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SMSFs - Super & Property, what's the big deal


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Client presentation on the benefits of a SMSF and the process for a SMSF to use the borrowing rules to invest in property. Includes the different ways of getting property into a fund and how to finance them.

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SMSFs - Super & Property, what's the big deal

  1. 1. SMSFs – What’s the big deal?The SMSF Coach - Liam Shorte BBS ADFS SSASMSF Specialist Advisor™Authorised RepresentativeGenesys Wealth Advisers
  2. 2. Important InformationThis presentation has been prepared by GenesysWealth Advisers Limited ABN 20 060 778 216,Australian Financial Services License Number 232686and Principal member of the FPA. Any advicecontained in this presentation is general advice onlyand does not take into consideration the participantspersonal circumstances.To avoid making a decision not appropriate to you thecontent should not be relied upon or act as asubstitute for receiving financial advice suitable toyour circumstances. Any reference to the participantsactual circumstances is entirely coincidental. Whenconsidering a financial product please consider theProduct Disclosure Statement. Genesys and itsrepresentatives receive fees and brokerage from theprovision of financial advice or placement of financialproducts.
  3. 3. Benefits of superannuation• Most tax effective structure for retirement savings.  Investment earnings when in accumulation phase taxed at a maximum of 15 per cent.  Investment earnings tax free in retirement (pension phase).  Tax deductions may be available for contributions to employers & certain individuals.  Benefits (either lump sum or pension)withdrawn from age 60 are tax free to the member.  Protection from creditors.
  4. 4. What is an SMSF? • An SMSF (self-managed superannuation fund) is a small superannuation fund managed by the members. • Regulated by the Australian Taxation Office. • Same tax implications as retail and industry funds.
  5. 5. Market statistics• Total number of SMSFs is 450,498 (September 2011).• $397 billion total assets:  $14.8 billion – residential real property  $45.4 billion – non-residential property.• 56% of members above age 55 (as at end of June 2011).Source: ATO SMSF Statistical Report and APRA Quarterly report.
  6. 6. SMSF vs. Retail/Industry fundSMSF Retail/Industry• More diverse investment • Less administrative choice . burden.• Members have more • Limited investment control of investment choice. decisions. • Limited flexibility.• More control of administrative/policy/rules.• Ability to transfer. personally owned assets (restrictions apply).• Family funds – members can be relatives.• Reduced fees.
  7. 7. Investment strategy• A written investment strategy is a legislative requirement for the trustees of an SMSF.• Sets out the investment objective for the fund, and how the strategy will be achieved taking into account:  risk  diversification  ability to pay benefits  needs of members.• Can only be provided by the trustees themselves or a licensed financial planner and should be reviewed regularly.• Check the trust deed before investments are made.
  8. 8. Investments• SMSFs provide a diverse investment choice A SMSF can invest in:  Direct property:  residential property  commercial property.  Direct equities:  listed securities/shares.  Managed funds:  widely-held unit trusts.  Artwork and collectables:  paintings  exotic cars  wine  yachts.
  9. 9. Benefits of holding property in an SMSF• Tax benefits:  marginal tax rate vs. superannuation fund tax rate (15%)  pension phase investment earnings tax free  no capital gains tax payable when sold in pension phase.• Can purchase commercial property from related parties:  an exception in the legislation applies to business real property (commercial property)  can transfer personally owned business real property into the SMSF  tax concessions may apply to alleviate or potentially eliminate capital gains tax upon transfer  potential stamp duty exceptions. • Note: an SMSF can invest in residential property, however it must be purchased from a non-related party.
  10. 10. How to get property into yourSMSF?• There are a number of ways in which you can get property into your superannuation fund, including but not limited to:  buy it outright using the superannuation fund’s money  make an in specie contribution  buy it using borrowed money, under a limited recourse borrowing arrangement.
  11. 11. Option 1 – buy property outright• The SMSF can purchase either residential or commercial property outright, using the fund’s money.• Use the fund’s existing capital to purchase the property outright.• Transaction must be at arm’s length.• Residential property cannot be purchased from a related party.
  12. 12. Option 2 – make an in speciecontribution• Contribute personally owned business real property into your superannuation fund.• Increases the capital of your superannuation.• May be eligible for capital gains tax concessions.• Ensure you are eligible to make a contribution to superannuation.• Ensure you are within you contribution caps.
  13. 13. Option 3 – purchase propertyusing borrowed money• An SMSF can now borrow to purchase a property under a limited recourse borrowing arrangement.• Leverage within superannuation.• Use income and contributions to service debt.• Obtain tax concessions ordinarily available within superannuation.
  14. 14. Option 3 – how does it work?• The borrowing must be to purchase an asset the SMSF could ordinarily purchase under the legislation:  the borrowing can be used for expenses associated with the acquisition .• The asset must be held on trust.• Rights of the lender are limited to the underlying asset.• When borrowing is repaid the SMSF has the right to acquire the asset.
  15. 15. Option 3 - how does it work? Loan – limited recourse Repayments + interest SMSF Beneficial ownership =Borrowings + income Guarantee /1 instalment st mortgage Legal owner Vendor Holding trust Transfer of asset
  16. 16. Option 3 – lending options• SMSFs can borrow from any lender (including you as a related party loan)• Commercial Lenders include:  NAB  CBA  Westpac  St George  Macquarie  Some specialist lenders .• LVRs apply.• Personal guarantees.
  17. 17. Option 3 – lending options• All Lenders require specific powers in the SMSF Trust deed so you will need an updated deed containing:  power to borrow  power to give security  power to appoint a nominee  conflict of interest powers (holding trustee is related to SMSF trustee).• Westpac require a corporate trustee for the SMSF and holding trust.• Meet lenders requirements BEFORE applying for the loan.
  18. 18. Example – Direct Borrowing PMK Repayments SMSF Funds to Loan Lender Purchase St George / PMK Family Trust Holding trustRent or “8 Victoria Ave CustodianIncome Trust” Trust’s role should be minimal . Hold property only via its trustee “8 Victoria Ave Asset – 8 Victoria Ave Custodian Trustee Pty commercial or residential Ltd” Property
  19. 19. Option 3 – lending options• Related party loan.• You can lend money to the SMSF from existing equity.• Dealings MUST be at arm’s length:  loan arrangement must be on commercial terms  interest rates must be market rates.• No personal guarantees.
  20. 20. Example - Indirect External lender St George PMK Repayments SMSF Funds to Loan Related lender Purchase PMK Family Trust Holding trustRent or “8 Victoria Ave CustodianIncome Trust” Trust’s role should be minimal . Hold property only via its trustee “8 Victoria Ave Asset – 8 Victoria Ave Custodian Trustee Pty commercial or residential Ltd” property
  21. 21. When & Why should SMSF Borrowing /Gearing be used?• High tolerance to property & gearing risk.• To control an asset like a business property which is essential to your business.• To access the property market for a long term investment earlier.• Specific financial goals.• Longer investment horizon & Understand leverage.
  22. 22. Risk profile• Is this your profile?  long term – 7 years plus  willing to invest almost entirely in growth investments  see a fall in markets as an opportunity to buy in  growth of 8 -13% long term.• Considerations include:  time frame  liquidity required  falls and rises  savings goals. • Commitment to long term repayments schedule.• Interest rate sensitivity.
  23. 23. Asset Protection IssuesWhat Happens upon:• temporary disability – break a leg• trauma – cancer, stroke, heart attack• total & permanent disability – severe injury/illness• terminal illness• death.Option 1 – sell property (may not be a good time).Option 2 – insure:  who should own the insurance and how can that be arranged through the SMSF – ask us!
  24. 24. Other risk considerations• Inflation risk• Interest rate risk – Government needs to repay debt• Market risk – Flood of new developments• Market timing risk – Buying High Selling Low• Diversification risk• Liquidity risk – Can’t sell part of the property• Legislative risk – Not as big a risk as people thinkThese may equally apply to super (and other) investments
  25. 25. What to do now?• Check if you are suited to additional risk via gearing?• Make sure you do not sign anything until the holding trust is in place.• Get loan pre-approvals early.• Ensure you are using the right solicitors/conveyancers.• Take advice from professionals not mates.Call us in to take you through it.
  26. 26. Thank You• Questions?