Let me guess. You’ve been secretly toying with the idea of setting up your self-managed super fund (SMSF) to ramp up your retirement. You realised with horror that unless you do something about your superannuation, you may not have enough money to live on in your old age.

As you listen to your friends and colleagues go on about how setting up your own SMSF is the Holy Grail of retiring richer, you’re convinced you should do it too.

After all, if millions of Australians are already doing it, they must be clearly benefiting from it.

Read more: Tips for buying property with your SMSF

Low tax

One of the most attractive features of investing within your SMSF is the fact that any income you derive within your super enjoys a low tax rate of just 15%.

Even better is the capital gains tax discount. Properties that have been held by the SMSF for at least 12 months and are sold will only attract a 10% tax.

If you bought outside your SMSF, you would have to pay tax on 50% of the capital gains using your marginal tax rate, which could be as high as 49%.

The best tax deal, however, comes when you reach pension age, then all the income you get from your SMSF investments or capital gain will be tax-free.

But there are a few gotchas. 7 things to know about setting up your SMSF & buying property

1. It’s expensive to set up an SMSF

As a rough guide, it costs about $2,000 to set up a new SMSF.

2. It’s expensive to maintain an SMSF

Because it’s regulated, every SMSF is audited for compliance. This could set you back anywhere between $500 and $1,000 pa.

3. You need substantial funds in your super

Due to the high cost of set up and maintenance, you need to have at least $200,000 in your super, as a rule of thumb, to be able to buy quality properties.

4. Borrowing through your SMSF is more complicated

Be prepared to provide a lot more documentation when borrowing to invest within your super. You also need to give personal guarantee, which means you are still liable to pay for the debts of your SMSF.

5. The amount you can borrow is usually much lower

Banks generally cap their lending at 65% of the value of the property although the competition has ramped up among lenders and some are offering up to 80% of the value of the property. However, they still require you to show a healthy buffer.

6. You cannot renovate the property

The property you buy within the SMSF should be tenant-ready and the law prohibits you from doing major renovations to improve the value of the property.

7. You cannot buy from a related party & family cannot inhabit the property

It is against the law to buy an asset, including property, from a related party. All investments must be strictly at arm’s length. Families and relatives are also strictly prohibited from renting the investment property bought within the super fund. This is to ensure the transaction is made purely on a commercial basis and avoids potential conflicts of interest.

As you can see, setting up your SMSF can be a good way to build your retirement fund, if you do it right. Make sure you speak to a qualified professional person before jumping in, however, as the consequences can be costly.

The information in this article is for general interest and is not intended as advice. For advice and planning, consult an experienced financial consultant.

Posted by Nila Sweeney – on 10th December, 2014