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Property investing within a SMSF

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This presentations considers the various ways you can invest in property using a Self Manage Super Fund.

This presentations considers the various ways you can invest in property using a Self Manage Super Fund.

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  • 1. Property investing
    within a SMSF
  • 2. Disclaimer
    This presentation provides general advice only. No direct or implicit recommendations are given in this document. This means that the general advice provided has not been prepared taking into account an individual’s financial circumstances (i.e. investment objectives, financial situation and particular investment needs). You should assess whether the advice is appropriate to your individual financial circumstances before making an investment decision. You can either assess the advice yourself or seek the help of an authorised representative through an Australian Financial Services License (AFSL) holder.
    [Your Company] believes that the information in this presentation is correct at the time of compilation but does not warrant the accuracy of that information. Save for statutory liability which cannot be excluded, [Your Company] disclaims all responsibility for any loss or damage which any person may suffer from reliance on this information or any opinion, conclusion or recommendation in this presentation whether the loss or damage is caused by any fault or negligence on the part of presenter or otherwise.
  • 3. About this session
    What we will cover:
    Ways to invest in property using a SMSF
    Structuring requirements (“how to”)
    Key Issues
    Questions
  • 4. What ways can a SMSF invest in property?
  • 5. Strategy 1 – Buy outright
    A SMSF can acquire either residential or commercial property. This can be outright within the fund or as tenants in common.
    Think about trustee structure
    Appropriate ownership on title
    Owning property inside super
    Individual MTR vs. Super Tax Rate (15%)
    Pension Phase (0%)
    Personal tax deductions (building allowance)
    • Capital growth
    Pension Phase (0%)
    Can acquire BRP from a related party
    Business Real Property (commercial)
    Potential use of Small Business Concessions to reduce or eliminate CGT
    Some states have stamp duty exemptions/concessions available
    Cannot transfer residential property into a SMSF
    SMSF should be in existence prior to acquisition
  • 6. Can and can’t do’s…
  • 7. Strategy 2 – Ungeared Unit Trust
    A SMSF can acquire units in an ungeared unit trust to acquire residential or commercial property. This strategy is commonly used where a SMSF has insufficient capital to acquire an asset and includes other unit holders (i.e. individual).
    Looking to acquire land to develop
    • subdivision
    Business Real Property
    can use to acquire own business premises
    transfer units across to SMSF over time
    Does allow for the transfer units to SMSF with residential property
    • must meet strict requirements outlined within SISR 13.22C
    Common arrangement for development
  • 8. Example
    (3). Unit trust acquires property with $600,000 of subscribed capital
    Unit Trust
    (Ungeared)
    Tenant
    (inc. related party)
    (1). SMSF applies for #300,000 @ $1.00 units = $300,000
    (4). Lease agreement between Unit Trust and tenant (can be related party for commercial property)
    (2). John & Jane redraw against own home (investment loan) and apply for #300,000 @ $1.00 units = $300,000
    (5). Distribution paid to unit holders
    SMSF
    (6). Repayments made back against redrawn equity
    Employer
  • 9. Key Requirements
    SISR 13.22C (ungeared unit trust)
    Fund must have < 5 members (SMSF or SAF); and
    Asset cannot be leased to a related party unless it is business real property (BRP); and
    Lease agreement must be legally binding with a related party; and
    The trust does not have outstanding borrowings; and
    The Assets of the Trust do not include either:
    An interest in another entity; or
    A loan to another entity, unless it is a deposit with an ADI; or
    An asset in which there is a charge; or
    An asset acquired from a related party after 11/08/99 unless BRP
    An asset that was owned by a related party since the later of 11/08/99 or 3 years before the date in which it was acquired
  • 10. Strategy 3 – Limited Recourse Borrowing Arrangements
    A SMSF can now borrow to acquire property using an SMSF Limited Recourse Borrowing Arrangement (LRBA). This strategy allows for individuals to leverage inside superannuation and use income and contributions to service the debt, plus obtain tax concessions ordinarily available within super.
    Section 67A (SIS Act)
    The borrowings must be for the acquisition of a single acquirable asset
    Can include expenses in connection with the borrowing
    The asset must be held on trust
    Asset is held on trust so that RSF Trustee acquires a beneficial interestin the acquirable asset
    Rights of the lender or any other person are limitedto the rights relating to the acquirable asset
    When the borrowing is fully repaid, the Fund has the rightrelating to the acquirable asset to become an asset of the SMSF
    Section 67B – Replacement Asset
  • 11. How does it work
    Personal guarantee
    Bare Trust
  • 12. What can the bare trust hold in custody for the SMSF?
    Custodian (Bare) Trust
    Custodian (Bare) Trust
    Custodian (Bare) Trust
    Custodian (Bare) Trust
    The Custodian can only hold a ‘single’ asset or collection of assets in the same way that they apply to a single asset (e.g. #1000 BHP shares)
  • 13. Gearing in Super – Lender Options
    Superannuation law allows for a SMSF to borrow money from any lender (including you), as long as the loan is on ‘commercial terms’.
    SMSF Bank loans
    Mainstream product from lending institutions
    Residential LVRs up to 80%
    Commercial LVRs up to 70%
    Borrowing must be for the acquisition of a single asset
    Banks will not lend on land
    Will almost always require a personal guarantee
  • 14. Gearing in Super – Lender Options
    Superannuation law allows for a SMSF to borrow money from any lender (including you), as long as the loan is on ‘commercial terms’.
    Related Party Loan
    You can lend money to your SMSF from existing equity
    • i.e. your own home
    Dealings must be arms-length (section109, SIS Act)
    Greater flexibility in terms & conditions
    No personal guarantees
    Refinancing issues
  • 15. Example
    (6). Rent paid to SMSF as beneficial owner of property
    SMSF
    (2). SMSF borrows money from related party on arms-length basis
    (1). Individual redraws on equity in own home to provide a loan to his SMSF
    (7). Repayments made by SMSF back to lender (principal and/or interest) – subject to terms of loan
    (5). Lease agreement between SMSF and tenant (can be related party for commercial property)
    Custodial Trust
    (Bare Trust)
    Lender to SMSF
    Tenant
    (inc. related party)
    (3). SMSF acquires property in name of Custodial Trustee using an SMSF LRBA
    (4). Lender’s rights in the event of default are limited to the property only.
    (8). Lender makes repayments back to own bank where money originally drawn.
  • 16. Gearing in Super - Strategy applications
    Below are a range of strategies that can be used in an SMSF Limited Recourse Borrowing arrangement
    Business owners renting or wanting to upgrade
    Pay more into super (as rent) above the contribution caps and get a tax deduction for your business
    Can do using a special purpose SMSF vehicle with business partners
    Business premises held outside super
    Ability to turn non-deductible (i.e. home loan) into deductible debt
    Residential and Property Investors
    Including property development
    Pre-retirees planning a sea change
    Refer to the last recorded Webinar for examples of these strategies
  • 17. What you need to consider?
    There are a range of factors that need to be considered should you wish to undertake an SMSF limited recourse borrowing arrangement to acquire property.
    These include:
    Yield
    Capital growth
    Loan-to-value ratio (LVR)
    Bank Loan or BYO Banker
    Servicing requirements (cash flow)
    Ability to contribute (contribution caps)
    Insurance requirements (taking on debt)
  • 18. Important Property Issues with LRBAs
    Appropriate structuring of a SMSF limited recourse borrowing arrangement is required to meet the stringent requirements of sections 67A & 67B of the SIS Act
    You need to be aware of the following key issues around LRBAs with property:
    Multiple titles with apartments, office buildings and farmland
    Scope to include where incident ancillary assets of very small value (a cark park does not necessarily qualify in ATO’s view)
    ATO will consider the particular facts on case-by-case basis (use SMSF specific advice)
    No ability to subdivide
    Would be a replacement asset and there does not qualify
    Borrowing to buy ‘off-the-plan’
    Is the asset an ‘improvement’ or a purchase of a completed apartment?
    Need to consider how the property development is structured (timing & financing requirements) for purchase/completion
    Stamp duty requirements
    Need to appropriately document the transaction to avoid ‘double duty’; show beneficial owner as being the SMSF
    Important to seek professional advice
  • 19. How can you deal with these issues?
  • 20. Gearing in Super to develop property
    You have the ability to combine strategies 2 & 3 to borrow to acquire land and or property to develop, including subdivision and off-the-plan.
    SMSF Limited Recourse Borrowing Arrangement to invest in an Ungeared Unit Trust
    13.22C related ungeared trust
    Typically will only apply to related-party loan only
    Banks won’t lend without wanting to take a charge over the property, which is not allowed.
    Related Party (BYO lender) will take a charge over units in unit trust
  • 21. SMSF
    Example
    (2). SMSF borrows money from related party on arms-length basis
    (1). Redraws on equity in own home to provide a loan to SMSF
    (6). Rent paid to Unit Trust
    (5). Lease agreement between SMSF and tenant (can be related party for commercial property)
    (8). Repayments made by SMSF back to lender (principal and/or interest) – subject to terms of loan
    Custodial Trust
    (Bare Trust)
    Tenant
    (inc. related party)
    Lender to SMSF
    (3). SMSF acquires in ungeared unit trust units in name of Custodial Trustee using SMSF LRBA
    (7). Distribution paid to SMSF as beneficial owner of units in unit trust
    Ungeared Unit Trust
    (SISR 13.22C)
    (4). Lender’s rights in the event of default are limited to the property only.
    (9). Lender makes repayments back to own bank where money originally drawn.
    (4). Unit Trust acquires land and uses additional funds to develop site
  • 22. Summary
    SMSFs provide a range of opportunities for individuals to consider using property as part of their retirement plans.
    Buy it outright
    Includes tenants in common
    ‘Pooling’ family members super monies
    Ungeared Unit Trust
    • Not quite enough in super
    • Wish to consider developing property
    Gearing in Super – SMSF Limited Recourse Borrowing Arrangement
    Lender options are available to you
    Insurance considerations (taking on debt)
    You can develop property by combining with strategy 2

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