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Self Managed Superannuation Funds

Will a SMSF be of benefit to your Financial Future? MAYBE…

Many people are reeling from the recent turmoil in global financial markets,

We’re all looking for different ways to invest our superannuation. Many people have had dramatic reductions in retirement benefits fro the various Industry Funds and are looking for answers to the lack of control they’ve experienced.

At The Property Investment Institute we are seeing increasing enquiries and demand from clients to take control of their super and establish a Self Managed Superannuation Fund (SMSF).

At The Property Investment Institute we have fully qualified Associate Partners who can and will advise clients on whether or not a SMSF is appropriate for their needs. If appropriate, we can then arrange experts to set up the funds and then administer them for the investor.

Why an SMSF?
By establishing a SMSF you can invest in direct property, shares or other assets.

There have been a number of recent legislative amendments that frees up the ability of a properly constituted SMSF to borrow funds to invest in various assets. A SMSF is permitted to borrow money for investment purposes, subject to certain rules and regulations. By adding borrowed funds to your SMSF and leveraging the funds already contained you may be able to really accelerate your returns.

How does a SMSF work?
A SMSF works the same as the General Industry Superannuation Funds that exist

The Government has directed general superannuation contributions into these funds over the last 25 years. As a member of your fund you must make contributions at the minimum amount to confirm with Government Regulations. Your fund then invests and manages those contributions and subsequent earnings similarly to the industry fund. You will be required to be a trustee of the SMSF. You will also be directly involved in the decision making processes of the fund. You, as the fund owner and manager have absolute discretion as to where and in what asset your funds are invested. However, most importantly the SMSF must pass the “sole purpose test” of being set up for the sole purpose of providing retirement benefits and there are some classes of assets that the Government have deemed unacceptable to invest in.

This means you will be responsible for tasks such as administration and accounting of the fund through appropriately skilled and qualified experts, managing tax implications and ensuring an acceptable investment strategy is in place.

You will also be responsible for ensuring legal compliance of your SMSF.

There are also restrictions in the number of members that your SMSF can have. Currently it is a maximum of four members, i.e. you as the fund holder, your partner and your children.

The benefits of a SMSF are that you can…
  • Have control over how and where your money is invested
  • An ability to purchase real (direct) property
  • Reduce your fund management costs (if your investments are more than $200,000)
  • Greater tax saving potential

The limitations of a SMSF are…
  • You are required to prepare, implement and regularly review the SMSFs investment strategies
  • You are responsible for making sure your fund complies with regulations
  • You have to administer the fund (or pay a company to do it)
  • You are subject to penalties for non-compliance (financial penalties to imprisonment)

Borrowings with in your SMSF

Can I borrow to purchase property with my SMSF ?

The Superannuation Industry (Supervision) Act 1993 (“SIS Act”), effective from 24 September 2007, as recently amended permits a SMSF to borrow money of a limited recourse nature for investment purposes in certain circumstances. These amendments provide an exception to the general prohibition of borrowing money by a SMSF under section 67(4A) of the SIS Act. The intent of the amending legislation is to permit a SMSF to invest in a number of different ways. The introduction of instalment warrants by the banking industry allows leveraged funding arrangements to purchase ASX listed shares and now extends the borrowing capabilities of a SMSF to borrow money to acquire any asset which a SMSF is permitted by law to acquire directly.

The following assets are approved under an instalment warrant arrangement:
  • Residential property
  • Commercial property
  • Listed securities
  • Units in Widely Held Trusts
  • Shares in Private Companies
  • Some works of art/Other Collectables (though there is doubt here)

The changes now state that the SMSF borrowings must meet the following conditions and criteria:

  • The funds are used for the acquisition of an asset such as real estate;
  • The asset is held on trust for the SMSF by another entity (i.e. the Property Trustee) so that the SMSF acquires a beneficial interest in the asset;
  • The SMSF has the right (but not the obligation) to acquire legal ownership of the original asset (or a replacement asset) by making one or more payments after acquiring the beneficial interest; and
  • The rights of the lender against the SMSF for default on the borrowing (and charges related to the borrowing) are limited to the rights relating to the original asset (or replacement asset) that is, the borrowing is limited recourse.
The in-house asset rules and prohibitions related to acquisition of certain assets from a related party still apply.

Property and my SMSF?

How ?

There are a number of ways property may be purchased to benefit your SMSF including specific property trust arrangements, joint ventures with a separate Property Discretionary Trusts, funding the purchase with a Bank Warrant Product or using the total funds within a SMSF to purchase the asset outright.

Similar to the normal way of investing in property, your SMSF manager (you) chooses the property to invest in (residential property must be purchased at arm’s length & commercial, industrial, retail or other property may be acquired from related parties so long as the property is let for business purposes).

If borrowed funds are used to leverage the funds in the SMSF, the SMSF should obtain a loan pre-approval. The SMSF pays the deposit, the balance of the purchase money (less the amount borrowed), the legal costs, and stamp duty as in any purchase. The conveyancing is handled as usual by a competent solicitor or conveyancer and the property acquisition proceeds to settlement. At that time the Property Trustee mortgages the property to the lender. The purchase MUST be in the name of the Property Trustee. The SMSF then manages the asset in the same way as you would with any other real estate investment.

One of a number of restrictions is that a member of the SMSF must not occupy the property, as the “in-house asset rule” would be breached. Other clear restrictions are that the SMSFs must comply with all regulations applying to superannuation funds.

Properly constituted SMSFs may acquire up to 100% of the fund’s total assets in the form of real property but must ensure that the level of investment in real property is in line with the fund’s investment strategy, including diversification of assets, liquidity, and maximization of member returns in the fund. The government has also made it clear that super funds investing in these types of investments must have appropriate risk management measures in place and must understand the risks.

Cost liabilities of the SMSF Associated costs of property in the fund.

As the beneficial owner of the property and the borrower of the funds to purchase the asset, the SMSF is responsible to pay all the usual costs incurred in a property investment. There will be council rates, water rates, and land tax (if the total land values exceed the prescribed amount), interest and other loan repayments, the costs of borrowing the money, any maintenance fees, costs of repairs, property management costs, and any insurances, management fees and whatever else may be imposed by the Property Trustee under the SMSF Investment Strategies and Constitution.

At some future date, when the loan is fully repaid, the SMSF is entitled to have the legal title transferred to it. Under current laws, the trust structure set up and administration may enable this transfer to be made without incurring tax, GST, or stamp duty liabilities (other than nominal) as the SMSF will already be the beneficial owner. This legal position may change.

At that time the SMSF can direct the Property Trustee to sell to any third party (subject to paying out the mortgage loan and any other amounts which might be outstanding). It is important that the Property Trustee is an arms length trustee from the SMSF Trustee and the members of the SMSF. This is to ensure that the transaction is not a facade, and the related party and in house asset rules are complied with.

The benefits of a SMSF Property Investment
Here’s a good example of how this might work for you…

Lets say the owner of a SMSF is around 40 years old and is looking to purchase an investment property for $500,000. These days we suggest that the net yield will be around 4%. The fund owner has a residential home, the principal place of residence, worth $900,000 and has a mortgage of $300,000. Other assumptions are; Interest of 7%pa, 5%pa rental growth, 5%pa capital growth, 48.5% individual marginal tax rate, a 15% SMSF tax rate, and the asset is held until age 60.

This SMSF owner wants to fund the investment property through an equity line of credit against his principal residence. The SMSF owner is gainfully employed and earns $150,000 per annum. The SMSF has accumulated $350,000 in superannuation funds, held in cash for these purposes.

This SMSF owner might fund the Investment Property purchase though his SMSF with a compliant loan with himself as the lender to his SMSF. The owner may then establish an equity line of credit (LOC) against principal residence and draw $300,000 to access some of the equity contained in the PPR. They would then personally lend $300,000 to superannuation fund via a “non –recourse” interest bearing loan. The rent payments can be used to repay the LOC interest.

The Next Step

The next step would be to establish a Security Trust to hold the investment property, recognising the beneficial interest of the SMSF in the investment property and the rights of the lender. Once the Security Trust has been established, the SMSF then can acquire the property for $500,000 using the $300,000 loan and $200,000, plus costs, from the accumulated cash balance in the fund.

The owner of a SMSF, who has established the loan to his SMSF, has greater flexibility in managing his superannuation contributions and funds flow and could potentially increase his superannuation contributions via a salary sacrifice arrangement. The increased contributions and/or returns may be then used to repay the SMSF loan. Obvious benefits include the owner of the SMSF to save tax not only on the property investment, but also at a personal income tax position.

The benefits to The owner of the SMSF owning the Investment Property in his SMSF are compelling and will amount to over $500,000 in extra benefits over the 30 year span of the SMSF v Purchasing the Investment as an individual or in a trust. These benefits will come from the very much lower taxation regime inherent in a SMSF structure.

The Australian Taxation Office (ATO) has some useful guides in relation to self-managed super:

  • Thinking about Self-Managed Super? (ATO publication)
  • What you need to know about setting up a SMSF (ATO publication)
  • Role and Responsibilities as a SMSF Trustee (ATO publication)


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