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Sounds like you have enough in super to use a SMSF and a limited recourse loan to purchase a property in your SMSF, however your SMSF will not be able to acquire a residential property that you currently own.
If you are forced to sell your IP there is nothing stopping you purchasing a different property with a SMSF to keep your property portfolio heading in the right direction. With $170k you should be able to find something that will be neutrally or positively geared.
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Previous comments by Richard and Scott are correct.
For more information on this strategy you can download a free ebook here:
http://buypropertywithsuper.net.au/Seems something got lost in translation from your 'source'.
It is a very good strategy for certain people.
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Hi R F I
I have responded to your post over on Invested: http://www.invested.com.au/4/best-way-start-out-trusts-38274/
Terry is on the right track.
You can distribute up to $3,333 to minors under 18 (including your children or even nieces / nephews etc)
If you are in VIC you can probably transfer the property into a trust with only nominal stamp duty (i.e. virtually no stamp duty – just legal fees) – but you need to plan for any capital gains on the transfer.
Hope this helps!
p.s. Congrats on having such a head start – you are in a great position at such a young age. Quietly jealous over here.
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I will not comment whether such an arrangement would be considered a 'scheme' – but a SMSF cannot give financial assistance to a member or a relative of a member – either directly or indirectly.
The ATO has released a Tax Payer Alert on this subject (in regards to financial assistance via an 'unrelated' trust):
http://www.ato.gov.au/superfunds/content.asp?doc=/content/00259571.htmAlso, from experience, when a SMSF lodges an annual return with 'Loans' listed (Return question 14b, Label H) – they are significantly more likely to have an ATO audit / review – which means that the ATO considers these types of 'investments' a high compliance risk.
Evolve
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Hi ASB,
To enable your SMSF to purchase a property from a member, it must be considered 'business real property' – meaning it has to satisfy the business use test which is: "used wholly and exclusively in one or more businesses"
SMSF Ruling 2009/1 deals with the definition of 'business real property' in more detail.
The following example (#13 of 37 examples) would be relevant to your situation:
Example 13: Letting holiday flats – no business
- Ms Hend owns 2 holiday flats, which she lets for short-term accommodation at a popular holiday destination. Ms Hend and her partner manage and maintain the flats, which includes cleaning and repairing the flats, and financial tasks such as banking.
- Ms Hend and her partner set up the Hend SMSF and both become members of the fund. They propose that the Hend SMSF acquire the flats from Ms Hend.
- The elements of repetition and continuity of acts and transactions indicate the possibility of there being a rental property investment business being carried on. However, the scale of the operation is such that it is not considered to be a business. As there is no business conducted in respect of the premises, the property is not business real property . Any sale of the flats to the Hend SMSF would contravene the related party asset acquisition rule in section 66.
Based on the above, your unit in the snowfields would not be considered business real property.
The only other example I could find from Ruling SMSF 2009/1 is the following (#19):
Example 19: Strata titled hotel complex
- Mr Chou owns a studio apartment in a strata titled hotel complex. The contract for purchase includes a requirement that the unit is leased for fifteen years to Xin Pty Ltd, hotel business, with rent paid to Mr Chou based on occupancy of the complex. The contract specifies that the freehold owner has no right to reside in the unit during the time it is leased to Xin Pty Ltd.
- Mr Chou wishes to sell the unit to his SMSF.
- The real property is used wholly and exclusively in Xin Pty Ltd's hotel business and is business real property of Mr Chou for the purposes of acquisition. However, if Mr Chou or a related party of the SMSF intended to stay in the unit at any time, there may be in-house asset implications.
You haven't provided enough information to enable me to be able to determine whether example 19 could apply to your situation.
It really comes down to whether there is a business involved – i.e. if there was one company that rents a large number of units in the same area an then handles all the bookings etc (similar to example 19 above) then it may be considered business real property as it is used wholly and exclusively in that business.
There is no work-around solution if the property cannot be considered business real property to enable you to acquire that particular unit.
There is nothing stopping you selling your unit to a third party and buying another completely different unit (can't be the same unit) in the name of the SMSF from an unrelated party – however you would obviously incur additional selling costs which is not ideal.
The other bigger picture issue is diversification – you haven't mentioned what other investments your SMSF has apart from the other unit it already owns – so maybe two very similar units at the same location are not ideal in terms of the risk aspects? I know the yield seems good – so you will have to balance that against any potential risk.
I hope that the above is helpful and provides some clarification. If you have any other questions please let me know.
Kris
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Maybe look into whether the property (or their respective shares in the property) can be put into a testamentary (a.k.a. bloodline) trust?
Obviously legal advice would be necessary to see whether it is possible, and this would also provide extremely good asset protection, taxation benefits and flexibility.
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Hi guys,
Just a quick update on this issue.
In September the ATO discussed this issue (and numerous other SMSF borrowing issues) with superannuation industry representatives at their NTLG superannuation technical sub-group meeting.
I have posted an article about this issue in more detail on my blog:
Hopefully we will have a resolution on this issue early next year.
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Hey Tyron
Just wondering if Washington Brown finds it difficult to differentiate themselves from other quantity surveyors?
I mean – you all basically produce reports which are going to have the same information and same benefits (deductions) for the property investor – so how do you sell your service?
This is your opportunity to enlighten us and also promote yourself
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Hi Mike,
If you have read anything from Robert Kiyosaki you should have learned the following:
– buy assets
– that produce income
– focus on cash flow
– structure your investments correctly to reduce tax and protect your assetsThe reason 'astute' property investors probably don't pay much tax is because a lot of them are so astute that they have geared themselves so negatively that their biggest expense is tax deductible interest. Add to that tax deductible depreciation and viola – you are paying bugger all tax.
I am not saying negative gearing is the root of all evil – in the short term it is not too bad and in times of strong capital growth it is an appropriate strategy. If possible try to find a way to be cash flow positive or neutral but still have your future investment properties generating a tax loss (thanks to depreciation).
You also should find a good accountant that earns their keep through the tax saving advice they can give which is appropriate for your situation.
Also ensure that your decisions are based on the quality of the investment rather than primarily on the taxation implications of the investment.
I am sure many other people on the forum can provide some general tips and direction – so keep reading and educating yourself and don't rush in to any investments – there are always bargains to be found.
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I have read three or four of Robert Kiyosaki's books and they contain some fantastic ideas.
The books really struck a chord with some of my core beliefs. By reading the books it gave me the kick in the butt to change my life – I even moved to a different country and totally changed the direction of my life.
I am also a little cynical that he has only made money from teaching others to make money, and I am also aware that some of the things he has said at seminars etc are factually incorrect – but he is passionate about financial education and that is to be admired.
I love the focus he puts on cash flow when investing in property – I have seen a lot of people focus on everything but cash flow and it has caused a lot of heartache.
We all need to continually learn and educate ourselves, and Robert Kiyosaki's books are a great starting point for the 'big picture' concepts.
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Good to know you are grateful Grateful!
I have read the Explanatory Memorandum that came out with the 07/07/10 changes and my interpretation is Yes – it can be done provided any improvement / renovations are NOT so significant that a replacement asset is created.
The key issue as I read it is:
Circumstances not permitting a replacement asset include:
– the replacement by way of improvement of real propertySo I guess the big question is – how much improvement to a property will create a 'replacement asset' ?
I have put forward the above interpretation to some other SPAA Specialists and they have agreed with my interpretation.
I know this issue is something that SPAA has questioned the ATO about recently – so hopefully we will see an ATO interpretative decision on this issue in the coming months to give some certainty to SMSF trustees. Until this happens each SMSF trustee must take their own advice and make their own decision.
In the interim a private ruling may be applied for if you want specific advice on your situation.
All the best!
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Hi Daniel,
I have recently started using Depreciator for my clients and I have been impressed by the service and how easy it is to organise.
I have also had good feedback from my clients.
Prices are $500 to $800
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Hi Emmy,
I have recently started using Depreciator for my clients and I have been impressed by the service and how easy it is to organise.
I have also had good feedback from my clients.
Prices are $500 to $800
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Hi Tim
Sorry for the delayed response
You should only need one Pty Ltd security trustee company for multiple properties as it can act as the trustee for multiple custodian / property trusts.
I hope this clarifies.
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That is great news Number 8
Good luck with everything – I hope everything runs smoothly with the bank.
Due to the typically higher yields, commercial properties work really well when purchased by a SMSF using a limited recourse loan. The banks typically will only lend up to 65% on a commercial property when purchased by a super fund, and based on this LVR and a gross yield of 9% to 10% a lot of the time the property will be cash flow positive (or maybe only slightly negative).
Cash flow positive property is perfect within a SMSF as you can quickly build up surplus cash via the excess rent and contributions (including salary sacrifice) – which in turn can be used to purchased more property or diversify into other types of investments.
It is good to see the costs coming down in regards to the set up / structure and advice surrounding a SMSF purchase using borrowings.
One cost that hasn't come down however is the bank legal costs – $2,000 plus is such a blatant rip-off – I mean how long does it take to review a SMSF trust deed and the associated docs such as the contract and the bare trust docs – a couple of hours max?
I encourage anyone involved in assisting people purchasing property using SMSF loans to put pressure on the banks to make them put pressure on their lawyers regarding these costs – if the banks want the business they will need to move. I know it is unlikely that it will make an immediate difference – the banks have too much power – but I am feeling unreasonable, and as George Bernard Shaw said:
"The reasonable man adapts himself to the world: the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man."And I want some progress!
It is always good advice to shop around when looking for a loan provider – and SMSF limited recourse loans are no exception. I have a comparison of current SMSF loan providers here.
I would be interested to hear Number 8's feedback through the process and whether he comes up against any hurdles / issues. Feel free to share mate!
On a related topic, there is a company up in Brisbane which have a total upfront cost of $1500 inc GST to set up and process a SMSF limited recourse loan. The amount includes all bank legal fees, but doesn't include any advice by an accountant / SMSF specialist (including SMSF set up) or the banks loan establishment / application fees.
They use St George and have managed to negotiate a better deal for their clients. They have a couple of noticeable differences to a typical SMSF limited recourse loan (instalment warrant) structure however:
- They have their own special purposes trustee – which holds the title as trustee of your custodian trust for the benefit of your SMSF
- They inter-twine their trustee into the loan / title – meaning if you want to refinance down the track you will basically need to set the whole thing up from scratch – which will be challenging even if possible
- They charge an ongoing % fee on the value of the underlying property
- They handle some of the administration as their trustee company is on the title and also look after any changes if required to ensure the structure stays compliant with any future change to the SIS provisions surrounding limited recourse borrowings
Overall this type of structure has some good points, but it also has some drawbacks – it is up to each individual investor and their advisers to determine whether it is right for them.
I was reading some old posts of mine on another forum – and I was predicting that purchasing property using your SMSF with borrowings would become more commonplace, and that once mortgage brokers, real estate agents and anyone else with a vested interest in property and loans got their heads around how it works we would see it become more mainstream.
I think I can safely say I was right!
Once again if anyone else has any questions about buying property with your super please throw them out there!
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Hi Kalkat,
I think Richard hit the nail on the head.
You time and money would be better spent educating yourself on how you can use your super (via a SMSF) to purchase property. It seems complex initially, however once you get your head around it it is a fantastic strategy.
I have just been reading from the Capital 360 website here:
http://capital360.com.au/superannuation-self-managed-smsf-to-buy-property-with-capital-360/I find it interesting that they utilise a unit trust structure – this is totally different to the limited recourse loans (formerly known as property instalment warrants) mentioned by Richard. The main and probably most important difference is that when the property is owned by a unit trust, and the SMSF invests into that unit trust, the underlying property cannot be used for security for any loans – you would need to use another equity source.
Warning – self promotion alert: About a month ago I posted an article on my blog about the 6 ways to purchase property using your super:
http://www.evolvemysuper.com.au/strategies/6-ways-to-purchase-property-using-your-super/I have been personally involved in assisting a number of clients purchase property with their super using the limited recourse loans which have been around for almost 3 years now (well – the law changed 3 years ago – it took the banks a while to catch up and develop new loan products to take advantage of it).
A couple of key things to realise in regards to purchasing property in your super with a limited recourse loan
– It is not for everybody – it is good for people who want to buy and hold – i.e. not looking for a quick increase in value and then flick it off for a profit
– It does costs more to set up – the main killer is the bank legal fees – but hopefully we will see these coming down soon
– Cash flow is king (isn't it always!). You want any property owned by your SMSF to be able to look after itself cash flow wise. Any contributions going in (such as SGC and salary sacrifice) should be built up to act as the deposit for properties #2 and #3 etc – you don't want to be dependent on contributions to cover interest payments and other costs – it is a false economy
– You can still negative gear – with depreciation & capital works deductions you can have a property in a SMSF which is both cash flow positive but has negative income for tax purposes – the negative gearing benefits are obtained via salary sacrificing pre-tax dollars
– You are unable to re-draw on the equity. You need to sell the property to realise any built up equity.
– You can renovate properties purchased with a limited recourse loan – but you can't borrow to do it. You also can't renovate to such agree that you create a whole new 'replacement asset' – so you can't knock-down and rebuild.I could go on and on about buying property with super – I personally enjoy working through the costs and benefits with people and seeing whether it is for them or not.
Anyway – I am not saying Capital 360 is bad – rather the opposite. I like the fact they seriously look at the most appropriate structure for their clients.
I guess you simply need to do your research and decide what is best for you.
Good luck and please feel free to ask more questions if you have them.
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Hey Tim,
Yes – that is correct – bare trust, property trust, debt trust, custodian trust all names for the same thing when talking about SMSF borrowing / limited recourse loans.
You need another company (with it's own ACN – not ABN) in addition to the trustee company of the SMSF for most lenders.
The following table is a quick reference to what the lenders currently require in regards to trustee companies for SMSFs and custodian trusts with limited recourse loans:
One of the reasons, I believe, that at least one of the trustees must be a company is that legally individuals can't transact with each other when they are acting as trustees – but a company as trustee and individuals as trustees can.
Looking at the above table, it is prudent that you have trustees companies for both your SMSF and your custodian trust.
There are a couple of articles on my blog (see link in signature) about using trustee companies if you want to learn more.
Any other questions let me know.
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Hey again tdorgan,
Another thing I previously didn't mention was that with SMSF limited recourse loan purchases (previously known as instalment warrants) – you can only have one property per trust. This was clarified by the government in their update to the SMSF borrowing rules that came into effect on the 7th of July 2010.
This means one property per custodian trust.
Funny thing is, if you purchase an apartment and the car park comes on a separate title – then you need two custodian trusts – one for the apartment, and another for the car park! Annoying.
My company was approached by a guy who was working as an agent for a NRAS property development business, and he promised he would refer dozens of clients to us so they could get advice on the most appropriate structure to use for their NRAS purchase.
Almost 1 year later we have not heard a peep – I don't think this is to do with the NRAS properties themselves – but it is curious!
Let us know how the purchase turns out.
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lifesjourney wrote:Richard,
I Have the July API didnt see you in it.
Cheers
MattTry the August issue – pages 44 to 48
Worth a read.
You will see a pattern with all the guys featured – I will give you a clue – starts with 'cash' and ends with 'flow'
This is the first time I have actually bought API magazine – it seemed a good read – I just had to ignore the gaping holes in the article about buying (geared) property with your super on pages 78-79. I guess editorial considerations need to be taken into account!
Sorry – off topic!
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Daniel,
In some circumstances – yes – it may be better for people to move out of their PPOR for a period of time and rent due to the additional tax benefits.
However in reality there are a lot more reasons and complications not to do it (finding tenants, being a tenant again yourself, is the property you are renting as good as your PPOR etc). If you don't believe me try explaining it to your wife or partner. I did this and got a very definite "NO" – even after I proved the tax benefit was over $100 per week!
Moving along…..
The majority of situations when people have a boarded are 'private and domestic' in nature – meaning people don't seek to claim tax deductions and will not be liable for CGT on that portion of their PPOR when they sell.
It is also important to note the the 'CGT exemption' only applies when you do not purchase another property and claim that as your primary residence.
Does that answer your question?
Good luck!
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