Self managed superannuation funds is the fastest growing area within the superannuation industry. There are a number of advantages in settling up your own fund including; controlling your own money, choosing where your funds are invested, ability to secure your funds in cash during volatile times, or using some of your funds as a deposit on a residential or commercial property and borrowing the balance.

Over the last 15 years there have been significant changes in relation to superannuation.  Establishing your own fund is not restricted to the self employed, contractors or the wealthy. PAYG income earners in the majority of cases are now able to roll their current superannuation balances into their own funds, and in most cases the results can be spectacular.

Buying a property through a self managed super fund is totally different to securing one in your own name outside of super. When buying a property outside of super an investor will need to generally need to top up the cash flow for up to 5 or 6 years until the property is cash flow positive. Whereas with a property purchased through a super fund the property will be cash flow positive from day one due the super contributions being received by the fund as well as rental income.

Finance Mentors has formed an alliance with a specialist financial planning firm and accountancy practice to provide a complete solution for people considering this strategy.  A client’s current fund will be reviewed and an assessment will be made in relation to the feasibility of establishing and rolling over to a self managed superannuation fund.

During 2007 superannuation rules and legislation changed to allow SMSF’s to borrow funds to purchase investment properties, both residential and commercial. Our Financial planners and accountants will provide full details on the structure and how purchasing and borrowing through your SMSF will effect you now and also in retirement.

This strategy can be looked at if you already have a self managed superannuation funds or if you have superannuation in traditional funds through your employer. As a guide you and your partner would need approximately $150,000 or more.

There are a number of reasons why you may consider borrowing to invest in property through your SMSF.  

Why buy property with your superannuation?

·         You may want to take some control over your own money in your superannuation fund.

·         You may wish to diversify the investments that your SMSF is investing in.

·         You may have wanted to invest in property through your SMSF, but didn’t want to purchase a property outright.

·         You may have wanted to invest in property through your SMSF, but without borrowing you didn’t have enough in the fund.

·         You may have wanted to purchase property in your own name, but for some reason you weren’t able to.

·         A business person may wish to purchase their commercial/industrial premises that their business in operating out of.

 How does my SMSF Purchase a Property?

Finance Mentors has alliances with a number of specialist property providers who will present suitable investment properties including a full feasibility and due diligence overview.

 - The property must be for investment purposes.

 - The Contract of Sale must be entered into in the name of the super fund and/or nominee.

 - The SMSF obtains finance through Finance Mentors.

 - A  solicitor or conveyancor, as recommended by Finance Mentors acts as per a usual property transaction on behalf of the SMSF.

 - The SMSF pays all normal purchase costs associated with the property such as the Deposit, Legal Costs, Stamp Duty, and loan Costs.

 - After settlement, the SMSF then manages the asset as per normal real estate investments.

What paperwork is involved?

-  Property Trust Deed under which the Property Trustee holds the property as trustee for the SMSF. This is a key document. Care is required to ensure that there are no adverse GST, taxation and stamp duty consequences.

 - The purchase and arrangement must comply with the SIS ACT.

 - The loan agreement is between SMSF and Lender.

 Can SMSF members occupy the Property?

- Not if it residential. If fund members or related persons occupy the property then the “in house asset rule” would have been breached.  

- Commercial properties can be occupied as long as the business occupying it is renting the property under a commercial lease.

 
I thought Super funds could not borrow. Is this correct?

That was correct until amendments to the Superannuation Industry Supervision ACT (SIS ACT) 1993 were made in September 2007. Under the new section 67 (4A) of the SIS ACT, SMSF’s can borrow providing the following conditions are satisfied:

 - The borrowed funds are used to purchase an asset (eg: property) 

• The asset is held by another entity (Property Trustee) in Trust for the SMSF 
• The SMSF must have the right to acquire legal ownership of the asset by way of making payment 
• The Lender’s recourse against the SMSF must be limited to the underlying asset.  
• The lender should not have recourse against other assets of the SMSF. 

What other Restrictions apply?

The SMSF must comply with all the regulations relating to the superannuation fund.

SMSF’s must ensure that the level of investment in the property complies with the investment strategy outlined to the SMSF, including diversification of assets, liquidity, and the maximization of member returns on the fund.

The Government has also made it clear that superannuation funds investing in this type of investment must have appropriate risk management measures in place and must understand the level of risk of the investment.

Who pays what and when?

As the beneficial owner of the property and the borrower of the loan, the SMSF is responsible for all associated investment property outgoings and mortgage payments, as would be the case if the property was purchased outside of the superannuation fund. For example, the SMSF would need to pay: 

• Council and water rates
• Body Corporate fees
• Loan repayments  
• Property Management fees
• Repairs/Maintenance (if necessary)

How can I Transfer the Property?

The SMSF can direct the Property Trustee to sell to any third party (subject to paying out your loan and any other outstanding costs).

Loan Features:

• The mortgage loan has been structured to mirror traditional mortgage products
• The purchased investment is valued by the banks independent valuer.
• Loans can be up to 80% for residential securities, depending on lenders policy
• Loan can be up to 65% for commercial securities, depending on lenders policy
• Loan Terms are generally up to 30 years for residential and up to 25 years for commercial. 
• Once purchased the loan cannot be varied or increased.
• The loan may be interest only for the first few years, but must convert to principal and interest.

Your Finance Mentors will assist with lender recommendation and establishment of the loan. It is imperative to use a finance professional such as us due to the complex nature of borrowing with SMSF.
 

Typical scenario:

       1. Client would sign off an approval to proceed after a SOA is provided by our planner. 

1. Assessment of the implications of rolling over current fund balances. Even if you are in a defined benefit scheme you probably will be far better off financially.  
2. Trustee company and a super fund is established. This is done by the accountant. 
3. Super funds are rolled across to your new fund. This is done by the financial planner. 
4. Funds are then invested as per recommendation and clients risk profile, a suitable deposit amount is identified and loan servicing is calculated so as to identify an optimum property purchase price point. 
5. A property is presented for purchase. A 10% deposit is drawn from the super fund and the balance of the deposit is paid upon settlement. 
6. A loan is applied for, for the balance of the purchase price. 
7. The fund receives rent for the property and also the normal super contributions. 
8. The fund pays the loan repayments for the loan and any other costs associated with a property investment.  

Example comparison between traditional superannuation and a Self Managed Super Fund

Tradional superannuation

$250,000 will grow to approximately;                              10 years $639,000  

                                                                                               15 years $ 958,000         

Self Managed Super Fund

$250,000 is rolled into a new Self Managed Super Fund

$150,000 used as a property deposit

$300,000 borrowed for the property acquisition

$450,000 property purchased

$100,000 balance invested in managed funds/shares/cash account as per Statement of advice.

 
Anticipated results after 15 years
 

Property valuation                                                       $1,320,000

$100,000 will grow to approximately                         $   677000

This takes into account rental income, contributions 
and payment of interest of investment loan.                           

Less loan                                                                      ($ 300,000)

Anticipated balance of super fund                                      $1,697,000

Result highlights

·       Substantially higher total super balance possible

·       Rent increases with property value

·       SMSF receives advantages through depreciation against other income and earnings

·       Employer contributions are continued into the new SMSF

·       Ability to salary sacrifice into new fund

·       Ability to switch investment mix at any time

·       Access your fund balances, earnings on line 24/7

·       Ability to control “Your money”

Finance Mentors Financial and its team of professional affiliates can facilitate the total process from the initial meeting where we discuss the complete strategy of SMSF and buying property through SMSF,  through to implementation of the SMSF, setting up the trusts,  rolling over from the previous fund,  advice on the property,  purchase of the property,  advice and applying for the loan through to final property settlement, property rental and management and the ongoing management of the fund and it’s investments. The growth rates, interest rates and any other costs or incomes are here purely to demonstrate the differences between traditional super and self managed super. This document is not a recommendation or endorsement. Every person’s situation is different and as such a personalized meeting must be scheduled with a Finance Mentors advisor.

Please call Mark Powers on 0402 577 580 for further information.

Mark Powers
Finance Specialist
m. 0402 577 580
markp@financemnetors.com.au