Your Superannuation Property Questions Answered
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Chapter 1: Why SMSFs?
Chapter 2: SMSF Requirements and Conditions
Chapter 3: Setting up an SMSF
Frequently Asked Questions: SMSFs
Chapter 4: Why Property and SMSFs?
Frequently Asked Questions: Property
Frequently Asked Questions: Business Premises
Final SMSF Checklist
“The starting point of all achievement is desire. Keep this constantly in mind. Weak desire brings weak results, just as a small fire makes a small amount of heat” - Napoleon Hill
Superannuation Property is an industry leader in end-to-end solutions for the purchase of direct property inside superannuation. We’ve written this guide to answer our most commonly-asked questions about self-managed superannuation funds (SMSFs) and buying property within super. The Australian Superannuation Scheme has been a core focus of our government and finance sectors for decades. In 2007, the option became available for everyday Australians to benefit from reduced-taxed income in retirement from direct property investment within super. A self-managed superannuation fund (SMSF) is one of the wealth building options for retirement that gives you the most independence. Naturally, this option comes with some risks, and you need to understand the pros, the cons, and the little details that will make all the difference to your long-term wealth creation.
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Why SMSFs? A self-managed superannuation fund (SMSF) is a legal tax structure regulated by the Australian Tax Office (ATO), with the sole purpose of providing for your retirement. An SMSF gives you the control that comes with managing your own super and investments.
SMSFs have gained popularity since 2007, becoming the largest investment structure in Australia. As at 2016, SMSFs held 30 per cent of the total $2 trillion super industry assets. The members are also trustees of the fund, which means they exercise full control over investments, and they are responsible for investment decisions. Members have a lot of freedom but they also have to accept regulatory responsibility that would otherwise be the duty of the existing noted super fund. The self-managed fund brings various advantages that a fund managed by a financial institution is incapable of providing. Some of the most important benefits include: --
Financial independence and 100 percent control over investment, with the ability to include direct property.
Participation of more than one family member in the fund.
Income security during retirement or permanent work inability.
Flexibility and freedom to make your own investment decisions.
Low taxation rates.
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SMSF Requirements and Conditions A self-managed super fund is established by one to four people for the sole purpose of providing retirement benefits. This is important to be aware of, because it needs to meet the sole purpose test to be eligible for the tax concessions normally available to super funds.
The SMSF needs to address a number of additional Australian Taxation Office (ATO) requirements: --
It must have at least one and no more than four members.
Each trustee or director also has to be a fund member.
Each member of the SMSF should also be a trustee or a director.
Members of the fund cannot be employees of each other.
The members are fully responsible for the SMSF and the manner in which it meets strict requirements and regulations.
The ATO states: “An SMSF must be run for the sole purpose of providing retirement benefits for the members or their dependants. Don’t set up an SMSF to try to get early access to your super, or to buy a holiday home or artworks to decorate your house. These things are illegal.”
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Setting up an SMSF An SMSF will require both time and effort on your behalf. You will need to follow a number of important steps to do it the right way. Talk to an SMSFspecialised financial adviser to have all the details figured out in advance.
Under the ATO guidelines, setting up an SMSF involves the following steps: 1. 2. 3. 4. 5. 6.
Consider appointing professionals to help you. Choose individual trustees or a corporate trustee. Create the trust and trust deed. Appoint your trustees. Check your fund is an Australian super fund. Register your fund (obtain a tax file number and Australian Business Number (ABN). 7. Set up a bank account. 8. Get an electronic service address. 9. Prepare an exit strategy. In practical terms: --
Seek advice to make sure you understand all of your obligations and responsibilities. This preparatory step is very important to ensure the smooth functioning of the SMSF in the future.
Choose the members. There can be up to four people (or a corporate trustee) involved in an SMSF. Typically, most people select members of their family, but you have the freedom and flexibility to choose.
See a financial adviser to help you prepare your investment strategy and begin implementing it.
Create the trust and trust deed. A trust deed is a legal document that sets out the governing rules for establishing and operating your fund. It must be prepared by someone qualified to do so, and then signed and dated by all trustees.
Put your documentation in order, in consultation with a legal practitioner.
Get specialised insurances that relate to the SMSF.
Let your current employer know that you have set up an SMSF. Typically, you will have to provide your employer with a letter of compliance and a letter that details the manner in which contributions can be made to the SMSF.
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FREQUENTLY ASKED QUESTIONS:
SMSFs Why set up an SMSF? SMSFs allow people to have greater control over the investment of their funds for retirement. The investment flexibility gained from the SMSF structure for members’ retirement funds is the number one reason for their rapidly growing popularity. This kind of flexibility has seen over 600,000 SMSFs established in Australia (99.5 percent of all super funds), and over $15 billion invested in direct property. The SMSF sector is the fastest-growing component of Australia’s super system. Do I need an investment strategy to establish an SMSF? Yes. An investment strategy is required by law when establishing an SMSF, and is prepared in consultation with a financial adviser. This strategy outlines the members’ tolerance for investment risk and investment objectives. The fund must remain within the objectives outlined in the strategy to ensure it remains compliant. The investment strategy can be updated over time to encompass members’ changing investment needs.
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Who can be a member of an SMSF? Anyone 18 years or over can be a member (‘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 (e.g. the ATO or APRA). What are my out-of-pocket expenses to get started? When establishing an SMSF, all costs are incurred by the new SMSF, which generally means that there are no out-of-pocket expenses to the members of the fund. Am I able to switch all of my current super to a self-managed super fund? Yes. There are no restrictions to keep any of your superannuation balance in your existing fund. Keep in mind however, when you transfer your super there may be associated fees, and entitlements under your existing fund, such as insurances, may cease. Similar personal insurances can be set up, and are recommended, within your SMSF though, so you can continue to be covered.
Can I contribute money from my personal income to my SMSF? Yes. A member can contribute money from their personal income to grow the SMSF or cover expenses. The ATO provides guidelines as to how much money a member can contribute to an SMSF. Contribution caps limit the amount that can be contributed by a member each financial year. These caps are indexed annually. Should I buy shares or property with my SMSF? Under superannuation law, members don’t have to invest in any one asset class. This means you can invest in shares, property or a combination of both. Superannuation law allows members to diversify the portfolio into multiple asset classes, and it would be prudent to consider having a diverse portfolio. What types of assets can my superannuation purchase? -- Residential Australian property -- Commercial Australian property -- Term deposits -- Australian shares -- International shares -- CFDs -- Bonds -- IPOs -- Warrants -- Options -- Forex -- Futures -- Metals -- Australian and international managed funds -- Collectables and personal use assets (restrictions apply).
Can my superannuation fund pay for personal insurances? Yes. You are able to house Life, Total and Permanent Disability and Income Protection insurance easily within an SMSF as long as the trust deed allows for it. The premiums can be paid from the fund balance and members are able to make pre-tax contributions to the fund to offset the effect of these premiums. What legislation do I need to be aware of? SMSFs are governed by the Australian Tax Office and are regulated by the Superannuation Industry (Supervision) Act (SIS Act). What happens if my SMSF defaults on an investment loan? Trustees sometimes gain a false sense of security, because a super fund is barred from providing any of its other assets as security for a loan. This provision will not necessarily protect a heavily geared fund from losing much of its members’ retirement savings if a property investment turns bad and loan repayments are not met.
It is important to understand these risks as an SMSF trustee. If investing in property, it is highly advisable to also obtain professional advice from a property adviser, to ensure the likelihood of ongoing rental returns that cover the loan repayments. What is the Pension Phase? When a member attains preservation age (between 55-60 depending on year of birth), they are able to change their fund to pension phase. Prior to this time, the fund is in the accumulation phase. Pension phase means a few changes for the member and their superannuation. They can now draw an income from their SMSF and the tax rates within their fund change. Investment income within the fund is now taxed at 0% and capital gains tax (CGT) is also decreased to 0%. This means that you can sell properties in pension phase and pay no CGT.
The fund can lose capital and interest payments to the date of the default. The lender can also deduct its costs of selling the geared property and discharging the loan before paying whatever is left to the fund. In a worst case scenario, a fund that spends all or most of its assets to pay initial loan instalments could be wiped out.
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Why Property and SMSFs? SMSF investment in property has seen tremendous growth since 2007, the year when taxation changes were made to allow SMSF property purchases.
Self-managed super fund property investment can involve both residential and commercial real estate. Several important rules affect the property purchase: ----
The property cannot be the residence of a fund member. The property cannot be used as a vacation house. The property should be purchased solely for investment purposes.
SMSF and property can be a great option for those starting out in investment. Many people own at least one property, and they often have a better understanding of the real estate sector than the share market. Buying property through an SMSF can be more profitable than purchasing it as an individual, as different regulations apply. Direct property investment within an SMSF means no out-of-pocket expenses for members, taxation benefits, and a secure long-term investment option to build a retirement income. The steps to investing in property through your SMSF are as follows: 1. Seek professional assistance to create the right property investment strategy. 2. Set up a Security Trust (‘Bare Trust’) on behalf of your SMSF. You will need it to provide a loan guarantee and to buy/hold the property. 3. Talk to a broker about qualifying for a loan. 4. Speak to a property coach who uses sound economics and locationbased data to make property investment recommendations for your particular situation. 5. Buy and hold your property through the Security Trust (‘Bare Trust’). 6. Once the loan is paid off, transfer the property from the Security Trust to the SMSF.
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FREQUENTLY ASKED QUESTIONS
Property Why use an SMSF to purchase property? SMSFs give you the ability to access a lump sum of money to use as a deposit for an investment property purchase. It can also be more tax advantageous to purchase property within the Superannuation environment. Superannuation Guarantee contributions of 9.5% can be used to cover any negative cash flow effects with the fund, meaning properties can usually be purchased and held without any effect on personal cash flow. What are the benefits of owning property inside super for my retirement? During pension phase, trustees have the opportunity to benefit from tax-free income from property rental income. No capital gains tax on the sale of a property asset is applicable during pension phase, which can help investors save hundreds of thousands of dollars. What type of property can I buy with an SMSF? Can I buy house and land, land only, or apartments? You are able to purchase residential investment and commercial property (such as shops, business premises, offices and factories) within an SMSF. You can invest in any property type, however there are certain considerations.
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Property investment within super is effective through gearing, which essentially relies on the rent paid when it is tenanted, something not generally possible with land only.
Take into consideration you are able to combine up to four individual members’ superannuation into an SMSF to increase the capital available.
Also, the fundamental character of the property cannot be changed while a loan is attached, thus preventing you from developing vacant land.
Can I use a property manager to manage the property? Yes. All expenses, including property management fees, are tax deductible. Remember, the idea of an SMSF to make as much money as possible, so looking for savings with property managers is important.
Can I ever live in the property (even after it’s paid off)? No. It can’t be lived in or rented to you or your relatives, even after it’s paid off or you are retired. Can my family members live in my SMSF’s investment property? No. An investment property owned an SMSF cannot be rented to a related party of the fund, i.e. members’ relatives. Should I buy a new or old property for investment? There are certain advantages to both, however new properties offer tax incentives and higher depreciation allowances, are often more desirable, and attract higher rents. How much superannuation do I need to get started with property? This depends on the cost of the investment property being purchased. Establishment costs, a minimum deposit of 20-30%, purchase costs and a reserve of one year’s negative cash flow is needed.
Is it possible to use my super to buy out an investment property I already own? No. You are not allowed to transfer or sell a residential property to your SMSF that is owned by a fund member or any person associated with a fund member, such as a relative. There may be exceptions however, in the case of a commercial property that is wholly and exclusively used by business. What are the potential tax benefits of owning property inside my superannuation? Within the superannuation environment, rental income from investment properties is taxed at 15%. This rate also applies for capital gains tax in the first year of ownership, after which it drops to 10%. No capital gains tax is payable on the sale of a property in pension phase.
Can I borrow to purchase property with my superannuation? Yes. Certain lenders provide loans to SMSFs to purchase investment properties of up to 70% of the property value, or in some cases, 80%. Can I set up an SMSF with my partner to have a greater deposit to buy an investment property? Yes. Approximately 70% of SMSFs have two members, however, an SMSF can have up to four members. This means you can effectively pool your assets with other parties (such as your partner) to raise the monies required. Who pays the deposit when buying the investment property? The SMSF pays all deposits on investment property. No out-ofpocket expenses are required by members. Who pays the mortgage? And other expenses of the property? The SMSF covers the mortgage payments, interest, maintenance, insurance, rates, body corporate fees, property management and any other associated property expenses. These expenses will usually be deductible to the fund. How can I minimise the risks involved in property investment? It is crucial to base an investment decision on facts, not emotion. Risks can be minimised by seeking professional advice about likely returns and vacancy rates, based on location research by a property economist.
What happens if I can’t pay the loan for my SMSF investment property? Loans for property investment within super are set up via a limited recourse borrowing arrangement (LRBA). This means the lender is only able to take the property and has no right to the remaining assets or funds in your SMSF. How does borrowing to buy a property inside superannuation affect my personal portfolio? Buying property inside superannuation could have an impact on your personal portfolio if you are required to contribute more money into the SMSF to cover expenses. It’s extremely important that members choose the right property to match their SMSF capacity (income and expenses). Members can avoid this by buying an investment property that doesn’t cost the members more than what the SMSF is earning through rents. Who is the actual owner of the property? A bare trust is required to be set up as the registered holder of a property until the loan is repaid, with the SMSF being the beneficiary of the trust. The bare trust holds the investment property on behalf of the SMSF trustees until the loan is paid off, upon which time ownership can be transferred to the trustees.
However, using a corporate trustee is more often than not favoured by lenders, with a higher loan to value ratio (LVR) available. A corporate trustee provides members with added asset protection. A risk avoidance strategy should be a number one priority when buying property with your superannuation. Can I buy a property before my SMSF is set-up? No. You cannot purchase a property before you have all the correct SMSF documents in place. Superannuation Property can provide you all the compliant documentation to correctly set up an SMSF in 24 hours. Can I claim depreciation inside a SMSF? Yes. Standard deductions such as deprecation are allowable inside an SMSF. What are the asset protection advantages of owning property in an SMSF? Assets held in a super fund are legally inaccessible to trustees in bankruptcy, provided contributions or asset transfers were not made with the ‘main purpose’ of avoiding creditors. This makes super a prized method of asset protection, particularly as there is no dollar limit on the protection. Many smallmedium business owners also place their business premises in a SMSF, partly as an asset-protection strategy.
Do I need a corporate trustee when buying property within super? You don’t necessarily need a corporate trustee when buying property. superannuationproper t y. c o m | 15
Example: A husband and wife are business partners and own business premises in their names. Depending on the circumstances, they may sell the property to their SMSF at market value or make an in-specie contribution of the property to the fund, which is when they transfer ownership of an asset they own to the fund. Are there any tax disadvantages to property investment in an SMSF? With certain exceptions, superannuation benefits must remain in the super system until members permanently retire after reaching their preservation age (currently 55 to 60) or turn 65. The locking of investment properties, and therefore benefits, into superannuation could be seen as an advantage or disadvantage by some fund members. Many high-income earners, for example, gain valuable tax benefits by negatively gearing properties in their own names. That is because the shortfall between rent and deductible costs (mainly interest) is deductible against other personal income. This may not be possible within super. What are the advantages of gearing property through an SMSF? The advantages of gearing are borrowing to invest. There are no advantages to negative gearing inside an SMSF, as the taxed rental income is almost always below the lowest tax rate.
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Prudent financial planners will recommend a positively geared scenario for your SMSF. This way, you are able to use a smaller-value asset to have a higher-value asset working for you. For example, $100k of your super can be used to acquire a $400k property asset that provides returns to the fund. Also, if the property value increases by 5%, you get a $20k return, as opposed to a $5k return that you would have achieved on the original capital ($100k) invested.
However, financial planners and specialist superannuation advisers typically urge fund trustees to recognise the possible consequences if their retirement savings are overly dependent on the profitability of a single high-cost asset. How much tax do I need to pay on property inside superannuation? PROPERTY OWNER TAX PAYABLE
Individual Company Superfund
ON Rental Income
Should SMSF members be cautious about giving personal guarantees for property loans? Yes. Although SMSFs are prohibited from providing other fund assets as security for an investment loan, there is nothing in the legislation to stop a lender seeking to enforce personal guarantees in the event of a default. Is my SMSF allowed to spend its entire savings on a single investment property? Yes. Superannuation law does not prohibit a fund from owning just one asset. Some fund trustees specifically decide to have SMSF portfolios dominated by a single property asset, usually after considering the diversification of their other super and non-super investments. SMSFs are required to have written investment strategies. Despite the requirement that fund trustees must consider diversification when preparing an investment strategy, they are not required by law to diversify.
Up to 22.5%1
1. Ignores the Medicare levy 2. Assumes the asset has been held for 12 months or more
Can I transfer my existing investment properties into my superannuation fund? Yes, but only if they are business real estate or commercial properties. No residential investment properties currently owned by a member or related party may be transferred into an SMSF. Who should I ask for advice when buying property with my superannuation? There are multiple advisors an investor should consult when buying property. They include: ------
Finance Broker Financial Planner Accountant Property Advisor Solicitor (Property).
Alternatively, speak with a specialist provider such as Superannuation Property. We include consultation with all of these advisers as part of our service, for no additional cost.
FREQUENTLY ASKED QUESTIONS:
Business Premises What are the advantages of my SMSF owning my business premises? Small-medium business owners commonly arrange for their SMSFs to hold their business premises for a range of reasons, including tax effectiveness, asset protection and succession planning. A family business with the business property within their SMSF would pay a commercial, arms’ length rent to the family’s SMSF. In turn, the fund would pay concessional tax on the rent and typically benefit from many of the usual tax breaks available to landlords – including tax deductions for interest on a property loan. Some fund trustees would gain a feeling of security because their family business, not some other unrelated, perhaps little known business, is the tenant. Founders of a family business – such as married or de facto couples – sometimes hold the premises of the family business in a two-person SMSF initially for retirement saving, tax and asset protection reasons. As the founders approach retirement they may decide to allow their adult children to become fund members. Thanks in part to the adult children’s super contributions, such a fund might eventually be in a financial position to retain ownership of the business premises for future generations, while paying the founders’ retirement benefits.
Depending on the circumstances, this could provide valuable security for the family business. What are the disadvantages of my SMSF owning my business premises? Conflicting loyalties and pressures may arise if your business strikes financial problems and fails to pay its rent.
Another consideration is how the ATO – in its role as regulator of self-managed super – may react to a fund’s failure to collect overdue rent from the fund members’ business. As regulator, the ATO can remove a fund’s complying status under the Superannuation Industry (Supervision) Act (SIS Act).
On one side, the family business may require the premises to keep operating in the expectation that profits will return. On the other side, the fund’s trustees – who are the same people as the business owners in these circumstances – are legally obliged to maintain the fund with the sole purpose of providing member retirement benefits. Under superannuation law, fund members must be trustees of the fund or directors of its corporate trustee.Much of the fund’s financial wellbeing may depend on regular payment of rent – particularly if a heavily geared property is the fund’s sole or dominant asset. If your business is unable to pay rent, your fund may struggle to meet loan instalments on a geared property, and that could lead to a forced sale.
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FINAL SMSF CHECKLIST
Before you decide on an SMSF, you can use the following checklist to determine your level of readiness and confidence with a self-managed investment option.
You need to: 1. 2. 3. 4. 5. 6.
Understand the functioning and processes of an SMSF. Be aware of the risks and possible shortcomings of an SMSF. Be certain that an SMSF is the right option for your retirement. Familiarise yourself with the relevant laws and regulations. Know what steps to undertake to set up the SMSF. Be prepared to deal with paperwork and all the obligations of a trustee. 7. Decide on the other members of the SMSF, if any. 8. Seek advice to develop an investment strategy. 9. Research property for investment, or seek property economics advice. 10. Have an emergency plan for situations that may arise out of your control. If you have more questions, know that self-managing your super doesn’t mean you have to go it alone. The most successful SMSF investors are those who seek professional, expert assistance and advice based on solid data. At Superannuation Property, we can help you create your investment strategy, determine where to invest, obtain finance, and take care of your legal compliance and accounting matters. Unlike other advisers, we have all of the professionals you need to set up an SMSF and buy property under the one roof, including property coaches and economists. mortgage brokers, and financial planners.
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Arrange a FREE consultation with our experts today Simply call us on 1300 873 847, or email [email protected]
Helping everyday Australians invest in property within superannuation.
Level 1, 18 Masters St
GPO Box 2291
Phone: 1300 URetire (1300 873 847)
Newstead QLD 4006
Brisbane QLD 4001
Fax: 1300 781 495 Email: [email protected]