HOW TO BUY PROPERTY IN YOUR SUPER The step by step guide on how to structure your property purchase inside super
PURCHASING PROPERTY IN SUPER DISCLAIMER The purpose of this e-book is to provide information and insights. It is generic information and not personal advice. This e-book is to be taken as a guide and not financial advice. Before you act on any strategies you should consult a licensed Financial Advisor and read the appropriate Product Disclosure Statement. All care has been taken to ensure the information provided is correct at the time of publication, however legislation is constantly changing so an older version of this e-book may be out of date and incorrect. Ark Total Wealth Pty Ltd takes no responsibility for any actions you take independently. Ark Total Wealth operates under the Australian Financial Services Licence (AFSL) 239445 from Level 7, 14 Martin Place, Sydney, NSW.
PURCHASING PROPERTY IN SUPER OVERVIEW One of the most popular and effective wealth creation strategies at the moment is to set up a Self Managed Superannuation Fund (SMSF) and then purchase Direct Property using a combination of your super funds and borrowed monies. On the surface it sounds simple, however you are combining three complex areas in Property, Superannuation and Debt into one transaction. Over the years we have seen many transactions put together incorrectly, so in this e-book we will focus on the best practise process of purchasing property in super as opposed to the benefits and risks of such as transaction. We will cover off the following; - How to setup your SMSF so it can be eligible to purchase property? - The structure required to Purchase the Property? BENEFITS - The process of the property transaction - Other elements you need to address whilst completing the transaction - The loan structure Please note that this process is a general guide as each lender will have a different process.
PURCHASING PROPERTY IN SUPER OVERVIEW Before we delve into the detail, the table below shows the steps involved in purchasing a property through super; 1. Setup Self Managed Superannuation Fund (SMSF) 2. Ensure Super documents are correctly drafted and signed (Trust Deed and Investment Strategy) 3. Get Pre-Approval for Loan 4. Find Investment Property 5. Setup Bare Trust Structure and relevant legal documents 6. Get Unconditional Approval for Loan BENEFITS 7. Exchange on Property 8. Settle on Property (including Stamping the Bare Trust) 9. Setup cashflows and bank accounts 10. Ensure all Insurance needs are addressed (could also be before step 1)
PURCHASING PROPERTY IN SUPER Before you even start The SMSF Setup As exciting as it may be to head off and start looking for a property to invest in straight away, you need to firstly ensure your SMSF is setup correctly. This includes the following; - Trust Deed - Your Trust Deed needs to be relevant to ensure it allows you to purchase Direct Property using leverage or a Property Warrant. If your SMSF was setup pre 2007 when the borrowing rules changed, there is a high probability it will be out of date. - Investment Strategy - Just like the Trust Deed, your investment strategy needs to be updated to allow for the purchase of a direct property. An area that needs careful consideration is the asset allocation limits of your fund. As property is such a large asset, it can typically take up a significant percentage of the funds assets. This may fall outside of the standard limits set within the original Investment Strategy. - Lending Requirement - Just like purchasing a property outside of super, before you make an offer on the property you need to ensure the lender will lend you the funds required to complete. This is not a simple loan and the complexity is explained in more detail in the lending section. - Trustee of the SMSF - Some lenders will require the Trustee to be a Corporate Entity as opposed to an individual - Liquidity of the Fund - One of the requirements within the Trust Deed is to ensure there is sufficient liquidity in the fund to meet ongoing expenses and any potential death benefits. Given you are purchasing a property, a large portion of your capital may be tied up in the property which means you need to look at alternative solutions to provide liquidity. One option is to take out a Life policy that will provide your fund with a lump sum benefit upon your death. This lump sum can then be used to pay any death benefits and reduce the debt of the SMSF. - Strategy - As simple as this sounds, you need to ensure that the property purchase fits in with your overall strategy. This includes looking at the cashflow of your fund, the asset allocation and the risks.
PURCHASING PROPERTY IN SUPER Getting the Loan The Loan Process This can be one of the most time consuming and complex parts of the purchase. As you are taking out a ‘non-recourse’ loan the lenders will have more requirements than for a typical loan. Each lender will have a different list of requirements and this is where you need to engage a qualified Mortgage Broker who is experienced in SMSF Loans. Here are the main areas the lenders will look at; - Serviceability - Just like outside of super the lenders will want to see evidence your fund has the surplus income required to service the loan. This income is counted as your contributions to super, income earned within the fund from existing assets and the potential rent from the new investment property. If you are self employed, the lenders will be stricter about lending money as you can essentially stop these contributions at any stage unlike an employee, who will always be paid the 9% super guarantee. Just like earning an income, you will need to show evidence you have been providing contributions to your super for a period of time. Some lenders will only consider your Superannuation Guarantee (SG) contributions whereas others will include all concessional contributions (such as Salary Sacrifice) provided you have the excess cash flow to continue to make these contributions. - Deposit - The lender will also want to ensure you have sufficient funds to complete and you are not using the entire balance of your fund. This may prove difficult for some as the required deposits can be between 20% and 30%. - Statement of Advice/Financial Advisor Letter - Most lenders will require a copy of the Statement of Advice so they can understand your strategy and a letter from your Advisor. - Guarantees - Particular lenders will require personal guarantees to take out the loan. This will depend on the excess cash flow, the asset position of the fund, and the Loan to Value Ratio of your purchase.
PURCHASING PROPERTY IN SUPER The Structure
After your loan has been pre-approved, you will need to setup the correct legal structures. There is no point setting this up until you know you can get the funds as it may result in unnecessary costs. To purchase a property with lending, the legal owner of the property must be a Corporate Trustee of the ‘Bare Trust’ or as it is sometimes referred to the ‘Property Warrant’ or ‘Property Trust’. There are multiple different names for this entity, however you need to ensure that the beneficial interest of the property is the Corporate Trustee of the Self Managed Superannuation Fund. The Bare Trust should be setup with a separate Corporate Trustee to the Self Managed Superannuation Fund. The ‘Bare Trust’ is as the name suggest, Bare other than the one asset that is being purchased. There are no tax returns or audits required for the Bare Trust, just the annual ASIC fee. To create the link between the Bare Trust and your SMSF you will need a ‘Security Trust Deed’ which creates the beneficial interest between the Bare Trust and the SMSF. The Non-Recourse Loan will need to be in the name of the Trustee of the SMSF. This is different to the name on the title of the property. If you are doing a related party loan, at this stage you will also need to arrange for a ‘Loan Agreement’ document. TIP: Make sure you double check the name ownership on the first page of the contract and match this with your Corporate Trustee of the Bare Trust. The diagram below shows the structural setup;
PURCHASING PROPERTY IN SUPER The Structure (Continued)
After the legal entities have been setup you need to structure the cash flow within the SMSF. A simple and effective way to do this is to have all rental income paid into your SMSF transaction account and all expenses (interest and property) debited from this account. Some bank accounts allow you to label each transaction which makes it easier when it comes time to complete your annual tax return and audit. If you are aiming to have several properties you may want to consider setting up a separate sub-account to house your property transactions. TIP: When setting up structures, aim to setup direct debits to avoid any mistakes of funds ending up outside of the super environment.
PURCHASING PROPERTY IN SUPER Conclusion
As you can see, there are multiple steps to the property purchase process and each one needs to be completed diligently to achieve your desired outcome. To ensure you complete the transaction competetently it is important to engage a team of professionals who have had experience in purchasing property through super. This includes a Financial Advisor, Accountant, Solicitor and Mortgage Broker.
SMSF ESSENTIALS GUIDE SUMMARY As you have seen within this e-book, there many benefits of setting up a SMSF provided it is setup and managed correctly. As your situation changes, you can take advantage of different features within a SMSF and the super environment. The key is to establish the following; - The key reason why you are setting up the fund - The exact structure of the fund and investment strategy - Now and in the future - The costs versus benefit - The process to get it audited each year Once you have your fund, you need to integrate this into your full financial scenario as your super should not be seen as a separate asset, rather an integral piece of your entire wealth position.
PURCHASING PROPERTY IN SUPER ABOUT ARK TOTAL WEALTH Ark Total Wealth is an independently owned full service financial advisory service. Ark operates it’s own Australian Financial Services Licence (AFSL: 239445) and it has been in operation for over 20 years. Ark Total Wealth advises across the following areas; - Wealth Accumulation - Pre-Retirement - Self Managed Superannuation Funds - Small Business Owners Ark Total Wealth is different to most financial planning companies as they focus on the strategy as opposed to the product and they charge a fee for service. Given Ark Total Wealth has the full advisory services they are able to integrate Financial, Loan and Tax advice together into one strategic personalised strategy. If you would like to chat with a qualified Financial Advisor, please contact us on the information below; e: [email protected]
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