All Topics / Help Needed! / What to do with $135k of super

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  • Profile photo of mathyland12mathyland12
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    @mathyland12
    Join Date: 2011
    Post Count: 14

    Hello

    I currently have $135k in super with a standard fund.  I would like some advice on using this to purchase a property via a SMSF.  But i here that its not worth it unless i have at least $150k in super?  Is this true?  Can someone please explain this?

    Mat

    Profile photo of TerrywTerryw
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    @terryw
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    Post Count: 16,190

    Consider forming a SMSF with another family member?

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
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    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of RedwoodRedwood
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    @redwood
    Join Date: 2013
    Post Count: 340

    Hi Mathyland,

    Assume the standard fund is a retail, industry or employer sponsored fund.

    With $135k of super you are in a great position. Depending if you combine you super with your partner (if applicable) you can increase this balance.

    What I suggest is considering setting up an SMSF, preferrably with a Corporate Trustee, rather than individual trustee, as this will be beneficial when you choose to take a loan in the near future.

    If you are alone, you will be the sole director of the Corporate Trustee. You can then roll the money over from the industry fund. From the day the SMSF is set up, this will take around a month.

    In the meantime, you can do your research on the right property to buy. Depending on residential or commercial you are still in a fantastic position. You can borrow at 80% LVR for residential and 70% commercial from the banks and when calculating the amount to borrow and invest ensure you have enough to cover the deposit and acquisition costs of the property (including bare trust set up).

    This is usually exciting for members of an SMSF and can be quite dangerous if you don't get the right advice. 

    In summary, there is no minimum balance (its a myth), its up to you, just be aware of the costs involved in setting up an SMSF and also expected purchase price in consderation of the super balance you have,

    Redwood | REDWOOD | SMSF | PROPERTY | FINANCE
    http://redwoodadvisory.com.au
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    SMSF - PROPERTY INVESTMENT - WEALTH CREATION AND FINANCE SOLUTIONS

    Profile photo of Jacqui MiddletonJacqui Middleton
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    @jacm
    Join Date: 2009
    Post Count: 2,539

    Hi Mat,

    As has been mentioned, there is no minimum amount required in super before you can set up your own SMSF.  However if your SMSF aspires to acquire property, there isn't a great deal of sense in setting up the SMSF until the balance is $70k+, because it would otherwise be a little while before it could afford to buy the first property.

    When a SMSF buys property, it must pitch in 20% deposit, the stamp duty, the solicitor fee, building and pest fee, bank fees (which can be up to approx $3500 since their lawyers have to read your super fund deeds).  The remaining 80% of the property price can be borrowed from a lender that offers SMSF loans.  So this is why you'd need at least $70k in super to setup and acquire a property.

    The balance you have in super ($135k) is certainly sufficient funds to set up a SMSF, acquire its first property, and have a decent pile of money left over towards saving for its second property. Meanwhile your tenants would be merrily paying off the mortgage for you with their rent payments, so that in theory, the property would be paid off by the time you reach retirement age. 

    As a rough guide, if you consider the case study of a property that earns $350 per week in rent, by the time you pay its bills (property management, council rates, water rates, insurance), you'd have approx $260 per week leftover.  This figure of course varies depending on the location of the property and the pricetag on the bills.  So this leftover amount of $260 per week is $13,520 per year in income, if the property were fully-paid-off today.  In the future, as rental hikes are applied and bills go up, this figure will look different, but it is reasonable to assume the figure will buy the same amount of groceries as $13,520 can buy in today's terms.

    If you have an understanding of how much income you would require per year "if you were retired today" this helps you to see "how many houses you would require if you planned to have your entire superannuation income stream coming from rental properties".  For example, if you determined you needed $35k per year, approx 3 houses would do it.  Does that help?

    (Needless to say, you need to ponder for yourself, and perhaps talk with a financial advisor about an appropriate asset split… eg if you should have some of your income in property, some in cash, some in shares etc.)

    Purchasing property in super is certainly a very powerful thing, due to the power of leverage (the ability to borrow to acquire the asset, and then let the rent pay the asset off).

    Jacqui Middleton | Middleton Buyers Advocates
    http://www.middletonbuyersadvocates.com.au
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    VIC Buyers' Agents for investors, home buyers & SMSFs.

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
    Post Count: 12,018

    Totally agree with what Jacqui has said and in fact be surprised how many forum members we have helped acquire property inside their SMSF with only 70K when it comes to the Roll over.

    Course on of the misunderstandings is that you can only borrow from a Bank lender which us total not the case and that you can only have a single mortgage which is again inaccurate.

    As a Financial Planner we design many variations on a theme for SMSF clients.

    130k is certain a good start and am working with 2/3 forum members at the moment with similar amounts.

    Certainly not too little to start with.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
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    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of mathyland12mathyland12
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    @mathyland12
    Join Date: 2011
    Post Count: 14

    Thanks to all who have responded

    After speaking to some friends over the weekend, they said they were scared off buying real estate with SMSF due to the fees involved and then the time taken to manage the fund. 

    Is there any advice to this?  How much does it cost to set up a SMSF so that it can buy real estate? 

    Mat

    Profile photo of TerrywTerryw
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    @terryw
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    mathyland12 wrote:
    Thanks to all who have responded

    After speaking to some friends over the weekend, they said they were scared off buying real estate with SMSF due to the fees involved and then the time taken to manage the fund. 

    Is there any advice to this?  How much does it cost to set up a SMSF so that it can buy real estate? 

    Mat

    Yep it is rather costly.

    I, as a lawyer, charge $4k to $5k to set up the SMSF and custodian. You need 2 trust deeds and 2 companies.
    You may also need financial advice

    The lenders will also charge you a fair bit, a large app fee and/or fees to review the deeds

    You will have ongoing fees such as tax returns and auditing and ASIC fees

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of RedwoodRedwood
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    @redwood
    Join Date: 2013
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    As Terry Said you need two structures.

    Recommend the SMSF with a corporate trustee ($900) – this is one structure where the members will be directors of the company or trustee.

    Second is commonly referred to a limited recourse borrowing agreement or 'bare trust'. Set up cost of $1750.

    This is for the SMSF only – ongoing annual fees around $1000 including audit.

    In relation to the loans, many of the banks are waiving their application fee (I can name three of them), and for residential you will incur legal fees to review the deal charged by the bank in between ($600 and $2000).

    Its a long term decision as you know SMSF is for retirement purposes and an advantageous tax rate is received,

    My advice – get advice, don't be scared off, its all about being educated in relation to the SMSF and the opportunity.

    Redwood | REDWOOD | SMSF | PROPERTY | FINANCE
    http://redwoodadvisory.com.au
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    SMSF - PROPERTY INVESTMENT - WEALTH CREATION AND FINANCE SOLUTIONS

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
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    Wow Redwood $1750 is that what you guys charge for a LCBA.

    And there was me thinking our $950 + GST we quoted a forum client last week was a but steep from our Lawyers.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of RedwoodRedwood
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    @redwood
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    G'day QLDs007, 

    Our fees are clearly stated on our website firstly this includes custodian trustee (including ASIC fees) plus custody deed.

    Let me clarify $1750 is for bare trust or Limited Recourse Borrowing Agreement (LRBA) set up NOT SMSF set up.

    Are you saying $1750 is steep? please prove me wrong here.

    As you know ASIC fees are just under $500. Excuse me if we are on different pages, however, I will stand by our fees 100% as has been mentioned in the thread, many others charge much higher for these services (up to $5k) and many of our clients are extremely attracted by our fees and more importantly our experience in the area.

    Please clarify what your quote of $950 involved as if it was for custody deed plus custodian trustee it just would not be sensible in my opinion in consideration of ASIC fees for setting up a company plus labour.

    Redwood | REDWOOD | SMSF | PROPERTY | FINANCE
    http://redwoodadvisory.com.au
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    SMSF - PROPERTY INVESTMENT - WEALTH CREATION AND FINANCE SOLUTIONS

    Profile photo of TerrywTerryw
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    @terryw
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    Redwood wrote:
    G'day QLDs007, 

    Our fees are clearly stated on our website firstly this includes custodian trustee (including ASIC fees) plus custody deed.

    Let me clarify $1750 is for bare trust or Limited Recourse Borrowing Agreement (LRBA) set up NOT SMSF set up.

    Are you saying $1750 is steep? please prove me wrong here.

    As you know ASIC fees are just under $500. Excuse me if we are on different pages, however, I will stand by our fees 100% as has been mentioned in the thread, many others charge much higher for these services (up to $5k) and many of our clients are extremely attracted by our fees and more importantly our experience in the area.

    Please clarify what your quote of $950 involved as if it was for custody deed plus custodian trustee it just would not be sensible in my opinion in consideration of ASIC fees for setting up a company plus labour.

    I charge about $1000 for a company set up plus $1000 for the custodian deed plus GST, so $2200 all up. So your fees are reasonable.

    But I am a lawyer and a mortgage broker and I often thrown in a free Custodian deed here and there if the client gets the loan through my broking company – they are not as complex as the SMSF deed.

    Also include legal advice in the above as well. There are complex legal issues with trusts.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
    Post Count: 12,018

    Yes ASIC fees are $444 with no GST charged so a little less than $500.

    In my opinion $1750 is expensive but i guess it all boils down to what your profit margins are and what you need to charge your clients.

    We feel that $950 + GST is perfectly adequate compensation.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of RedwoodRedwood
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    @redwood
    Join Date: 2013
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    G'day Richard, thanks for clarifying my question re fees. By clarifying, not meaning to be rude at all. Moving on, please send me you lawyers details, as with those fees we would be interested in working with them.

    Cheers, Redwood

    Redwood | REDWOOD | SMSF | PROPERTY | FINANCE
    http://redwoodadvisory.com.au
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    SMSF - PROPERTY INVESTMENT - WEALTH CREATION AND FINANCE SOLUTIONS

    Profile photo of Richard TaylorRichard Taylor
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    @qlds007
    Join Date: 2003
    Post Count: 12,018

    Sure let me check with him first he is ok in me handing them out and then more than happy to do so.

    We keep him more than busy at the moment.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
    http://www.mortgagecapitalaustralia.com.au
    Email Me | Phone Me

    0-40 Properties in a decade with a unencumbered portfolio value in excess of $40M. Ask me for a copy of my API Interview.

    Profile photo of TerrywTerryw
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    @terryw
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    Post Count: 16,190

    I am not sure how non lawyers can set up companies and trusts. Even if a lawyer is preparing the documentation a non lawyer can not give legal advice so what happens if a client asks who should be trustee or who should be director? What does this clause mean? etc

    Also neither accountants of financial planners will be covered by their PI insurers for legal advice. For the amount of profit you are turning over is it worth the risk?

    Just a few weeks ago I set up a custodian company for a SMSF who entered into a contract to purchase a property in the name of the SMSFs when it was intended to borrow because of unqualified advice. It was a close call but we saved the client only to have them copy St George’s custodian sample deed word for word! Signed up they even left ‘insert name here’ all over the deed where they were supposed to actually inser the names! My retainer didn’t extend to the custodian deed – but I had to warn them anyway.

    In summary, only lawyers can prepare deeds and only lawyers can set up companies and trusts, including SMSFs and bare trusts. This is the case even if an accountant or a fina planner uses deeds prepared by a lawyer because it involves legal advice. What you need to do is to let the lawyer set up the trust completely and then you can give financial advice – if you hold an AFLS or are an authorised rep.

    It would be interesting to hear what AFSL dealer groups think about this.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

    Profile photo of mathyland12mathyland12
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    @mathyland12
    Join Date: 2011
    Post Count: 14

    Wow……

    I'm now comfortable that my original question has been answered and i'm confident that my $135k is more than enough to set up a SMSF to purchase property.  I've now made a decision to do this.  And im also reasonably comfortable with the fees i'm up for.  

    However im only partially comfortable about "Who" to go and see first to set this up?  A lawyer? An Accountant? or Financial Advisor? If the answer is the Accountant, should i use my current accountant? I already have a family trust that has purchased one property and my current accountant knows my situation well. (sorry as im not sure if this is a silly question).  Similar should i be using the same finance broker? or should i split up my lending?

    Sorry for so many questions.

    Additionally are there any groups or regular seminars in Perth that i can attend to learn more about all this stuff?  Im an educator by trade and craving to learn more in order to set my family up for the future. 

    Mat

    Profile photo of Jimmy86Jimmy86
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    @jimmy86
    Join Date: 2013
    Post Count: 46

    Hey mat,

    Just make sure you scope out the FULL amount of fees before you proceed with your property purchase, and make sure you get all these fees in writing before you proceed either way.

    Also (and possibly risking hatred of myself to other forum members, considering it being a 'property investing forum') …consider diversifying your investment plan with your SMSF.

    As there is a lot of industry buz happening about people with lower balances entering the SMSF sphere and purchasing a single asset class with their whole balance.

    ie buying 1 x property. – puts you at more risk than possibly in your retail or industry fund.

    see: http://www.smh.com.au/money/super-and-funds/smsf-alert-on-property-20121204-2as1l.html   

    Also, with your fees, you would need to take into consideration considerable increased 'insurance fees' to cover yourself, your family and investments'.

    In saying this though, I don't want to scare you off. Property investment and borrowing to invest in property is the fastest growing sector within SMSFs. And the majority of Australian's are most comfortable investing in property because they are familiar with it, and have done very well with it, and the Australian market is relatively stable.

    We would advise you to consider either pooling with a family member or salary sacrificing to boost your balance and consider some cash/equity diversification to buffer yourself and satisfy the 'sole purpose test' that ASIC are warning about.

    I'd consider getting a statement of advice drawn up to consider your age, income, contributions, retirement goals and then assess if property is going to suit you.

    Best of luck!

    Jimmy86 | Future Assist SMSF Specialists - Bris | Melb | Syd
    http://www.futureassist.com.au/setupansmsf
    Phone Me

    Self-managed super specialist administrators and advisers

    Profile photo of certifiedfinancialplannercertifiedfinancialplanner
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    @certifiedfinancialplanner
    Join Date: 2011
    Post Count: 3

    There is no such thing as a standard fund.  The question is not how much you have in super but what you plan to have in the future, and what the costs of managing this are.  Generally people try to have $150,000 or more because some accountants charge $5000 or more per year.   Clearly if the ongoing management would cost $1000 then the starting capital could be less also.

    Real estate is generally a fantastic asset as it performs differently to shares or other asset classes.

    In the past buying direct residential property inside of super has been out of reach for most Australians due mainly to the costs associated and the high entry level to buy just an average Australian property. To buy just one residential investment property in most states in Australia you are going to be up for costs of well over $400,000. Therefore, in the past you have had to have at least $400,000 inside of your super fund to buy just one property, let alone all of the transactions associated costs such as stamp duty.

    Thankfully these rules have now been changed.

    In 2007 the Superannuation rules were changed to allow you to borrow money inside of a SMSF to purchase both residential and commercial property.

    Now that you can borrow money through a Self Managed Superannuation Fund (SMSF) to buy residential investment properties, it puts SMSF's in a league of their own.

    For residential investment property banks are willing to lend up to 80% of the value of the property. For commercial property the banks are willing to lend up to 70%.

    So, if you are looking to buy a $400,000 residential investment property using your SMSF, the bank will lend your SMSF up to $320,000 to help fund the purchase. All that you require in your SMSF is the $80,000 difference plus the funds required to cover any transaction costs and ongoing fees.

    Most banks will have special arrangements in place for SMSF trustees wanting to borrow to buy an investment property. The process to gain approval for a SMSF investment property loan is very different to obtaining a property loan in your own name as any borrowing arrangements inside of super will need to comply with the SIS Act.

    To meet these borrowing rules, unlike buying a property in your individual name, a SMSF can only borrow to invest in direct property through a special structure called a Bare Trust (also known as a Property Trust or Custodian Trust). Although the legal title will rest with the Bare Trust, the SMSF maintains the beneficial ownership of the property, meaning the SMSF will receive all of the rental income and capital gains made by the investment property. The purpose of this arrangement is so that the lender can take charge of the property if the SMSF fails to meet the interest obligations and pay off the loan.

    Keep in mind though, leverage when borrowing to buy a direct property inside of super is considered a double edged sword. While gains are potentially magnified so too are losses. For certain types of properties, in many areas it is common to see short term declines of 20% in price. If you are forced to sell a property in a depressed market and you borrowed 80% to fund the purchase of the property using your SMSF, a 20% fall means that you have lost your entire investment (100% of your super funds contribution). So you can lose everything. It is for this reason all investors should ensure they are safe guard themselves from being forced to sell at anytime and should consider Life, Trauma, and TPD insurance to ensure adequate personal insurance cover to prevent being forced to sell a property.

    There are many additional rules and restriction when buying property with superannuation. It is critical you understand these restrictions and seek professional assistance. The cost of making a mistake attempting to go it alone can be very high.

    Profile photo of Jimmy86Jimmy86
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    @jimmy86
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    Post Count: 46
    mathyland12 wrote:

    However im only partially comfortable about "Who" to go and see first to set this up?  A lawyer? An Accountant? or Financial Advisor? If the answer is the Accountant, should i use my current accountant? I already have a family trust that has purchased one property and my current accountant knows my situation well. (sorry as im not sure if this is a silly question).  Similar should i be using the same finance broker? or should i split up my lending?

    Sorry for so many questions. 

    Mat,

    ATO recommends seeing a financial planner first, as step 1 > http://www.ato.gov.au/Super/Self-managed-super-funds/Setting-up-an-SMSF/Step-1–Appoint-an-SMSF-professional-to-help-you-set-up-and-run-your-fund/

    Your accountant can only give limited advice on property in SMSF, as it is regulated by ASIC and ATO. – they can help you set it up though.

    Your Broker, real estate agent cannot give you advice on SMSF set up or property investment. – they can assist you in property sourcing and the right finance product to suit.

    See a financial planning firm that has SMSF advice experience. Set it up right. Get an understanding of compliance. Then source your investment :)

    Jimmy86 | Future Assist SMSF Specialists - Bris | Melb | Syd
    http://www.futureassist.com.au/setupansmsf
    Phone Me

    Self-managed super specialist administrators and advisers

    Profile photo of TerrywTerryw
    Participant
    @terryw
    Join Date: 2001
    Post Count: 16,190
    mathyland12 wrote:
    However im only partially comfortable about "Who" to go and see first to set this up?  A lawyer? An Accountant? or Financial Advisor? If the answer is the Accountant, should i use my current accountant? I already have a family trust that has purchased one property and my current accountant knows my situation well. (sorry as im not sure if this is a silly question).  Similar should i be using the same finance broker? or should i split up my lending?

    Sorry for so many questions.

    /quote]

    You will need financial advice, so I would say a financial planner should be the first person to contact. Decide whether you really should set up the SMSF and what it will invest in etc.

    Then you will need legal advice on the terms of the trust deed, how to structure the trustee company, who should be director, shareholder, terms of the constitution. Also consider control of the company upon your death or incapcity etc. You will also need legal advice on who should enter any contracts and under what conditions.

    Then you may need tax advvice, but the fin planner may be able tp provide the basics.

    At the same time, or just after set up, contact a mortgage broker to get the pre-approval in place.

    Then one you have found a property contact the lawyer before signing, get the contract reviewed, get finance fully approved and then exchange contracts.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    http://structuring.com.au/
    Email Me

    Lawyer, Mortgage Broker and Tax Advisor (Aust wide) http://propertytaxbook.com.au/

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