A change in the regulatory landscape has seen more and more Australians buy property within their SMSFs. In fact, over the past 5 years total investment in property by SMSFs has almost doubled to $80b. Buying a property, particularly within SMSFs, can be tricky and there are some key things that need to be taken into consideration before a purchasing decision can be made:
- type of property
Are you going to buy a new property or established dwelling? There are lots of people promoting the purchase of new properties in super. This is typically being driven by agents/advisers receiving large commissions from property developers, or the property developers themselves.
Commissions range from $10,000-$40,000 per property sold. Anyone receiving a commission may not have your interests at heart, they are probably trying to flog property and make a few
(thousand) extra dollars. What’s more – who do you think is ultimately paying for the commission? If you aren’t sure then look in the mirror and you will have the answer. You will probably pay an inflated price for the property.
The fact is that established properties are likely to produce higher returns than new properties.
What happens to the value of a new car when you drive it out of the showroom? It is no different with new properties. They lose their shine and fall in value in the short term as a result.
- Trustee Structure
Every super fund has one or more trustees. The trustee(s) can either be a company or individuals and while it is slightly cheaper to have an individual trustee structure, that is where the benefits end. It is generally recommend having a company as trustee, particularly when thinking of purchasing a property, as banks are far more likely to lend, and on more favourable terms, to company trustee structures. There other clear benefits to having a company structure including limited liability and decreased administrative burden when adding members/removing from the fund.
- Structure of SMSF loans
SMSF loans are structured differently to normal loans in a few ways:
• The loans are “limited recourse”. This means that if your SMSF can’t make the repayments, the bank can repossess the property but can’t touch the other assets in your fund.
• The property is owned through a separate legal structure called a bare trust. As a result you end up with 4 legal entities – the SMSF, the bare trust, the SMSF trustee and the trustee of the bare trust.
- Getting the Documentation right
It is critical to get the documentation right for SMSF loans. If you get it wrong the ATO will require that you unwind the transaction which usually means selling the property. This will cost you tens of thousands of dollars in stamp duty, commissions, legal fees etc. Don’t risk it!
The best way to make sure you get this right is partnering with a SMSF provider who has a track record in dealings with property purchases inside super. History shows that general accountants often get this wrong – by setting up the 4 entities in the wrong order and/or putting the wrong names of the wrong entities on various documents. Many of them haven’t done this before and you become their guinea pig.
- Investment restrictions
There are a number of restrictions which govern how you can invest your super money. They all stem from the premise that super is there for retirement saving and not for personal gain. Here are a few things to be aware of:
• Your super fund can’t buy a residential property from you or a related party
• You can’t live in a property owned by your super fund, nor can a family member and;
• Your super fund can buy a commercial property from you, and your business can rent a commercial property from your super fund. All transactions need to take place at arm’s length (ie at a fair price).
- Improvement Restrictions
Once you have purchased your investment property you may want to renovate the property. In a nutshell, here is what you can do if you have borrowed money to buy the property:
• Borrow more money or use the fund’s bank account to pay for maintenance and repairs
• Use cash in the fund’s bank account to pay for improvements in the property – as long as you don’t change the nature of the property.
There is a lot of detail sitting behind these rules. So it is wise to obtain advice in this area, as with most issues relating to SMSF’s.
- Capital Gains Tax
If your super fund sells a property (or any other growth asset e.g. shares) after you have commenced a pension, you won’t pay capital gains tax. For this reason, it is likely to be beneficial to hold the property for a long period of time.
This will influence the type of property you buy. Don’t buy a property just because you can get it for a good price today – a saving of a few thousand dollars today will be immaterial in 20 years’ time. Buy the property because it will deliver good income and growth over the long term. That means a good property in a good location.
There are quite a few things to consider when buying property in super. Teaming up with someone who has experience in the area is crucial as the paperwork is very complex and punishment for getting it wrong can be very severe. But don’t fret – along with this report we intend to match you up with a high performing provider who will sit down with you for a free consultation and talk you through, among other things, how to buy property in your super.
Josh Golombick is the general manager of White Collar Quotes; a start-up built to help Australians find the perfect support for their Super. Contact josh@whitecollar.com.au or call 1300 739 800.
