New super story smsf linked in

Kovacs Property Group
Wealth through Property Education and Trusted Implementation

The New Super Story…. puts you in control


Educational Information Only NOT financial advice

• The information is indicative only and meant to be used as a guide to the
benefits of the strategy. This information should NOT be construed as a
recommendation to acquire any particular financial product.

• The information does not take account of any persons personal
circumstances and is by no means a suggestion that the factual and
generic information and calculations would be applicable to any persons
personal circumstances, the information may be portrayed entirely differently
after your advisor analyses your personal circumstances.

• These examples are pre - tax and do NOT include any TAX liabilities in
any way.

• Your TAX situation may have a major impact on the outcome.


We think the changes made on the 24th of
September 2007 make Superannuation the best
all-round environment to buy & hold residential
investment property.
It allows 3 fundamentals of wealth creation to exist in a
protected environment:-
• The principle of making your money work harder for you
(contributions, borrowings, compound growth & diversification)
• The business principle of making money and keeping it All
(tax structure / in-built protection /no capital gains tax / savings)
• Understanding Money grows exponentially if you give it time
(Time is your friend)


New SMSF Changes In Overview
• SIS Act 1993 amended 24th of September 2007
• SMSF can now borrow and charge their assets
• The property is held on trust for the SMSF by another
entity (Custodian Trustee)
• SMSF must have the Future right to acquire legal
ownership of the property
• Limited recourse –
– Property as security ( Held by a separate trust)
– Guarantees in a “personal capacity” only


SIS Act requirements

• Can‟t transfer personal property to the Fund
• Separate Trust for each property (purchase)
• SMSF to establish new Property trust & trustee
• Borrower: SMSF (not Custodian Trustee/Trust)
• No “top-ups” or “re-draws” allowed (SIS Act)
• Acquire a new asset (purchase, not re-borrow)


Get educated with the right team
• You have Trustee responsibilities
• Min 20% Deposits by fund (5:1 gearing)
• Compliance is a key issue (ASIC, ATO, ACCC, Super Commissioner)
• Requires a special trust structure to comply
• SMSF borrowing has more set up requirements than
normal Negative Gearing
• Need to have Accounting, Legal and Financial advice
• Purchase contract and document timing is CRITICAL


Recent Government Announcements.…
• On 14 September 2011* saw a relaxation of the restrictions in place
over SMSF Borrowing arrangements, key points are:
– Borrowed funds can now be used to „maintain‟ or
„repair‟
– Existing cash reserves can be used to improve a
property
– Purchased property can be brought up to a standard to rent out but not improved.
– As long as the assets doesn‟t become a different asset, 3 bedroom v 4 bedroom house.
Improvement can be made to refurbish a kitchen, addition of a pool or new garage.
(The rules previously prohibited any improvement or substantial repair. These constituted a ‘replacement
asset’ and was a breach of the rules. As a result the entire structure failed and need to be dissolved).
– This represents a significant shift in the ATO‟s overall view. I‟d expect to see more interest in
the SMSF Borrowing as a result and therefore put more pressure on exciting supply.

* 2011 a draft ATO (SMSFR 2011/D1) ruling was issued


The seven main questions you need to asked : -

1. What‟s the difference in running costs?
2. What‟s the difference in end result $$ ?
3. Can I do it?
4. What are the funding requirements?
5. What type of properties?
6. What does it cost to setup?
7. Is it complicated to do ?


Q1. What’s the difference in running costs?
Total Debt $450k Total Debt $325k
Tax SMSF Deposit
21% 21%

Tenant
Tenant
47%
47%

Your 9% Super
You Contribution
33% 33%
Out of Pocket
Out of pocket $0/ wk
$150/ wk

NO Deposit – Negative Gearing $125k Deposit –Super Gearing with deposit


Q2. What is the difference in end result $$

$810k
Extra from gearing

$210k
extra
Gearing
$120k Vs
extra
Non - Gearing

Cash on Cash

(7.2%)


Q2 Exciting CGT comparisons when property is Sold
Purchase Entity Personal S.M.S.F
> 10 Years into
Term Held > 10 Years > 10 Years
Pension Phase

Purchase Price $500,000 $500,000 $500,000

Sale Price $1,000,000 $1,000,000 $1,000,000

Gross Gain $500,000 $500,000 $500,000

Depreciation
$100,000 $100,000 $100,000
ADD BACK

CGT Assessable $600,000 $600,000 $600,000

% Assessable 50% 67% 67%

Taxable Gain $300,000 $400,000 $400,000
TAX Rate 33% 15% 0%

CGT Bill $100,000 $60,000 $0


Q3. Can I do it?
• Three part answer
– Will the bank lend the money?
• Finance Specialist (Borrow ability)
– Can they cash flow and structure to buy?
• Financial Planner (Risk profile)
• Solicitor ( Legal advice)
– Is it right for now ?
• Accountant (All things considered is it a “GO”)
Banks will not lend without their approval!


Q4. Funding Requirements
Bank Requirements
– Most want 20% Deposit
– Funded by rent and existing contributions
– Secured by the Asset trust (Limited Recourse)
– Personal Guarantees, not as members

IPP - Requirements
– Safety buffers (Inside Super and in Personal world)
– Must be buying value
– Must have a desire for change


Q5. What types of properties?

• Security location - metropolitan & major centers only
• Standard residential home or unit
• Retail, office, warehouse, industrial
• Properties up to 1 Hectare in size
• No specialised properties


Q6. What are the set-up costs?

• Typically $2,000 to $4,000 depending on
what you have in place.
(These costs are paid by the SMSF)


Q7. Is it complicated to do ?
• No, your network of specialist‟s absorb the difficulty
– Must know the risk
– 5 types of specialist advice required
– There are compliance traps (ASIC, ATO, ACCC, Super Commissioner)
– Structure and timing are important
– An investment mindset is paramount
– A system makes it easy


Putting on a business hat……….does it
make good business sense?
1. Will revenues exceed expenses?
2. How is cash flow maintained until I retire?
3. Focusing on cash flow instead of profits.
4. Underestimating the competition?
5. What type of properties?
6. Inadequate capital? (Expenses are going to be higher, revenue slower)
7. Underestimating the time needed to break even?
8. Overestimating the size of the market (Start small grow fast).
9. Make sure you collect the receivables
10. Having an exit strategy.


Finance
Specialist
•Compliance
Property •Structuring
Professional Accountant
•Financing
• Intelligence SMSF •Contracting
• Integrity IPP
• attitude
• aptitude
• Intensity
Financial
Solicitor
Planner


Benefits to clients
• Super funds can now gear at about 3:1
• Properties are protected by SIS Act
• Separate funding to your other commitments
• Minimal out of pockets for the client ( Paid from 9% SGC)
• Principal can be paid off by tax deductible contributions
• Reduced capital gains Tax (0% - 15%)
• Deposits and costs are paid by the fund
• Increases assets and capital gain potential in fund


The Fine Print !
When purchasing….
• Don‟t sign a contract for a property & then look at setting up a SMSF & borrowing arrangement
– will breach the super rules

• Don‟t pay a deposit for a „SMSF borrowing property‟ from personal funds
– may create stamp duty issues later on

• Ensure that the correct name is on the „contract of sale‟…i.e. „Bare Trust‟
– may create stamp duty issues later on

Ongoing holding…..
• Borrowed monies can only be used to repair or maintain a property!
– Any borrowed amount used to “improve” a property will be in breach of the rules & cause the
structure to fail

• Only existing SMSF cash can be used to improve a property, proceed with caution!
– Can‟t go beyond it‟s original character
– Originally 3 bedroom 1 bath to a 4 bed with 2 bath will cause a breach of the rules


Protection
SIS Finance
Accountants
Specialists

Quantity Your Solicitors
Surveyors

Property Financial
Managers Planners
SMSF
Property Innovative
Developers Quality design
Builders

We want you to join our
Investment Property Program (IPP)

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