The top 7 reasons why you should consider buying a property with your SMSF.
1. It’s a physical asset you can see.
You can drive past your investment property and actually see your super working for you. Do you know where your super is right now? - Most people do not.
2. You don’t need the full purchase price of the property in your fund, only enough for a deposit.
Generally, you’ll need at least a 30% deposit plus purchase costs to enable you to buy a property.
3. Pay no tax with a SMSF.
Until you’re 60, you’re taxed at only 15% on income (versus up to 45% in your own name) and only pay 10% capital gains tax. When you’re over 60, you pay NO tax on income and NO capital gains tax.*
4. You have absolute control.
You can decide what your super will be invested in. This means you can have some in property, some in shares – it’s up to you. If you choose property as part of your strategy you can see it, touch it or even drive past it!
5. Your employer helps pay for the property.
By law, employers put 9% of your salary into a super fund. Why not have those contributions go to your SMSF to pay off the property? In most cases, the extra income results in the property within the SMSF returning a cash positive result.
6. You can combine Super balances.
A SMSF allows you to pool the balance of your fund with your spouse, parents, children or other family members. SMSF’s can have up to 4 family members which means that between a few of you, there may be enough for a deposit on a property.
7. It’s not as hard as some would have you think.
Whilst it’s true that SMSFs have compliance rules to follow, your accountant or planner will attend to the majority of compliance for you. So as long as you act in the best interest of the members you should be fine.
How does my SMSF purchase a property?
The SMSF (You) chooses the property it wishes to invest in the ordinary way. Residential property must be purchased from an arm’s length vendor (someone who is not related to you in anyway). Non- residential property can be purchased for full value from related parties so long as the property is let for business purposes.
1. The SMSF obtains a loan approval from a lender. You will need a specialist broker such as Prowealth Money, because the average bank or mobile broker will have little to no knowledge of how to structure the loan in accordance with tax office requirements.
2. The SMSF’s own (your own) lawyer/conveyancer acts on the purchase in the ordinary way.
3. The SMSF pays the deposit, the legal costs, and stamp duty in the ordinary way from the combined member funds.
4. On completion of the purchase, the Security Trustee (You) mortgages the property to the lender.
5. The SMSF then manages the asset in the same way as you would with any other real estate investment.
SMSF Investment Property FAQ's
Can I occupy the property?
No. If a member of the SMSF occupies the property the “in-house asset rule” would be breached. This rule dictates that a member cannot receive any benefit from the SMSF assets until they reach retirement, so living in it would clearly violate this rule. The SMSF can buy a property that a member intends to live in after retirement if you transfer the property from your SMSF to yourself after you retire.
I thought super funds could not borrow or use their assets as security for loans. Is this correct?
That was correct, until amendments to the Superannuation Industry Supervision Act 1993 (SIS Act) made in September 2007. Under the new section 67 of the SIS Act, SMSFs can borrow providing the following conditions are satisfied -
• The borrowed funds are used to purchase an asset (e.g. real estate). For example you could not use your super to pay off your car loan or go on a holiday.
•The asset is held on trust for the SMSF by another entity. In our example, it is the ‘Security Trust’. This is a legal requirement, which separates ownership and control of the asset.
•The SMSF must have the right to acquire legal ownership of the asset by making payment. In other words, your SMSF can’t make payments for a assets that it can never actually own. By making loan repayments, the property will eventually be owned by the SMSF when the loan is paid off.
•The lender’s recourse against the SMSF must be limited to the underlying asset (i.e. the purchased property). The lender must not have a right of recourse against other assets of the fund. This is an important feature, as, if you were to default on a property purchased in your own name, the bank could come after any other properties you owned, your home, cash in bank accounts, your car - the list in endless. If you borrow money with your SMSF, and you default on your payments, the bank can only sell the asset for which it lent money for. This means the bank cannot take cash, shares or other investment assets from your super fund. The bank must write off the loss and that’s why there were very few banks willing to lend to SMSF’s in the early days of the legislation. Many banks do however ask you to personally guarantee super fund borrowings against your personal assets.
What other restrictions apply?
SMSFs must comply with all regulations applying to superannuation funds.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 maximisation of member returns in the fund. Where a fund invests 100% of its assets in real property, trustees (you) must ensure that the fund continues to meet these requirements. For instance you must ensure the fund has sufficient liquidity to meet its liabilities (such as pension payments). 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 of investment.
Who pays what and when?
The SMSF is responsible for paying all the usual amounts that you would expect to if you had bought an investment property in your own name rather than your super fund. Your SMSF will be required to pay Council rates, water rates, land tax (if any), interest and other loan repayments, lender’s fees, repairs, property management costs, and any insurance premiums.
What about land tax?
As the SMSF is the beneficial owner of the property, land tax is payable if the total land values exceed the proscribed amount in each state. Check with the Office of State Revenue in your state.
How can I transfer the property?
The SMSF (You) can direct the Security Trustee (You) to sell the property to any third party (subject to paying out the mortgage loan and any other amounts which might be outstanding).
How do I get a loan for my SMSF?
You will need to speak to Prowealth Money and ask for a SMSF loan available from a limited number of banks. You should also be aware of other lending methods known as ‘Installment Warrants’, often organised by accountants and financial advisors. Most traditional ‘Warrant’ type structures have high establishment costs and high ongoing costs as the warrant provider pays a commission to your financial advisor every year. This is something you must avoid, as it will erode your Super for little benefit.
Essentially, new SMSF loans falls within existing credit policies and procedures for most banks. An important feature of these loans is that individuals (the SMSF members) are allowed to find their own properties. This is an important point as it differentiates bank SMSF loans from many other advisor products that are sometimes linked with developers to sell residual stock (which may be overvalued) using traditional installment warrants. Thus the decision to invest is entirely that of the SMSF. Like all bank loans, all properties are required to be independently valued by 3rd party valuers ensuring you are paying fair market value.
What next?
To find out if a SMSF is right for you, download the forms below and contact us on 1800 13 22 64 to make an appointment with an advisor.
*Please note, you should seek advice from Prowealth Financial Planning and Prowealth Accoutning before making a decison about your super and certain elibibility requirment need to be met.