DIY Super

[antinahat]

Does anyone have any advice on Paritech DIY Super Funds and DIY super in general? Apparently they advocate setting up a SMSF if you have more than $40,000 to invest; costs are $1000 to set up and $1000 to run. Most of the advice I have read/heard suggests that you need at least $100, 000 which I don’t have yet; however I am looking for the most tax effective structure for the longer term. The reasons I want to set up a SMSF are; control of investment decisions, getting tax benefit of salary sacrifice, paying less tax on interest or dividend. My strategy is to invest mainly in residential property but also in shares and property trusts.

Also what if I set up a SMSF which purchases a property together with me as tenants in common with SMSF contributing its holding in cash (let’s say equating to a deposit of 20%). I know that I can salary sacrifice and pay a monthly contribution into the SMSF for the SMSF to invest. However, can the SMSF then invest the contribution into the property thereby increasing its percentage holding of the property? What are the tax, legal and administrative implications? I know many would say why put more equity in? Use the additional cash to put a deposit on the next IP. However, it may be the best option at the time for the cash sitting in the Fund.

Thanks

Ant

 

[Lotana]

Antinahat,

When deciding to set a SMSF one should declare their goals. As far as I know, super funds can't invest in a single property if it represents a substantial share of its total value. What are your other reasons for going self-managed? The fees that you mention represent about 3% of the value of your fund (if you spread the set up cost over 5 years). This is on top of the fees you would pay to fund managers, financial advisers, etc.

I use myself and am happy to recommend the following alternative - use a wrap account or a master trust. I use Yourprosperity.com.au and that's what it costs:

1. Set up fee $0
2. Administration fee 0.65% (in your case $260 pa)
3. Free transactions (buy/sell managed funds)

What you are getting is:

1. Access to 120 funds including wholesale funds, geared funds, and hedged funds. Wholesale funds charge much smaller fee than their retail counterparts but require $50K or more to enter. Through this wrap account you can get in with $1-2K.

2. Full web-based operation. Transact on-line and instantly get any reports.

3. Up to date funds research and unit pricing available on-line.

Basically, you manage your own account, buy and sell funds as you wish. Your cash sits in their cash management account earning interest. If property is your only obsession - invest exclusively in wholesale property trusts if you wish.

I found it to be good value for money. I am not associated with Yourprosperity or with National Australia Bank who owns it.

Say cheese

Lotana

 

[Lotana]

Oh yes, and another thought. If you find a financial adviser who can refer you to Yourprosperity and share commissions with you!

Say cheese

Lotana

 

[Kevmeister]

I wonder if any of the discount brokers like Neville Ward Direct have access to YourProsperity, since they brokers rebate most of their commissions. Might make it even cheaper.

Kevin.

 

[antinahat]

Thanks for the advice – I spent quite a bit of time going through the YourProsperity site and I also spoke to one of the advisers. It’s a good option. The major reason for going the super route was that I want to invest directly in shares which declare a dividend, but want to minimise the tax. As you so correctly pointed out, the costs of maintaining a DIY fund will probably outweigh any tax advantages (at least until the fund gets to a decent size). I was also trying to find a way of investing in residential property with dollars taxed at 15% as opposed to the marginal rate. Back to the drawing board......


Ant

 

[Kevmeister]

I was thinking about this the other night.

*Last time* I looked at YourProsperity I came to the conclusion that the fee structure of YourProsperity was not particularly great.

The 0.65% they charge, even if they do provide you access to wholesale funds, often means the 0.65% they charge on to of the discounted wholesale management expense rate, means you end up paying pretty much the same retail MER anyway.

What is much more important with a super fund is utilising a broker etc that rebates 100% of your entry fees. If you contribute $10K a year to super a 5% entry fee (not untypical), is $500 of that $10K you are giving away.

And, at the end of the day, that $500 more your fund has to earn (ie. better performance) to keep you ahead.

It took me a while to cotton onto this (because I didn't know fund's entry fees could be "gotten around") and even in the last couple of years has probably saved me several thousand $.

Kevin.

 

[Lotana]

Kevin,

I've been using YP's Super Trust for a year, bough and sold several funds, and have not been charged any entry fees. You are right that 0.65% YP fee is charged on top of the fund manager fee (or MER), but there is no entry fee. The total fee is still less than retail funds' MER in most cases, here are some of the examples (the funds I currenly hold):

UBS Property Securities Fund. Entry fee Nil, MER = 0.6%
Platinum International Fund. Entry fee Nil, MER = 1.25%
Sagitta Property Wholesale Trust. Entry fee Nil, MER = 0.8%

YP's 0.65% is on top of these.

If you invest through an adviser, he/she may rebate some of their commission in lieu of the entry fee. Very few of them can bend to rebate their trailing commission.

Say cheese

Lotana

 

[Kevmeister]

My point was that you don't have to invest in a master trust a'la YourProsperity just to think you are getting a good deal.

I don't think a 0.25% difference in MER one way or the other (and when I checked YourProsperity a while back as I noted I found some funds where you could end up paying more than the retail MER - which is why I didn't go with it - no significant saving).

That's why I simply use Neville Ward Direct as a discount broker. I am not limited by the fund choice of a master trust like Your Prosperity. NWD offers 5000+ prospectuses. Any fund that NWD offers I can buy into and they rebate almost always 100% of their commission (the only time they cannot is where the fund manager does not permit it - a very small percentage).

I don't think it's such a big deal if broker's can't rebate their trailing commission. That's how they get paid. The point is that fund managers pay broker's trailing commission out of *their* earnings not out of the customer's contribution.

I know that's slightly naive because the MER charged by the fund manager will include a component in order to pay the broker, but the fact that the average retail MER is 2% and the wholesale MER is perhaps 1% means the broker can't be getting that much.

What really cheeses me off is that even if you invest directly with the fund manager, you *will not* get a lower MER. I raised this with MLC once and they argued that if I invested directly with them then they must provide me customer service, so they are entitled to receive the brokerage just like a real broker. I guess that kind of made sense.

Kevin.