PROPERTY INVESTMENT THROUGH SELF MANAGED SUPER FUNDSBeginners Guide

Property in an SMSF: The BasicsAn SMSF is a superannuation fund set up for the benefit of 1-4 members who are also the trustees of the fund. To be recognised and regulated by the ATO an SMSF must comply with the SIS Act (1993) and other rules and regulations governing SMSF’s.

Prior to 2007 SMSF’s were not able to borrow funds. This meant that property investment was generally not an option for the majority of super funds. Changes made to the SIS Act have now made it possible for SMSF’s to borrow funds (under strict conditions and regulations) meaning that it is now possible for many more investors to pool their funds together to invest into direct property. The many investors this has opened up some exciting and tax efficient ways to boost their superfunds and take control of their investments!

Who is this guide for?

This guide is for anyone or group (of up to 4 investors) with a combined superannuation balance of over $150,000 and who would like a better understanding of how their superannuation funds can be used to invest into property.

What is covered in this guide?

1. Who can buy property in Super?

2. How much super do I need to get started?

3. How does an SMSF borrow money?

4. How is an SMSF structured?

5. What are the tax benefits?

6. What type of property can I invest in?

7. How does this compare to my current fund?

8. The Value of Financial Advice

9. What makes Coronis Financial Planning Different?

Who can buy property in Super?The first think you will need to do to buy a property with your super is to establish an SMSF.

All members of the fund must be individual trustees or directors of the corporate trustee, so make sure they’re eligible.

Anyone 18 years or over can be a trustee of a super fund as long as they are not under a legal disability (such as mental incapacity) or a disqualified person.

A person is disqualified if they:

• Have been convicted of an offence involving dishonesty

• Have been subject to a civil penalty order under the super laws

• Are insolvent under administration (including being an undischarged bankrupt)

• Have been disqualified by a court or regulator (for example, by us or APRA).

A company can’t be a trustee if:

• A director or other responsible officer of the company (such as a secretary or executive officer) is a disqualified person

• A receiver, official manager or provisional liquidator has been appointed to the company

• Action has started to wind up the company.

Members under 18 can’t be trustees but a parent, guardian or legal personal representative can be a trustee on their behalf.

How much Super do I need to get started?With recent changes to many banks lending policies, all members will need a combined super balance of between $150,000 and $200,000 to get started, or approximately 40% of the intended property purchase price.

Or

$150,000 Balance

Single members with a balance > $150,000

$45,000 Balance

$25,000 Balance

$50,000 Balance

$30,000 Balance

2 - 4 members with a balance > $150,000

This will depend on a few things such as the value of the property, your income and the banks’ lending criteria.

There is a limited number of banks and lending societies that lend to SMSFs and they all have differing criteria, which is why it’s a good idea to seek advice from an experienced SMSF mortgage broker.

How does an SMSF borrow money?Borrowing in an SMSF to purchase an investment requires a strict set of rules to be followed. These rules dictate that any borrowing within an SMSF must be on a limited recourse basis.

What is limited recourse borrowing?

A Limited Recourse Borrowing Arrangement (LRBA) requires an SMSF trustee to take out a loan from a third party lender. The trustee then uses those funds to purchase a single asset (or collection of identical assets that have the same

market value) to be held in a separate trust.

If the loan defaults, the lender’s rights are limited to the asset held in the separate trust. This means there is no recourse to the other assets held in the SMSF.

Even though your investment is contained in a specific holding trust, the SMSF will have beneficial ownership or the asset while the separate trust has legal ownership. This means that the SMSF itself will receive the benefit of any income and capital growth. Legal ownership of the asset can be transferred through to the SMSF once the LRBA has been repaid.

The fact that this type of arrangement has to be in place has two very important implications.

a) It significantly increases the amount of paperwork required to set up a loan

b) It means that banks or other lenders will be much more stringent in following due diligence procedures in order to minimize their exposure to excessive risk.

These two factors combine to ensure that typical SMSF loan products are substantially different and significantly more difficult to set up compared to standard arrangements. Being prepared for this fact by carefully studying lender requirements and ensuring that all necessary documents are provided at the correct stages will significantly smooth the process of obtaining funding. It will also ensure that all loans comply with superannuation legislation.

SMSF Members Security Trustee (legal owners)

SMSF Trustee

Tenant Property

Lender

SMSF

What are the tax benefits?There are significant tax concessions for any assets held within super, and this includes property:

Rental income is taxed at a maximum rate of 15% within your SMSF and not at your personal tax rate.

This 15% can be reduced even further by claiming all property expenses and depreciation, against the income.

Your Life, TPD and Income Protection insurance policies can be paid for by the SMSF and these are a tax deductable expense to the fund.

In some circumstances the costs incurred in managing the property (interest, depreciation, rates etc.) can potentially reduce the income tax payable by the fund to zero.

If an SMSF has a tax loss in one year it can carry this loss forward to the next year to reduce the tax payable in that year.

The capital gains tax rate on the sale of assets in accumulation phase is a maximum of 10% (as long as the asset has been held for 12 months).

There is no income tax to pay on rent or other investment income once the fund is in pension mode.

There is no capital gains tax to pay if the property is sold once your fund is in pension mode.

BY INVESTING IN PROPERTY THROUGH YOUR SUPER YOU CAN POTENTIALLY SAVE HUNDREDS OF THOUSANDS OF DOLLARS IN TAX OVER THE LONG TERM.

What type of property can I invest in?There are a number of rules that you must comply with when buying a property with an SMSF.

For example:

You can’t buy the property from a related party (including yourself.

You can’t transfer a property you already own into your SMSF unless it’s a commercial property.

You can’t rent the property to a related entity or anyone you know.

The SMSF cannot accept loans that are not made on commercial terms.

The asset mush be deemed a single acquirable asset.

You cannot buy land and build on it.

3 Common Mistakes that lead to Non-Compliance:

1. Buying the property in the name of an individual rather than the fund

2. Purchasing a property with more than one title.

3. Transferring legal ownership of properties before all proper arrangements are in place.

How does this compare to my current fund?There are many types of superannuation funds and each type is a bit different. Knowing the different types of fund will make it easier for you to choose the right one for you. Some examples of the different types of funds are:

• Retail funds: Usually run by banks or investment companies such as AMP, Westpac and BT.

• Industry funds: Usually for employees in a particular industry ie healthcare and building.

• Public Service funds: Created for employees of Federal and State government departments.

• Self managed superannuation funds (SMSF): Run by the trustees and members of the fund

There are some important differences between these types of funds, particularly when comparing SMSFs and other traditional funds.

The table below highlights some of the different and important features:

Feature Self-managed Superannuation Fund Traditional Superannuation Fund

Regulation Members are all trustees or directors of a corporate trustee. Each trustee is responsible for ensuring required administrative tasks are undertaken.

By APRA.

Administration Self-managed Superannuation Funds. The appointed fund trustee acts on behalf of all members. Members have no involvement in the management or maintenance of the fund.

Investment choice

Wide investment choice, including direct property and some other assets not available to other super fund types.

Limited investment choice.

Costs SMSFs with small account balance are less cost-effective than SMSFs with larger account balances (say $200,000 or more). SMSFs with larger balances are more likely to be competitive with other types of funds.

There may be higher costs for members with large account balances in this type of fund when compared to an SMSF.

Winding up the fund

Fund may need to wind up (early) if members leave the fund. Trustees are responsible for arranging finalisation of financial statements, tax returns and other tax and compliance obligations; and may need to sell fund assets to pay or rollover benefits for departing members.

Members instruct the fund to pay benefits as a pension or as a lump sum.

On winding up, the fund does all administration and deducts costs from member benefits.

Compensation / avenues of recourse

In most cases the SMSF trustees initiate any action required. This action can be taken through:• A claim on a practitioner’s professional indemnity insurance• The Courts• The Financial Ombudsman Service (FOS)

Action can be taken through:• Superannuation Complaints

Tribunal• The Courts• The Financial Ombudsman

Service (FOS)

Trustee Maybe be two or more individual trustees or may be a company of trustees

Must be an APRA approved company trustee

The Value of Financial AdviceProfessional financial advice is one of the most valuable services you can engage in. It is a must for anyone serious about improving their chances of achieving financial independence.

Financial Independence is a point in life when you are no longer dependent on work, government or family for your income. It is a point where you are generally debt free and have sufficient investments and income to look after yourself.

A Financial Adviser is a professional who brings together a wide array of skills, experience and disciplines to develop and execute a financial strategy to help clients achieve their goals and objectives on their journey towards financial independence.

A Financial Plan is a written document that outlines a steady path towards your financial independence.

Please contact Coronis Financial Planning to organise an initial obligation-free meeting to see how you can take a positive step forward by creating a personalised Financial Road Map that will guide you in your wealth creation journey.

To accomplish this we will work through a five-step process:

1. Identify your values

2. Set your goals

3. Perform an Investment Health Check

4. Create a Financial Road Map

5 .Implement your plan

CORONIS FINANCIAL PLANNING PTY LTD (ABN 47 169 711 193) as a corporate authorised representative of Financial Masterplan PTY LTD (AFSL 344628).

What makes Coronis Financial Planning Different?Coronis Financial Planning is not owned by a bank or large institution that dictate products and strategies for our clients, allowing us to offer services that best suit your requirements and circumstances.

Our advisers are educated and experienced in Financial Planning, specialising in advanced investment strategies for wealth accumulators. We provide a balanced approach to investing between property and shares; plus considerable expertise in Self-Managed Superannuation Funds and wealth creation.

Contact

Ian McDonaldfrom

CORONIS FINANCIAL PLANNING

on 07 3105 5777 or send an email to financialplanning@coronis.com.au today about designing or reviewing a retirement plan to meet your requirements.

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General Advice Disclaimer: The information provided on this information sheet is general in nature only and does not constitute personal financial advice. The information has been prepared without taking into account your personal objectives, financial situation or needs. Before acting on any information contained in this information sheet you should consider the appropriateness of the information having regard to your objectives, financial situation and needs.

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