Shift your super into a higher gear


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This presentation looks at a range of strategies for using gearing via a Self Managed Super Fund instalment warrant lending arrangement.

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  • The points on this slide are the technical requirements that you must fulfil to be able to borrow within your super account. <Go through points on slide observing/clarifying: Borrowing is used so that your super fund has the beneficial ownership of the asset and the right to acquire legal ownership through the payment of instalments. Your super fund has the right to receive the income return from the asset purchased. The second requirement is actually on the lender. The loan is a ‘limited recourse’ loan. This means if the asset you bought with the borrowed funds actually fell in value, the only recourse the lender has against you (the super fund) is against the asset purchased with the borrowed funds. The lender can’t call on any other assets of the super fund. This is important – it means your ungeared super investments remain in the fund and remain available for your retirement. The asset purchased with the borrowed funds is one a fund can ordinarily invest into. Importantly, this change we are taking about has not broadened the investment choice – you are still limited to those investments permitted under superannuation law, and what’s covered by the investment strategy for your fund. But you can now used borrowed funds to make those purchases.
  • Shift your super into a higher gear

    1. 1. SMSF Instalment Warrants Aaron Dunn, SMSF Specialist Adviser ® Shift your super into a higher gear
    2. 2. Disclaimer <ul><li>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 your individual financial circumstances (i.e. your 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. </li></ul><ul><li>SMSF Funding Pty Ltd believe that the information in this presentation is correct at the time of compilation but do not warrant the accuracy of that information. Save for statutory liability which cannot be excluded, SMSF Funding Pty Ltd 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 SMSF Funding Pty Ltd or otherwise. </li></ul>
    3. 3. Gearing in Super <ul><li>S.67(4A) requirements </li></ul><ul><ul><li>Borrow funds to acquire an asset held on trust so that the trustee has beneficial interest in the asset and a right to acquire legal ownership (or replacement) through payment of instalments </li></ul></ul><ul><ul><li>In the event of default or exercise of rights by the trustee, lender’s recourse is limited to rights relating to the asset </li></ul></ul><ul><ul><li>The asset (or its replacement) is one which the fund would be permitted to acquire and hold directly </li></ul></ul>
    4. 4. <ul><li>How it works </li></ul>Bank Fund members Instalment Warrant Trust (Custodian) Secured Asset
    5. 5. The parties involved Client Finds property, seeks finance (agent, buyers advocate) Lender Structures and provides finance Lawyer Create Custodian Trust, documentation for IW, conveyancing (property) Financial Planner Financial Product considerations, Investment Strategy, Insurance Accountant / Administrator Fund Admin, Annual Return & Reporting Auditor Financial and Compliance Audit
    6. 6. Targeting your clients <ul><li>Four target areas to discuss with clients in using an SMSF Instalment Warrant: </li></ul><ul><ul><li>Business owners renting or wanting to upgrade </li></ul></ul><ul><ul><li>Business premises held outside of super </li></ul></ul><ul><ul><li>Residential and Commercial Property Investors </li></ul></ul><ul><ul><li>Pre-retirees who are planning a sea-change </li></ul></ul>
    7. 7. Gearing options <ul><li>Borrowings from the bank </li></ul><ul><ul><li>Personal guarantees? </li></ul></ul><ul><li>BYO Banker </li></ul><ul><ul><li>refinance against existing equity </li></ul></ul><ul><li>SMSF JV </li></ul><ul><ul><li>Special purpose funds for business partners / joint investors </li></ul></ul>
    8. 8. Targeting Clients - #1 + #2 <ul><li>Business Owner/Operator </li></ul><ul><ul><li>Now able to gear to acquire or transfer commercial premises within an SMSF </li></ul></ul><ul><ul><ul><li>Regardless of existing borrowings outside of super for existing premises </li></ul></ul></ul><ul><ul><li>Ability to utilise various super and tax strategies to reduce or eliminate any CGT. </li></ul></ul><ul><ul><li>R estructuring of arrangements can eliminate existing non-deductible debt </li></ul></ul><ul><ul><li>Strategy target age – 35+ </li></ul></ul>
    9. 9. <ul><li>The Family Home </li></ul><ul><li>Family home = $700,000 </li></ul><ul><li>Debt = $300,000 (not deductible) </li></ul><ul><li>potentially used as business security </li></ul><ul><li>The Family business </li></ul><ul><li>Run a successful widget business. </li></ul><ul><li>Business premises held in family trust </li></ul><ul><ul><li>asset protection </li></ul></ul><ul><li>Factory Valued at $600,000 </li></ul><ul><li>Debt of $200,000 (deductible) </li></ul><ul><li>Rental agreement (business & trust) </li></ul>John & Jane Existing Superannuation John = $150,000 Jane = $100,000 Case Study The power of the SMSF & Borrowing Rules Widget Co. Pty Ltd (business) Family Trust Rent Security Security
    10. 10. John & Jane John & Jane SMSF John = $150,000 Jane = $100,000 Borrow = $350,000 (LVR 70%) Case Study The power of the SMSF & Borrowing Rules Widget Co. Pty Ltd (business) Family Trust Rent Security Instalment Warrant Trust Limited Recourse Loan Asset held on trust via Custodian Arrangement <ul><li>Outcomes for John & Jane </li></ul><ul><li>Creation of SMSF & Instalment Warrant </li></ul><ul><li>Transfer of property </li></ul><ul><ul><li>No CGT </li></ul></ul><ul><li>Family Trust receives $600k </li></ul><ul><ul><li>payout FT debt ($200k) </li></ul></ul><ul><li>John & Jane payout $300k home loan </li></ul><ul><li>Further $100k to invest (can contribute back into super) </li></ul><ul><li>100% deductible debt for SMSF, being made from deductible super and rental payments in business </li></ul><ul><li>Future growth of property – no CGT (if sold post retirement) </li></ul>Paid off home loan
    11. 11. Targeting Clients - #3 <ul><li>Property Investors (residential or commercial) </li></ul><ul><ul><li>Need to consider </li></ul></ul><ul><ul><ul><li>Yield </li></ul></ul></ul><ul><ul><ul><li>Capital growth </li></ul></ul></ul><ul><ul><ul><li>LVR </li></ul></ul></ul><ul><ul><ul><li>Bank or BYO banker </li></ul></ul></ul><ul><ul><ul><li>Ability to contribute to super / servicing </li></ul></ul></ul>Strategy target age – 35+
    12. 12. Targeting clients - #4 Find the perfect house for when you retire?
    13. 13. Finding your dream home to retire <ul><li>SMSF can acquire now using SMSF instalment warrant </li></ul><ul><li>Available to rent until retired </li></ul><ul><ul><li>You/client can’t use (sole purpose test) </li></ul></ul><ul><li>Sell own home and move into dream home </li></ul><ul><ul><li>No CGT on transfer when in pension phase </li></ul></ul><ul><ul><li>Tax-free in-specie lump sum (>60 tax free); </li></ul></ul><ul><ul><li>Contribute proceeds of principal residence to replace asset value (subject to age and caps) </li></ul></ul><ul><li>No stamp duty* </li></ul><ul><ul><li>Need to consider relevant state stamp duty requirements </li></ul></ul><ul><li>Strategy target age – 45 to 50+ </li></ul>
    14. 14. Where are we at? <ul><li>Increasing enquiry for property investment </li></ul><ul><ul><li>Lower interest rates have created interest in direct residential and commercial property investment </li></ul></ul><ul><ul><li>Bricks and mortar as part of their retirement plans </li></ul></ul><ul><li>‘ Gearing in super’ solution becoming mainstream </li></ul><ul><ul><li>Establishment costs may be a deterrent </li></ul></ul><ul><li>Property will capture higher level of asset allocation in SMSFs moving forward </li></ul>
    15. 16. Self Managed Super Funding Pty Ltd <ul><li>[email_address] </li></ul><ul><li> </li></ul>