no commercial SMSF lenders who will accept the farm as security. Nor will they accept the proposed income from the farm business as it is a start-up with no trading history.

The concept of having a rural property in an SMSF is valid, as the land would fall under the classification of “business real property”, with up to two hectares allowed for domestic or personal use. Business real property is defined by the ATO as land and buildings used wholly and exclusively in a business. It is common to see this set-up where the business would lease the property from the SMSF to carry on its income-producing primary production business. The business needs to be a separate entity and run its own set of accounts.

The ATO has also recently sent out letters to more than 17,000 funds it has identified as having one asset in their SMSF that accounts for more than 90% of the fund’s total assets. In Scott and Casey’ scenario, they would come under the microscope of the ATO.

It’s not good news for Scott and Casey’s dream. However, it is not the end of the world.

An alternative is to look at their asset allocations within their existing funds and look to build wealth in a more simplified manner, where the investments are more diversified and provide growth and income from day one. Their existing super funds have low annual management costs, are portable, have a large range of investment options and can offer much greater diversification than farm land. While running your own business/farm can be liberating, knowing that you have a stable income stream in retirement can be more beneficial in the long run. However, if the dream lifestyle is the farm, then Scott and Casey need a strategy to improve their LVR and go into the business with plenty of capital behind them, including a business plan. They also need to take into account insurance to cover the loans at a bare minimum, repayments/loan term, the estimated growth of the land value and the end game – that is, when they do retire and how do they draw an income from the farm if they are no longer running goats?

Sometimes the simplest of options can be the best option, as there are many things that we can’t control. In

Scott and Casey’s scenario, this would include: changes in interest rates, changes in government, changes in legislation that may not be grandfathered, the weather

(droughts, floods), the family’s health, animal diseases and pest infestation – a locust plague could decimate the feed available for the goats, requiring Scott and Casey to bring it in.

I realise some of this may be far-fetched. However, they are all events that could cripple the super fund, whereas a good diversified portfolio in a retail, wholesale or industry super fund would not suffer the same consequences due to the spread of assets around the world and across different asset classes, including Australian shares, international shares, bonds, property (listed), cash/fixed interest and infrastructure.

I like to keep things simple (the KISS principle), as it keeps you out of trouble and your wealth is guaranteed to grow over time.

The things we can’t control could cripple the super fund