The latest buzz word: Self Managed Super Fund
If you’ve been keeping an eye out on the latest trends and practices amongst savvy investors, you may have heard them mention the term self managed super fund, otherwise known as a SMSF. So what is all the fuss about and how can you benefit from a SMSF?
What is a Self Managed Super Fund?
A self managed super fund is a micro superannuation fund established for between 1-4 people. Directors/trustees control it and are also members of the fund. They also decide where to invest the funds.
While this seems to be the latest buzz word, SMSF’s are not a new idea. However, it wasn’t until September 2007 that they could actually borrow money to invest in property or shares.
What type of people does a SMSF suit?
If any of the following reflect your current situation, you could benefit from having a SMSF:
- You (and your partner) are between the ages of 25-60 years old and have a considerable amount of superannuation which you have built up;
- The GFC caused you significant losses and since then have been generally frustrated with your super’s performance ;
- You don’t have a huge amount saved in super, but would happily consider combining your super with that of your partner and possibly up to 3 other family members to purchase an investment;
- You’re aware of the influence of risk in the market, and want to see your wealth grow but in a manner which doesn’t jeopardise your financial stability;
- You’d like to learn more about borrowing to purchase property inside a SMSF;
- You’d like to live a comfortable retirement without going backwards financially;
- You currently pay high commissions to an accountant or financial advisor regardless of how your investments perform each year.
What are the benefits of buying property through a SMSF?
There are many benefits of buying property through a Self Managed Super Fund, including:
- Reducing the cost of an investment property by over 40%. For example, the cost to purchase a property is lower (based on price versus cost) and you can reduce the term of the mortgage by approx. 10-15 years.
- Ability to take on good debt in a tax structure that you can pay off and service debt using 100 cents for every dollar.
- Limited Recourse loan type, meaning other super assets are not subject to bank security.
- Full use of depreciation and capital building tax deductions – not added back to create extra tax on sale of property (as per normal negative gearing).
- Ability to pool funds with up to four members to allow increased exposure to property assets.
- Ability to inter-generationally transfer wealth in a safe asset protected environment.
What are the conditions of borrowing under a SMSF?
Borrowing under a SMSF is a little bit more complicated than a standard home loan, which is why it’s important to seek professional advice when looking to invest using a SMSF. Borrowing under a SMSF is unique for several reasons:
- You must borrow funds under a Limited Recourse Loan arrangement – which means that the SMSF has no liability to make extra payments in the case of a default (however sometimes banks do ask for personal income guarantees from members of the SMSF – so make sure you have professional advice).
- You must purchase the asset through a Holding Trust with a company acting as the trustee. This serves as an extra level of protection in case one of the members of the trust suddenly goes bankrupt – meaning the bank or lender cannot access the property to service their debts – as the trust is technically the legal owner of the property.
- The asset will not be transferred to the SMSF until the loan is paid off. Upon doing so, the asset will be transferred to the SMSF free of any capital gains or stamp duty.
- SMSF loans are not normally able to be highly leveraged, with the borrowing capacity usually limited to approximately 70% of the purchase price versus a maximum of 95% under your own name.
- Normally interest rates are higher on SMSF loans, with discounts on these products still rare in the current market.
What type of property can I purchase in my SMSF?
Using your self funded super fund, you can borrow money to buy residential property, retail property or even commercial property. Buying off the plan is also allowable in most circumstances.
Generally when you are borrowing you cannot purchase land and build or renovate in your SMSF. You also cannot borrow to finance the house in which you live or lease the property you own to someone you know or a family member.
I heard a SMSF is advantageous for tax reasons, why is that so?
Income and capital gains from a property, as with other fund-held assets, are concessionally taxed.
This means income comes with a 15% tax per year and capital gains come with a tax at an effective 10% during the property’s “accumulation or saving phase” if the property is held for more than twelve months. Once the assets of the fund begin to pay back into the superannuation pension fund, income and capital gains are tax-free. Currently this may be at an age as early as age 55. This means that your SMSF can eventually sell a property in the pension phase without paying a cent in capital gains tax. This can be regardless of how much the asset has risen in value over the years.
After members turn 60 superannuation pension payments are not longer taxable.
What are the steps?
Whilst this is a complex process with many steps involved, the basic ones that you should know are:
- Set up a Self Managed Super Fund with a corporate Trustee, if you don’t have one. If you do, you need to update/check the Deed and investments strategy of the fund. This ensures that the fund is able to borrow to purchase property;
- Setup a second Company to act as trustee for the property trust. This is the entity that enters into contract on the property. Don’t make the mistake of just setting up the SMSF and entering into contract with the SMSF. You won’t be able to borrow or will have to rescind and re-enter into contract;
- Rollover any existing super holdings to the SMSF bank account setup. Consider replacing or holding appropriate risk insurance directly in the SMSF, prior to the rollovers;
- Pre-qualify the SMSF with suitable lender for maximum lend. This involves looking at available resources initially in the fund and what may be available ongoing to get into the SMSF, i.e. SGL or SS amounts;
- Find a suitable property(s);
- Have legal draft the bare trust and instalment agreement (specific for each unique property and state purchased in);
- Financial and legal sign off process prior to bank providing finance;
- Conveyancing on property and settling the IW Deed with the appropriate State regulatory body
- Separate legal, financial and accountants often won’t get you the smoothest or most efficient result and costs can duplicate, so we strongly advise dealing with a firm who specialise in the process and can do the lot.
For these reasons, it is beneficial to seek assistance from an expert. They can put together a SMSF and property package with the least hassle. They can also structure all aspects to give you the maximum benefit possible.
This article comes courtesy of Rates Direct.