I openly admit that I am not an expert in choosing properties (indeed my own personal history with property investing is dismal to say the least but improving!). I work on the structure and strategy with my clients and recommend they do their own in-depth property research or lately I have been recommending people use a Buyer’s Agent if they are inexperienced or lack confidence, time or want help and advice but need to know that person is working 100% on their behalf.
That brings me to the title of this blog and I asked a local Buyer’s Agent here in the Hills District of Sydney who operates countrywide to explain the role and benefits of a Buyer’s Agent. So here is our first Guest Post from Jay Anderson of Jay Anderson – Property Strategist | Buyers Agent | Property Advisor
“Empowering clients to make the right choices!” –
Searching for a home to live in or investing in property, could at best be an intimidating experience. You wouldn’t invest half a million dollars in a business without a strategy or without a business plan, so why would you invest that, or even more, into a property without a plan or strategy? With a process of consultation we determine what clients really need to reach their own personal property goals. Through step by step professional guidance we determine a strategy suitable to our clients needs and finally implement that strategy, finding the home or investment property that credibly suits the designed and agreed personal property strategy.
Why use us as your Property Investment Advisor and Buyers Agent:
We work exclusively for the Property Investor/Home Buyer. We have no alliances with any real estate agencies, selling agents or property developers and we fight for our buyers! There’s a clear distinction between our services and those of selling agents. We don’t sell property, have no ‘stock lists’ and as exclusive buyer’s agent, we only act for the buyer not the seller.
We give our clients guidance throughout the entire purchasing process. We provide insight on the market conditions and the best areas to buy/invest in based on their individual needs and property ambitions, empowering our clients to make the right choice and purchase their ideal property at the right price.
You don’t have to rich and famous to use our services. We can assist you whatever your budget is. We will save you money (we use great negotiation techniques), time (we do the running around for you, we source properties on and off market, attend inspections, provide photos/videos and will advise you what to offer) and alleviate the stress that often accompaniesa property purchase.
We save our clients heartache. No more the need to try to figure out if my friends ‘advice’ at the BBQ to invest in that ‘hot’ area is credible or not! Believe it or not, but 80% of mistakes that’s made in investing in real estate are made at the buying stage. “You don’t know what you don’t know” and whilst you “can” do it yourself, there is so much at stake.
We are a fee for service organisation and do not accept any sales commission or incentives from vendors, builders, developers or third parties. We are truly independent and represent the buyer only.
We will only refer our clients to service providers that have their best interest at heart. We have created a safe environment for property buyers with like-minded people all focused on: ‘What’s in the best interest of my client’.
We carry appropriate and adequate Professional Indemnity insurance for the services we provide and are a proud member of the Property Investment Professionals of Australia (PIPA), Property Investors Council Australia (PICA), a Qualified Property Investment Advisor (QPIA) and a licensed Real Estate Agent (LREA)
Why not build your property portfolio on good foundations? Make your next property acquisition an informed one.
The SMSF Coach or Verante Financial Planning do not request or receive any commissions or referral fees from recommending services like Jay’s, we just want the best professional advice for our clients.
For more detail on Investing in Property through an SMSF check out our previous articles
Keep updated by putting an email address in on the left hand column and pressing the “Sign me up!” button. Happy to take comments in the section below.
Bye for now.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 Norwest NSW 2153
40/8 Victoria Ave. Castle Hill NSW 2154
Suite 4, 1 Dight St, Windsor NSw 2756
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
I am always on the look out for interesting tips for clients and while this may not necessarily be SMSF related, many of my readers are also wish to help their children with money for house deposits, education funds or other ad-hoc expenses . I read the blogs from Dr.Brett Davies at Legal Consolidated regularly and found them very informative and excellent guidance so, with his permission, I am “paying it forward” again!
In his blog Parents making loans to childrenhe discusses why smart parents use loan agreements to protect the family wealth. Here is the detailed article and video he prepared.
Parents making loans to children
Sad parents
Mum and dad give their daughter, Joanne $400,000 to buy a house. She then marries Ken. Ten years later Joanne and Ken divorce. The house is still worth $400,000. It is the only asset of the marriage. The Family Court awards $200,000 to Ken. The Family Court is not interested that the money was a gift from Joanne’s mum and dad. Instead, loans to children are safer.
Smart parents
Mum and dad lend $400,000 to their daughter, Joanne. Joanne signs a legally prepared Loan Agreement built on Legal Consolidated’s website. Joanne purchases a house with the money. She marries Ken. Ten years later they divorce. The house is still worth $400,000. It is the only asset. The Family Court is shown the Loan Agreement. The Family Court orders that Ken gets nothing. This is because the assets of the marriage are nil.
To protect your loan build a legally prepared Loan Agreement – on a law firm’s website. Homemade loan agreements may not work. They carry less weight with the Family Court and Bankruptcy Court. Why take the risk?
But I love my children
There is nothing wrong with helping our children financially. It could be for their first car, grandchildren school fees, a holiday or a property. Today it is becoming more popular to help out our children with a home deposit, but simply giving away the money has real risks. It is important to protect the money in case:
they divorce
go bankrupt
suffer from drugs
suffer a mental condition
stop loving you – ‘King Lear’ offers his daughters his Kingdom for the return of their love, but after they promptly abandon him
you run out of money yourself, in your old age
Documenting loans to children
Never ‘give’ your children money. Always ‘lend’ them money ‘payable on demand’. Get it back if something goes wrong. Treat yourself like you are a bank, and your children are taking out a loan.
Creating a loan agreement not only protects your own interests but also benefits the child as you can decide in the future to forgive the loan while you are alive or in your Will.
With loans to children, never rely on a verbal agreement. Press the Build button and build a Loan Agreement on our website. We are Australia’s only law firm website providing legal documents online. It puts everything in writing with rules about the loan.
Any tax issues?
There are no tax issues. The interest rate for the loan is ‘as advised by the Lender’. Therefore, while the interest rate is zero you have no income tax issues. If the child separates you can increase the interest rate to draw more money out of the failed relationship. There is less money for the Family Court to give to your ex-in-law.
A loan isn’t always for property and the grandchildren’s school fees. You can also fund the children’s Superannuation fund. Speak to your Financial Planner and Accountant.
At different times, it is common to benefit one child over another with money. If you benefit one child over another then it is adjusted automatically at the time of your death. Say you lend one child $500k and the other child $300k then that is adjusted at your death. So it is all fair again.
When making loans to children:
talk with all your children together about the loans
never gift children money – only loan them money (this protects both you and them).
don’t rely on home-made loans or IOUs – build a Loan Agreement
Can I just do a Loan Agreement on the back of an envelope?
In the movies, IOUs are often handwritten on a piece of paper. Sometimes instead of a Loan Agreement, someone does a ‘minute’. Both approaches fail. In Rowntree v FCT [2018] FCA 182 shows the additional care required to document even simple related-party transactions, such as loans. In this case, the taxpayer, a practising NSW lawyer, claimed he borrowed over $4m from his group of private companies. The Court said:
‘Mr Rowntree has not deliberately chosen to ignore the law. His evidence presented to the Tribunal suggests that he genuinely believed that there were arguments to support his view that a loan was in existence.’
He failed. Only a legally prepared Loan Agreement satisfies the ATO, Bankruptcy Courts and Family Court.
Cheeky son refuses to pay Dad back
In Berghan v Berghan [2017] QCA 236 the son borrows money from his Queensland aged father. The son refuses to pay it back.
The son, in the first court case, successfully argues that the monies were given to him as a gift. However, the Court of Appeal held that the amounts were loans.
Portrait of an ungrateful child
The son’s company suffers financial stress. The son gets $98k from this Dad. The boy continues to borrow more money from dad.
Later, the son borrows his father’s credit card. The boy clocks up another $13k of debt.
The First court case
His Honour said that Dad failed to prove a legal binding agreement. There was no paperwork. There was no written loan agreement. It was a gift.
The Judge said:
The son promised to look after his Dad in old age. But that was just a moral obligation.
Dad is making the payments to the son, for the benefit of the company, was simply discharging his parental obligations. This is because their daughter was an employee at the son’s company. The money was therefore of a charitable nature. Dad was protecting the son’s company so his daughter would keep her job.
Dad allowed his boy to use the credit card when the boy was injured and impecunious. These circumstances are charitable.
Good sense prevails in the Appeal
The Court of Appeal had a better sense:
The lengthy period it took Dad to make a demand for the money does not count against his assertion that a breach of contract existed. The Court held post-contractual conduct is not taken into account when interpreting the terms of a contract.
The motive Dad had in transferring his son the money, be it “charitable” or otherwise, was not relevant.
The Court set aside the decision of the District Court. The Court said that the monies were paid with an understanding that they would be repaid. This was an “inescapable conclusion”. The transactions were a contract of loan. The Court gave judgement in favour of Dad of $286,000 including interest.
This is another example of elder abuse. The decision shows the perils of not signing a loan agreement. Going to Court – twice in this instance – was expensive and exhausting for the aging father.
What happens if your child has a partner and buys a home?
What if your child has a partner? The loan agreement may change depending on whose name the home is purchased under. Best that your child signs the Loan Agreement and buys the home just in their name. This binds your child alone, and the partner has no say in the matter. What if the partner objects? It is important to stay firm and explain it is ‘to protect your interests, it is nothing personal’. This protects yourself and your child, if the relationship with the partner does not end up ‘happily ever after’.
What happens if the home is purchased in both your child and their partner’s name? Then both your child and their partner sign the Loan Agreement. Our Loan Agreements allows the loan to be lodged as a caveat. Or our Loan Agreement can be registered as a second mortgage – but the bank is notified. So caveats are more common.
We are in no way connected to Legal Consolidated, we do not receive referral fees or commissions of any sort from them. This is purely general advice from a trusted source and you should seek legal advice form them or your own solicitor before making any decision.
Looking for an adviser that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options. Do it! Make 2019 the year to get organised or it will be 2029 before you know it.
Please consider passing on this article to family or friends. Pay it forward!
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
I was on the hunt for some interesting insights in to the current market and using momentum or contrarian strategies for clients . Lawrence Lam of Lumenary Investment Management writes in this guest blog that it not always a case of either or but a combination.
At a recent lunch with another fund manager I found myself engaged in a discussion about the state of the current market.
‘From your perspective, are you seeing many good opportunities?’ I asked.
‘I’m seeing good companies, but prices are toppy,’ he said, wincing before continuing. ‘More than I’d like to pay. But we’ve recently deployed more anyway.’ He shrugged his shoulders, ‘Momentum in the market is strong – the fed is decreasing rates. Despite the high prices, we wouldn’t want to miss this momentum.’
I nodded as we both acknowledged this unique investment environment. Decreasing rates, high stock valuations, yet stock prices that have continued to climb steadily.
Walking back to my office I reflected. ‘Is now a good time to be a momentum investor? Or is it time to go against the herd?’
Harness the power of momentum or be a contrarian?
It’s a dichotomy faced by all investors, but it isn’t a binary decision. Your portfolio can be made up of both momentum and contrarian investments. So the question becomes: how can we determine the optimal proportion of holdings between momentum and contrarian?
Are you seeing the full picture?
Momentum investors have much to gain if the wave of popularity is caught early. However, be the last one to the party and you will be left with all the cleaning up. The real question is: how much more of the wave is left to catch? The solution to this contradiction can be found by understanding the long-term context.
The ratio of a company’s stock price-to-intrinsic value tells us how much the market is willing to pay for the company. It’s a useful measurement of sentiment at one point in time. There’s a clear link between sentiment (the stock price) versus fundamental value (intrinsic value).
But it doesn’t give us the full picture. To understand this contradiction, we need to see how sentiment for the stock has changed over a significant period of time – over entire market cycles. Extend the ratio of stock price-to-intrinsic value over a 15 year horizon and you’ll now gain a multi-dimensional view of just how manic-depressive Mr Market is.
As an example, here is the change in sentiment for the founder-led aerospace electronics company HEICO Corporation.
During the GFC, Mr Market was very pessimistic. He was only willing to pay 1.8x the intrinsic value of HEICO. But alas Mr Market is as fickle as they come. More recently, he has been very bullish. He’s willing to pay 4.8x intrinsic value. A large proportion of the returns have been driven solely by the company’s increasing popularity with investors.
Now we have a better view of the context. Understanding the stock price and intrinsic value over a long time period equips us to answer the following question…
Is the party getting started or is it about to end?
There’s an interesting observation about parties. When do they end?
Answer? They end when the alcohol runs out. Rarely do they end immediately though. Good times roll on for a while longer before the sudden realisation hits the sobering crowd.
So when is the worst time to join a party?
As you’re pondering the answer, here is another view of HEICO to illustrate the point.
Although the intrinsic value of HEICO’s business has consistently increased over time, the increase in it’s price has far outpaced the fundamental growth of the company. HEICO is a solid and growing company, but its impressive performance has been driven primarily by sentiment and price, rather than actual business value. The price-to-intrinsic value ratio shows this.
Risk is heightened when a company’s stock price outpaces its intrinsic value for significant periods of time. As crazy as Mr Market is, one thing is certain – his enthusiasm and pessimism never last forever. The gravitational pull of a company’s fundamental value is unrelenting.
The best time to join a party is when there’s plenty of alcohol and not too many people. But tread carefully when there crowd is pumping and booze is running low. Whilst the fun may continue for a while longer yet, the risk of an abrupt ending is heightened.
A ‘reasonable’ price
Pure momentum investing focuses predominantly on the historical price movement and pays little attention to actual fundamental value. But if you want to understand if a trend is justified, the fundamentals are critical.
Armed with this insight, we can make a judgement call on what a ‘reasonable’ price would be and whether we should join the party. Some sectors run hot. Today, technology is a classic example. But a strong trend shouldn’t be a deterrent. Prices may seem exorbitant, but in the context of the company’s historical sentiment, sometimes the high price is worth paying. What may seem expensive on an absolute basis may be reasonable in the context of history. For example, the price-to-intrinsic value of Facebook was high on an absolute basis in late 2018, but was reasonable when compared to its history. It has proven to be a good entry point so far.
But there’s more for enterprising investors – the picture is still not yet complete.
A deeper level of analysis
Competition
You may have noticed my focus on individual company analysis rather than broad-based economic generalisations. We are buying slices of companies after all. Whilst we can understand the sentiment in our target company, it is also important to have context across other comparable companies. The same price-to-intrinsic value historical ratio across a few companies will give us a sense of sentiment across the sector. We’ll be able to see if there are any other reasonably priced companies.
Potential growth
So far the focus has been on gaining historical context. Sometimes the momentum is justified if there are tangible growth prospects. In other words, intrinsic value is expected to grow significantly with price. In those situations, the trend may be your friend. For those that heard me speak at the AIA National Conference, I outlined my framework to assess the potential growth of a company.
Intrinsic value
Speculators focus on stock price movements only. Investors focus on the underlying true worth of a company.
As Warren Buffett says “Price is what you pay, value is what you get”.
The fundamentals of a company’s value is reflected in its Intrinsic value. Importantly, in determining a company’s intrinsic value, I’ve stripped out accounting distortions that may hide a company’s true worth.
Closing remarks
Is the trend your friend?
If the fundamentals of a company are sound and the price is reasonable in the context of its history and other competitors, then the trend may indeed be an ally. Ride the wave and enjoy the party.
Price and intrinsic value may deviate for many years but price will eventually move towards intrinsic value over the long-term. Seeing the full picture is key to capturing sensible opportunities. In every party, everyone sobers eventually.
Happy compounding.
Note:
Stocks mentioned have been used as examples only. They are not recommendations to buy or sell.
About me
Lawrence Lam is the Managing Director & Founder of Lumenary, a fund that uncovers the best founder-led companies in the world. We invest in unique, overlooked companies in markets and industries beyond most managers’ reach. We are a different type of global fund – for more articles and information about us, visit www.lumenaryinvest.com
The SMSF Coach is in no way connected to Lawrence Lam of Lumenary Investment Management and we do not receive referral fees or commissions of any sort from them. This is purely general advice and market commentary from a trusted source and you should seek personalised financial advice before making any investment decision.
Looking for an adviser that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options. Do it! Make 2019 the year to get organised or it will be 2029 before you know it.
Please consider passing on this article to family or friends. Pay it forward!
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98993693, Mobile: 0413 936 299
PO Box 6002 NORWEST NSW 2153
U40, 8 Victoria Ave. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Advisory Pty Ltd ABN 434 605 488 042, AFSL 476223
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
ASIC and the ATO have on numerous occasions highlighted the dangers of buying property through one organisation that organises all steps in the process. they call them “one-stop-shops”. This is where you get all or most of the following services for a new SMSF from one associated group:
Real Estate recommendation for a specific property and/or manage the property rental
Property Adviser who does initial training or introduction to property investing, then pointing you to associated service providers
Accounting and Audit to set up and do the admin for your new SMSF
Financial Planner to prepare a Statement of Advice on the suitability, risks, costs, benefits of and SMSF and benefits lost in moving to an SMSF
Conveyancer to process the property transaction
Mortgage Broker to sort out the finance
One of the issues is that they may not be very transparent about how they’re interconnected. Always ask each party what their fees are and do they pay any form of remuneration, fees, referral commission charges etc to any other party.
397 – “The use of property one-stop shops is an area of significant concern. These models tend to promote the purchase of geared residential property through an SMSF, arranged by groups of related real estate agents, developers, mortgage brokers, accountants and financial advisers.
398 – The one-stop shop model creates inherent conflicts of interest that may affect the advice given to a client to set up an SMSF, make subsequent investments, or use specific services. These conflicts can arise from direct or indirect commissions, referral payment arrangements, representative remuneration structures or even management pressures.
399 – We have previously achieved enforcement outcomes against operators of property one-stop shops involving SMSFs—such as Park Trent Properties Group Limited and Anne Street Partners. In light of the findings from this project, we will continue to conduct surveillance on these property one-stop shop operators and take enforcement action where appropriate.
400 – We will also work with other regulators, including the ATO and APRA, to develop a holistic approach to addressing problems that we are seeing with property one-stop shops.”
Despite these warnings ASIC’s further research has shown that people still value the idea of a One-stop-shop for their advice needs when buying property. I assume this is because people just like simplicity and want someone to manage the process for them. Well you can have that simplicity without the inherent dangers involved by choosing to work with professionals who charge a fee for service for their advice and do not accept commission or any remuneration from other parties or fully disclosed like such as with a Mortgage Broker who is remunerated by the lender.
So when thinking about a property for your Self Managed Superannuation Fund or any asset really, you should always ensure that at least some of the providers of services are working in your Best Interests. Financial Planners are obligated by law to act in their Client’s Best Interest but we all know that money , fees or commissions may blur the lines. So don’t be afraid to ask questions about:
who is providing you the advice
how are they being paid,
Are they receiving any other form of remuneration
how are they connected to the other service providers
It is important for your professional service providers to work on strategies on your behalf but that does not mean they need to be paying fees to each other which ultimately increases your costs. Let me explain how I work with other professional service providers for example:
I do not provide specific advice on “the property” for you and stick to my area of expertise; whether an SMSF is right for you and how you can use it to achieve your goals. I charge you a specific fee for this advice which is outlined in a Letter of Engagement before you commit to my service. If you want ongoing advice, again I explain it up front in an Ongoing Service Agreement.
I provide you with a range of SMSF Admin and Audit solutions from other providers that will suit your needs. I have 4-5 options to ensure you can choose what suits you with our guidance and often that may be to use your current Accountant. I do not receive any commission, fees or other remuneration from these providers. I simply insist they take good care of my clients
If people want help choosing a property, again I have a number of trusted Buyer’s Agents throughout the country that are on hand to provide advice. I do not receive any commission, fees or other remuneration from these providers. I simply insist they take good care of my clients.
If you need assistance in getting finance arranged then I refer you to a number of brokers who have experience and expert knowledge in SMSF Lending. I do not receive any commission, fees or other remuneration from these providers. I simply insist they take good care of my clients.
Legal Advice/Conveyancing – If you do not have a current lawyer or they do not have SMSF experience then I refer clients to a number of lawyers / conveyancers with specific experience and expertise in the rules around SMSFs for property transactions, powers of attorney and estate planning.
I do not receive any commission, fees or other remuneration from these providers. I simply insist they take good care of my clients.
Can you say the same about your service providers?
Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? Then why not contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel:02 9899 3693, Mobile:0413 936 299
PO Box 6002 NORWEST NSW 2153
Suite 40, 8 Victoria Ave, Castle Hill NSW 2154
Suite 4, 1 Dight St., Windsor NSW 2756
Corporate Authorised Representative of Viridian Advisory Pty Ltd ABN 34 605 438 042, AFSL 476223
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
Thankfully after the reams of changes to superannuation in last years budget that we are still trying to negotiate the through the implementation minefield, the government have left SMSFs and Superannuation largely untouched this year. As the SMSF Association have said “Stability and confidence for superannuation is the good news coming out of the 2017-18 Federal Budget.” However there are a few issues and gladly opportunities you need to be aware of.
Contributing the proceeds of downsizing your home to superannuation (or just taking advantage of strategy if moving house)
Tip: If you’re over 65 self funded retiree and your marginal tax rate is more than 15% then strategy may be useful. May also help avoid the Medicare levy increase in 2 years time.
It is proposed that from 1 July 2018, people aged 65 and over will be able to make a non-concessional contribution of up to $300,000 from the proceeds of selling their home. These contributions will be in addition to the existing contribution caps.
Features associated with this measure include:
The property must have been the principal place of residence for a minimum of 10 years
Both members of a couple will be able to take advantage of this measure for the same home, meaning $600,000 per couple can be contributed to superannuation through the downsizing cap
Amounts will count towards the transfer balance cap when used to commence an income stream
Contributions will be subject to social security means testing when added to a superannuation account
Contribution eligibility requirements, such as the work test and restrictions on contributions from age 75 will not apply to these contributions. The requirement to have a total superannuation balance of less than $1.6 million to be eligible to contribute will also not apply.
Social security changes
Pensioners who lost their Pensioner Concession Card entitlement due to the assets test changes on 1 January 2017 will have their card reinstated. This card provides access to a wider range of concessions than those available with the Health Care Card, such as subsidised hearing services. Pensioner Concession Cards will be automatically reissued over time with an ongoing income and assets test exemption.
As of 1 July 2018, there will be stricter residence requirements for the age pension and disability support pension. From that date, pension recipients will need to have at least 15 years’ residence in Australia or 10 years’ continuous residence with certain restrictions.
First home super saver scheme – talk to us about how you can use this to help your children or grandchildren
From 1 July 2017 individuals will be able to make voluntary contributions to superannuation of up to $15,000 per year and $30,000 in total, to be withdrawn for the purpose of purchasing a first home. Both voluntary concessional and non-concessional contributions will qualify.
These contributions (less tax on concessional contributions) along with deemed earnings can be withdrawn for a deposit from 1 July 2018. When withdrawn, the taxable portion will be included in assessable income and will receive a 30 per cent offset.
Features associated with this measure include:
Contributions will count towards existing concessional and non-concessional contribution caps
Earnings will be calculated based on the 90 day Bank Bill rate plus three percentage points.
The ATO will administer this scheme, calculate the amount that can be released and provide release instructions to superannuation funds.
The amount withdrawn (including the taxable component) will not flow through to income tests used for tax and social security purposes, such as for the calculation of HECS/HELP repayments, family tax benefit or child care benefit.
Example of how to use this strategy: Get your child or grandchild to salary sacrifice up to $15,000 each year until they max out the $30,00 limit and let them live at home or support their living costs to ensure they can still make ends meet. This way you promote a savings culture and they get a tax incentive at the same time. Boost the savings by matching what they put in to the super account dollar for dollar in to an High Interest Savings account.
If you are giving money to children then teach them a valuable life lesson on regular saving at the same time…best gift you can give to them.
Bank levy may hit dividends or term deposit rates
The Government will introduce a major bank levy which will raise $6.2 billion in the next four years. This will either be passed on to customers with lower rates on deposits or higher mortgage rates or to shareholders in the form of lower dividends. Another good reason to review your exposure to the large banks as the market cycle changes.
PROPERTY INVESTORS
Integrity of limited recourse borrowing arrangements
The Government is proceeding with amendments to the transfer balance cap and total superannuation balance rules for limited recourse borrowing arrangements (LRBAs). The outstanding balance of an LRBA will now be included in a member’s annual total superannuation balance for all new LRBAs once this legislation is passed.
Integrity of non-arm’s length arrangements
The Government will amend the non-arm’s length income rules to prevent member’s using related party transactions on non-commercial terms to increase superannuation savings by including expenses that would normally apply in a commercial transaction.
Disallow certain deductions for residential rental property
From 1 July 2017, deductions for travel expenses related to inspecting, maintaining or collecting rent for a residential rental property will be disallowed.
Investors will not be prevented from engaging third parties such as real estate agents for property management services. These expenses will remain deductible.
Also from 1 July 2017, plant and equipment depreciation deductions will be limited to outlays actually incurred by the SMSF in residential real estate properties. Plant and equipment items are usually mechanical fixtures or those which can be ‘easily’ removed from a property such as dishwashers and ceiling fans. Here’s the list of residential #property plant and equipment items that will go in crack down on negative gearing deductions. Here’s the list of residential property plant and equipment items that will go in crack down on negative gearing deductions.
This measure addresses concerns that some plant and equipment items are being depreciated by successive investors in excess of their actual value. Acquisitions of existing plant and equipment items will be reflected in the cost base for capital gains tax purposes for subsequent investors.
Other matters: Energy Assistance Payment
A one-off Energy Assistance Payment will be made in 2016-17 of $75 for single recipients and $125 per couple for those eligible for qualifying payments on 20 June 2017 and who are a resident in Australia.
Qualifying payments include the Age Pension, Disability Support Pension, Parenting Payment Single, the Veterans’ Service Pension and the Veterans’ Income Support Supplement, Veterans’ disability payments, War Widow(er)s Pension, and permanent impairment payments under the Military Rehabilitation and Compensation Act 2004 (including dependent partners) and the Safety, Rehabilitation and Compensation Act 1988.
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
So you have heard you can buy an investment property with your superannuation? Here is some general information and pros and cons of property in an SMSF. I have also provided links to more comprehensive information on the strategies most often used.
People have been using their superannuation to buy property in their SMSF for decades now but it really came to the fore when SMSFs were allowed to borrow to buy assets in 2007 and when this was given more clarity in terms of borrowing to buy residential property in 2010.
Investing in property within superannuation is not as straightforward as investing outside the superannuation environment and you need to do your homework. Buying property through super can be great way to invest for retirement but it’s probably most suitable for people who are only 15 to 25 years away from it. Not only do they probably have 20 years or more contributions and hence sufficient balances for a deposit at their disposal, they are also more likely to be able to hold the property until after retirement to realise the best of the tax savings.
I have also provided some more detailed general guidance on specific strategies and the implementation process on my Property in an SMSF page.
Property Investment in an SMSF:
People are able to combine their superannuation accounts in to an SMSF and use then are able to buy both residential and commercial property with or without the support of a mortgage from a lender.
However it’s important to note that all investments need to be in the best interests of fund members and meet the Sole Purpose test of superannuation and the legislation dealing with this topic.
So please make sure that any property investment has an income stream and realistic prospects for capital growth. Overall, an SMSF investment strategy needs to take into account the personal circumstances of all the fund members, including their age and risk tolerance and needs to consider:
diversification (investing in a range of assets and asset classes)
the liquidity of the fund’s assets (how easily they can be converted to cash to meet fund expenses)
the fund’s ability to pay benefits (when members retire) and other costs it incurs
the members’ needs and circumstances (such as, their age and retirement needs).
the steps that will be taken to insure the members and protect their retirement savings.
What you should make clear in the investment strategy:
When it comes to purchasing any investment asset through a SMSF, the Australian taxation office (ATO) provides the following guidance:
Investments must be purchased on an ‘arm’s length’ basis and must be maintained on a strict commercial basis.
The investment must meet the sole purpose test of providing retirement benefits to fund members.
In terms of property, this means that the purchase cost and sale price – as well as the rental income – must reflect a true market rate of return. It also means that you usually cannot buy the property from – or sell the property to – someone associated with any of the Fund’s members. This is called a “Related Party” transaction.
It also means that neither you nor anyone associated with you can receive any personal benefit of holding the asset. (more on this below)
So what are the pros and cons of holding a property in Superannuation?
Pros
Combined investing as a couple or family:. Your personal savings outside superannuation – or even your individual account balance(s) within superannuation – may not be enough to meet the deposit requirements of a direct property. Combining your account balances with the other members of your family, though, may give you the purchasing power you need to invest in a large asset.
It can be tax-effective. Superannuation receives concessional tax treatment on assets used to save for retirement. The earnings within your superannuation fund are taxed at only 15% with a 33% discount for assets held more than 12 months (i.e 10% CGT)– which is most likely less that your marginal tax rate. The big bonus is if you hold on to that property until retirement the earnings within the pension phase are tax-free. That is on the rent if you keep the property or the sale proceeds if you sell it. (subject to the $1.6m pension transfer limit per member from 1 July 2017).
Making repayments from pre-tax dollars. If you can afford to save and have room within your concessional contribution limits then you can salary sacrifice additional income to super to pay off the loan quicker from pre-tax dollars. So paying 15% on salary sacrifice and then making additional repayments rather than paying your marginal tax rate on the income and saving it outside super.
Supporting Business growth . While the rules prevent you purchasing a residential property from yourself or a related party, you can buy a commercial or industrial property (know as Business Real Property) to lease back to your own business – provided you pay a current market rate of rent. This helps free up funds to grow the business.
The feel of Bricks and Mortar! – providing more control over your investments. Many SMSF investors appreciate having control over the investments they buy and the ability to “value add” to their property investments via renovation or development (See more detail in SMSF Borrowing: What Can I Do With An Investment Property Within The Rules. there is no substitute for that feeling when you have a real understanding of where your money is invested.
Cons
Big lumpy illiquid asset. Diversification – the wise move of not having all your eggs in one basket is more difficult to achieve if your SMSF owns just one or two large assets. That lack of diversification may not be in the best interests of the SMSF members especially across generations. The old adage “You can sell off a bathroom when you need cash” comes to mind so make sure you plan your “what if strategies” and look at insurance, cash buffers and especially the funding of future pensions upfront.
Set up costs are higher. There are thousands of dollars in set-up costs and there are sometimes higher fees involved in getting a loan through your SMSF with lenders. As always set up costs should be balanced against long term benefits of the strategy. Because of the costs buying property through a SMSF is generally only suitable for funds with $200,000 or more.
Not great for Negative Gearing. If you borrow to buy property through your super and you’re negatively geared, the tax offset only applies to other income earned within the fund taxed at only 15% – not at your marginal tax rate on your regular income.
You cannot benefit personally from the property. Investments within a SMSF must be purchased via an ‘arm’s length’ transaction and must be maintained on a strict commercial basis. As such with a residential property, you cannot purchase from, lease to, or rent to a related party. The ATO advises that one of the most common breaches of the sole purpose test is in assets that provide a pre-retirement benefit to a member or associate. Some examples of a breach would be using a SMSF property as a personal holiday house, or renting a SMSF property to a family member.
You must be certain of future cash flow. Firstly you must expect to have to provide a higher deposit than if borrowing directly. While you can borrow to buy property within a SMSF, you cannot borrow to build or improve the property. Ensure that your level of contributions, plus the rental income, will be enough to cover any costs that you will need to meet from cash. Think seriously about having decent Income Protection insurance as well as Life and TPD insurance for the term of the loan. Again, a cash buffer is essential.
Liquidity at retirement. When your superannuation transfers to the pension phase you will need to ensure that you have built up a sufficient amount of cash to fund the required pension payments without risking a fire sale of the property. This can range from 4% of the pension member’s balance before 65 to 5% from 65-74 and upwards from there.
Reduction in Personal borrowing capacity: With banks typically asking for personal guarantees now which then restricts your personal borrowing power. (Thanks Mark Hearne).
There are many tips and traps to be aware of when it to comes to investing within a SMSF that I have done over 14 separate articles on the subject and all are available free on my blog at www.smsfcoach.com.au . So do some reading and your own research and please ensure that you get professional advice on your own circumstances, and assistance either via our team or your own advisors before you set up your fund or start the strategy.
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
Like every strategy we discuss with clients we stress that have to look at the exit strategies up front rather than scramble to react if something happens that changes the financial position of the members or of the fund.
While a self managed superannuation fund can increase its assets and leverage the potential growth by borrowing to purchase a property, that borrowing can also cause financial distress if a fund member dies or becomes disabled. The lack of liquidity and cash flow could force the trustee to:
Sell the property in a difficult or dropping market
Realise capital gains or losses before expected i.e. before the members are in pension phase
Have to deal with increased transaction costs.
Since August 2012 Trustees of an SMSF have been required to consider insurance for members and we would say that is very sensible when debt is involved.
SUPERANNUATION INDUSTRY (SUPERVISION) REGULATIONS 1994 – REG 4.09 (2)(e)
The trustee of the entity must formulate, review regularly and give effect to an investment strategy that has regard to the whole of the circumstances of the entity including, but not limited to, the following:
for a self managed superannuation fund – whether the trustees of the fund should hold a contract of insurance that provides insurance cover for one or more members of the fund
In the past strategies like Cross insurance on each member of superannuation fund was often used to reduce the impact that the sudden death or disability of a member may have on a fund however the ATO have ruled out many of these strategies including using the SMSF to fund Buy-Sell Agreements between business partners.
SMSF mortgage repayment solutions on death
If there is life insurance on the member that dies then any proceeds are added to their account balance and can be paid as a lump sum out of the fund to beneficiaries but that may leave a fund a debt still to be paid off and with less contributions going in as one member is deceased and the fund may not have the free cash-flow to fund the full balance pay out without selling the property.
The strategies outlined below are those now available as to manage the cash-flow liquidity issues and death benefit payment requirements that have arisen when a fund member dies suddenly, whilst the fund still has a Limited Recourse Loan Arrangement in place.
Payment of insurance benefits as an income stream to spouse
If it is 2 spouses or defacto’s that have set up an SMSF and borrowed to purchase an investment property, life insurance is often used to extinguish the debt. The reason for this is that generally the disability or death will eliminate or reduce the level of contributions that are made for the member, from which the loan repayments have been sourced.
Where the members of a fund are spouses then death benefits can be paid as an income stream. This means that even if a fund has borrowed to purchase a property, the property does not need to be disposed of to pay out the death benefit. This is even more important if your business is run out of the property.
In this case the life/TPD cover can be held by the member covered by the insurance and the premium can be paid from that members account. These arrangements comply with the SIS Regs, and the policy can be held through the self managed fund.
If the member dies or becomes disabled, the proceeds will be credited to the affected member’s account and loan will be repaid. Following the repayment of the loan a pension will commence to be paid to the member in the event of TPD or to the spouse in the event of death. If under 65 they can take as little as 4% per annum to keep as much in the fund as possible.
Example: Tax Dependants like spouses
Jack and Diane are married and members of Mellencamp Family Super Fund (“SMSF”)
Account Balances:
Jack – $100,000
Diane – $100,000
SMSF took out a loan of $300,000 to acquire property valued at $500,000
Jack dies after getting a bad knock playing football ( for the younger readers get the full story here
anyway thank you for indulging me and now back to the example:
SMSF Cash flow after Jack’s death
The loan is paid out.
Diane starts a minimum 4% annual death benefit pension. Only one member left contributing now but no interest to pay.
Rent
$17,500
Concessional contributions
$5,000
Total inflows
$22,500
Interest
$0
Operating costs
($2,000)
Life premiums
$0
Pension
($16,000)
Total outflows
($18,000)
Tax
($675)
Net cash flow (surplus)
$3,825
what are the tax implications of the pension
Age at Death
Type of Super Death Benefit
Age of Recipient- DEPENDANT
Taxation Treatment of Taxed Element
Any age
Lump Sum
Any age
Tax free
60 & above
Income stream
Any age
Tax free
Below 60
Income stream
60 & above
Tax free
Below 60
Income stream
Below 60
Marginal rate of tax less 15% tax offset
To implement the strategy, the following factors, need to be considered:
The funds trust deed must permit the fund to hold the insurance and to pay the TPD or death benefits as an income stream
The fund’s investment strategy should state that the trustees have considered the needs of the individual members and determined to take out life insurance for the fund members in order to repay any outstanding mortgage under an LRBA
Whether the fund’s cash flow allows for the taking out of the insurance policies. The premiums will normally be deductible in this circumstance as the benefits can be paid as a pension. For younger trustees you should consider Level Premiums and reviewing the cover as the loan is paid down.
Funding benefits from a reserve
If a fund is not able to pay a death or disability benefit in the form of a pension because they don’t have a spouse or the fund trust deed does not permit the payment of a benefit as a pension, then it may need to consider the use of a reserve strategy.
This strategy involves the fund trustee taking sufficient TPD and death cover over the lives of the fund members to enable the repayment of a loan and the payment of benefits as a lump sum.
The fact that the insurance policies are paid from the fund’s reserve and the insurance proceeds in the event of an insured event are credited to the reserve, means that the insurance benefit can remain in the fund. The fact that the insurance proceeds can remain in the fund means that insurance liabilities can be met and the loan repaid without the asset purchased under the borrowing arrangement needing to be sold.
In order to implement the strategy effectively, insurance policies premiums for each of the fund members will need to be paid from the reserve. The fact that the premium is paid from the reserve will then require any insurance proceeds after an insured event to be credited to the reserve.
Example 2 – Non- Tax Dependants – 2 brothers in a business
So sadly Brad dies …big ahhhh!
SMSF Cash flow after Brad’s death
Death benefits are held in a Reserve.
The loan is paid out but the value is held in the reserve account
Results in large reserve ($400,000)
allocate back to Brian < 5% of his balance p.a. or
allocate up to $25,000 p.a. this year and $25,000pa going forward to Brian’s account depending on other concessional contributions in year
Rent
$17,500
Concessional contributions
$10,000
Total inflows
$27,500
Interest
($18,000)
Operating costs
($2,000)
Life premiums
($1,500)*
Pension
$0
Total outflows
($21,500)
Tax
($900)
Net cash flow (surplus)
$5,100
* Deducted from general fund expenses
Other Issues to consider
There are a number of other issues that fund trustees will need to consider when implementing this strategy:
If the members of the fund are business partners rather than spouses, the spouse of the deceased member may feel that the business partners are benefiting from the death of their spouse. It is really important to discuss these strategies upfront with family so they know they are provided for but that the business needs stability too.
When the insurance proceeds are credited to a reserve, it may be difficult to transfer that reserve back to fund members without exceeding the excessive concessional contributions cap.
The insurance premiums are not tax-deductible under Section 295-465 of the ITAA 97 because the policy is not held for the purpose of providing a fund member with a death or disability benefit.
The cost of the insurance premiums could be very high so seek advice on all possible solutions.
The cost of the insurance premiums may limit the trustee’s capacity to take out other insurance cover for members
By the Way – one other reason to cover your exit strategies
What happens if a trustee fails to address insurance in their SMSF?
The trustees could be fined 100 penalty units ($21,000) for each trustee – Section 34 SIS Act; Section 4AA Crimes Act 1911
and if someone else has been affected by the loss as a result:
A person who suffers loss or damage …may recover … against that other person or against any person involved in the contravention. – Section 55(3) SIS Act
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
Image courtesy of Vichaya Kiatying-Angsulee at FreeDigitalPhotos.net
The ATO have issued long-awaited guidelines providing SMSF trustees with suggested ‘Safe Harbour’ loan terms on which trustees may use to structure a related party Limited Recourse Borrowing Arrangement (LRBA) consistent with dealing at arm’s length with that related party.
By implementing these “Safe Harbour” loan terms, SMSF trustees are assured by the ATO Commissioner that
..for income tax purposes, the Commissioner accepts that an LRBA structured in accordance with this Guideline is consistent with an arm’s length dealing and that the NALI provisions do not apply purelybecause of the terms of the borrowing arrangement.
It is absolutely essential that all non-bank SMSF borrowing arrangements (LRBAs) be reviewed prior now extended to 1 Jan 2017
Where has this come from?
The ATO first released and then re-issued ATO Interpretative Decisions in 2015 (ATO ID 2015/27 and ATO ID 2015/28), dealing with Non-Arm’s Length Income(NALI) derived from listed shares and real property purchased by an SMSF under an LRBA involving a related party lender – where the terms of the loan were not deemed to be on commercial terms.
These ATOIDs state that the use of a non-arm’s length LRBA gives rise to NALI in the SMSF. Broadly, the rationale for this view is that the income derived from an investment that was purchased using a related party LRBA, where the terms of the loan are more favorable to the SMSF, is more than the income the fund would have derived if it had otherwise being dealing on an arm’s length basis.
NALI is taxed at the top marginal tax rate, currently 47% – regardless of whether the income is derived while the fund is in accumulation phase where tax is normally 15% or in pension phase when the income would usually be tax exempt.
After that bombshell, the ATO announced that it would not take proactive compliance action from a NALI perspective against an SMSF trustee where an existing non-commercial related party LRBA was already in place, as long as such an LRBA was brought onto commercial terms or wound up by 30 June 2016.
The Nitty Gritty Details of the Safe Harbour Steps
The ATO has issued Practical Compliance Guideline PCG 2016/5. As a result, provided an SMSF trustee follows these guidelines in good faith, they can be assured that (for income tax compliance purposes) their arrangement will be taken to be consistent with an arm’s length dealing.
The ‘Safe Harbour’ provisions are for any non-bank LRBA entered into before 30 June 2016, and also those that will be entered into after 30 June 2016.
Broadly, this PCG outlines two ‘Safe Harbours’. These Safe Harbours provide the terms on which SMSF trustees may structure their LRBAs. An LRBA structured in accordance with the relevant Safe Harbour will be deemed to be consistent with an arm’s length dealing and the NALI provisions will not apply due merely to of the terms of the borrowing arrangement.
The terms of the borrowing under the LRBA must be established and maintained throughout the duration of the LRBA in accordance with the guidelines provided.
Safe Harbour 1
Safe Harbour 2
Asset Type
Investment in Real Property
Investment in a collection of Listed Shares or Units
Interest RateNote: as of 10 Jan 2019: The RBA no longer round the rates to the nearest 5 basis points.
RBA Indicator Lending Rates for banks providing standard variable housing loans for investors. Use the May rate immediately preceding the tax year. (2015/16 year = 5.75%)(2016-17 year = 5.65%)(2017-18 year = 5.8%)(2018-19 year = 5.8%)(2019-2020 year = 5.94%)(2020-2021 year = 5.1%) (2021-2022 year = 5.1%)(2022-2023 year = 5.35%)2024 FY = 8.85%
Same as Real Property + a margin of 2%
Fixed / Variable
Interest rate may be fixed or variable.
Interest rate may be fixed or variable.
Term of Loan
Variable interest rate loans:Original loan – 15 year maximum loan term (both residential and commercial).Re-financing – maximum loan term is 15 years less the duration(s) of any previous loan(s) in respect of the asset (for both residential and commercial).Fixed interest rate loan:
Rate may be fixed for a maximum period of 5 years and must convert to a variable interest rate loan at the end of the nominated period. The total loan term cannot exceed 15 years.
For an LRBA in existence on publication of these guidelines, the trustees may adopt the rate of 5.75% as their fixed rate provided that the total period for which the interest rate is fixed does not exceed 5 years. The interest rate must convert to a variable interest rate loan at the end of the nominated period. The total loan term cannot exceed 15 years.
Variable interest rate loans:Original loan – 7 year maximum loan term.Re-financing – maximum loan term is 7 years less the duration(s) of any previous loan(s) in respect of the collection of assets.Fixed interest rate loan:
Rate may be fixed up to for a maximum period of 3 years and must convert to a variable interest rate loan at the end of the nominated period. The total loan term cannot exceed 7 years.
For an LRBA in existence on publication of these guidelines, the trustees may adopt the rate of 7.75% as their fixed rate provided that the total period for which the interest rate is fixed does not exceed 3 years. The interest rate must convert to a variable interest rate loan at the end of the nominated period. The total loan cannot exceed 7 years.
Loan-Value –RatioLVR
Maximum 70% LVR for both commercial & residential property. Total LVR of 70% if more than one loan.
Maximum 50% LVR.Total LVR of 50% if more than one loan.
Security
A registered mortgage over the property.
A registered charge/mortgage or similar security (that provides security for loans for such assets).
Personal Guarantee
Not required
Not required
Nature & frequency of repayments
Each repayment is to be both principal and interest.Repayments to be made monthly.
Each repayment is to be both principal and interest.Repayments to be made monthly.
Loan Agreement
A written and executed loan agreement is required.
A written and executed loan agreement is required.
Information sourced from Practical Compliance Guidelines PCG 2016/5.
Potential Trap to be aware of: Importantly, as part of this announcement, the ATO also indicated that the amount of principal and interest payments actually made with respect to a borrowing under an LRBA for the year ended 30 June 2016 must be in accordance with terms that are consistent with an arm’s length dealing.Information sourced from Practical Compliance Guidelines PCG 2016/5.
For the 2017-18 and 2018-19 years the rate is 5.8%
For the 2019-20 year the rate is 5.94%
For the 2020-21 year the rate is 5.1%
For the 2021-22 year the rate is 5.1%
For the 2022-23 year the rate is 5.35%
For the 2023-24 year the rate is 8.85%
For 2019-20 and later years, the rate published for May (the rate for the month of May immediately prior to the start of the relevant financial year)
It is the applicable rate under Column H of the above spreadsheet (click on link). The rate seems to have started in August 2015 but I assume we must use the May rate from now on.
In referencing the Indicator Rate you can use: Ref: Title: Lending rates; Housing loans; Banks; Variable; Standard; Investor Lending rates; Housing loans; Banks; Variable; Standard; Investor Frequency: Monthly Units: Per cent per annum Source RBA Publication Date 04-Apr-2016 Series ID: FILRHLBVSI
A complying SMSF borrowed money under an LRBA, using the funds to acquire commercial property valued at $500,000 on 1 July 2011.
The borrower is the SMSF trustee.
The lender is an SMSF member’s father (a related party).
A holding trust has been established, and the holding trust trustee is the legal owner of the property until the borrowing is repaid.
The loan has the following features:
the total amount borrowed is $500,000
the SMSF met all the costs associated with purchasing the property from existing fund assets.
the loan is interest free
the principal is repayable at the end of the term of the loan, but may be repaid earlier if the SMSF chooses to do so
the term of the loan is 25 years
the lender’s recourse against the SMSF is limited to the rights relating to the property held in the holding trust, and
the loan agreement is in writing.
We do not consider that this LRBA has been established or maintained on arm’s length terms. The income earned from the property, which is rented to an unrelated party, may give rise to NALI.
At 1 July 2015, the property was valued at $643,000, and the SMSF has not repaid any of the principal since the loan commenced.
If after considering TD 2016/16, it is determined that the income earned from the property is in fact NALI, to avoid having to report NALI for the 2015-16 year (and prior years) the Fund has a number of options.
Option 1 – Alter the terms of the loan to meet guidelines
The SMSF and the lender could alter the terms of the loan arrangement to meet Safe Harbour 1 (for real property).
To bring the terms of the loan into line with this Safe Harbour, the trustees of the SMSF must ensure that:
The 70% LVR is met (in this case, the value of the property at 1 July 2015 may be used).
Based on a property valuation of $643,000 at 1 July 2015, the maximum the SMSF can borrow is $450,100. The SMSF needs to repay $49,900 of principal as soon as practical before 30 June 2016.
The loan term cannot exceed 11 years from 1 July 2015.
The SMSF must recognise that the loan commenced 4 years earlier. An additional 11 years would not exceed the maximum 15 year term.
The SMSF can use a variable interest rate. Alternatively, it can alter the terms of the loan to use a fixed rate of interest for a period that ensures the total period for which the rate of interest is fixed does not exceed 5 years. The loan must convert to a variable interest rate loan at the end of the nominated period.
The interest rate of 5.75% applies for 2015-16 and 5.65% p.a. applies from 1 July 2016 to 30 June 2017. The SMSF trustee must determine and pay the appropriate amount of principal and interest payable for the year. This calculation must take the opening balance of $500,000, the remaining term of 11 years, and the timing of the capital repayment, into account.
After 1 July 2016, the new LRBA must continue under terms complying with the ATO’s guidelines relating to real property at all times.
For example, the SMSF must ensure that it updates the interest rate used for the loan on 1 July each year (if variable) or as appropriate (if fixed), and make monthly principal and interest repayments accordingly.
Option 2 – Refinance through a commercial lender
The fund could refinance the LRBA with a commercial lender, extinguish the original arrangement and pay the associated costs.
For any period after 1 July 2015 that the original loan remains in place, the SMSF must ensure that the terms of the loan are consistent with an arm’s length dealing, and relevant amounts of principal and interest are paid to the original lender.
The SMSF may choose to apply the terms set out under Safe Harbour 1 to calculate the amounts of principal and interest to be paid to the original lender for the relevant part of the 2015-16 year.
Option 3 – Payout the LRBA
The SMSF may decide to repay the loan to the related party, and bring the LRBA to an end before 30 January 2017.
For any period after 1 July 2015 that the original loan remains in place, the SMSF must ensure that the terms of the loan are consistent with an arm’s length dealing, and the relevant amounts of principal and interest are paid to the original lender.
The SMSF may choose to apply the terms set out under Safe Harbour 1 to calculate the amounts of principal and interest to be paid to the original lender for the relevant period.
Each option will have many advantages and disadvantages – so it is important to understand what the practical implications of each option are, and how physically you will approach each option. Seek specialised advice on this matter as it is not a strategy suitable for DIY implementation
Important Note to 13.22C or Unrelated Unit Trust Investors
The guidelines provided in this PCG are not applicable to an SMSF LRBA involving an investment in an unlisted company or unit trust (e.g. where a related party LRBA has been entered into to acquire a collection of units in an unrelated private trust or a 13.22C compliant trust). As such, trustees who have entered into such an arrangement will have no option but to benchmark their particular loan arrangement based on commercial loan terms, or to bring the LRBA to an end.
Please visit out SMSF Property page to get details on all available strategies for SMSF property investors.
UPDATE (Relief for those caught by Budget measures)
In a letter to an industry association, the Treasurer, Scott Morrison, has outlined transitional arrangements to allow additional non-concessional contributions above the proposed lifetime limit in certain limited circumstances. Contributions made in the following circumstances may be permitted without causing a breach of the lifetime cap:
where the trustees of a self managed superannuation fund (SMSF) have entered into a contract to purchase an asset prior to 3 May 2016 that completes after this date and non-concessional contributions were planned to be made to complete the contract of sale. Non-concessional contributions will be permitted only to allow the contract to complete provided they are within the relevant non-concessional cap that was applicable prior to Budget night, and
where additional contributions are made in order to comply with the Australian Taxation Office’s (ATO) Practical Compliance Guideline (PCG) 2016/5 related to limited recourse borrowing arrangements, provided they are made prior to 31 January 2017.
Additional non-concessional contributions made under these proposed transitional arrangements will count towards the lifetime cap, but will not result in an excess.
I hope this guidance has been helpful and please take the time to comment. Feedback always appreciated. Please reblog, retweet, like on Facebook etc to make sure we get the news out there. As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or via Skype. Click here for appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 9899 3693, Mobile: 0413 936 299
PO Box 6002, Norwest NSW 2153
U40, 8 Victoria Ave., Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
Immediately after I published my last blog Stamp Duty Requirements on Change of SMSF Trustees I got questions on stamp duty on property transfers to a Self Managed Superannuation Fund. At first I attempted to the answers myself but to ensure ongoing accuracy I am pleased to have Caroline Harley, one of the best lawyers in the SMSF sector review and update this information.
Caroline Harley | Special Counsel
So here is the current breakdown on stamp duty for property investors or small business owners looking to move property they own personally in to their SMSF.
Stamp duty imposed by State and Territory governments should always be researched and considered before transferring land to an SMSF. Concessions or exemptions from duty may be available depending on the State or Territory in which the land is situated.
This concession can be very significant. If the SMSF purchases NSW land/property from a member with a market value of $500,000, the duty which would apply (but for the concession) is $17,990. With the concession, the saving in duty is $17,240 as concessional duty is only $750.
Reminder: the land/property must be business real property owned in the personal name of the member rather than a company (otherwise the trustee would not be permitted to acquire the real estate).
The provisions of the duties legislation of each State or Territory differ, however where concessions or exemptions are available they generally require the transferor to continue to be the beneficial owner of the land (this relates to business real property as it is the only land which an SMSF may directly acquire from a member).
The following tables set out the details of the stamp duty offices and relevant provisions of the relevant legislation in each State and Territory. This is up to date as at 27 February 2017.
NSW
Transfer to a SMSF
Duty payable
$750 subject to conditions being met. Previously $500 but increased 01/02/2024. Depending on the documentation in place for the transaction you may be able to apply for a retrospective re-assessment and obtain a refund. An SMSF specialist lawyer would be able to advise you on this.
Relevant provisions
62A NSW Duties Act 1997
General description of legislation
Nominal duty is charged on a transfer of dutiable property from a person to a trustee of an SMSF where the: transferor is the only member of the super fund or the property is to be held by the trustee solely for the benefit of the transferor (ie property or proceeds of sale of property cannot be pooled with property held for another member and no other member can obtain an interest in the property or proceeds of sale); and property is to be used solely for the purpose of providing a retirement benefit to the transferor.
Document-ation
Evidence that it is a complying SMSF as at the date of the agreement/transfer, copy of minutes of meetings of the SMSF stating the intention to have the property transferred to it and confirming that the property was owned beneficially by the transferor member, copy of the SMSF trust deed or a variation to it, showing a non revocable clause that the property is segregated for the transferor member’s benefit only (follows wording in section62A(2))
No duty is charged in respect of the transfer of dutiable property made without monetary consideration to a trustee of a super fund, where there is no change in beneficial ownership (again, property must be held in the personal name of the member and not a company name). A transfer of property to a trustee of a super fund by a beneficiary of the fund does not, for the purposes of this section, effect a change in the beneficial ownership of the property.
Document-ation
Documents are required – refer to ‘Evidentiary Requirements for Dutiable and Exempt Transactions’ on SRO website
Nominal duty is charged on a transfer of dutiable property by a person to the trustee of a super fund where –
▪ there is consideration for the transfer; and
▪ only the transferor can be a member of the super fund or the property is held in the superfund specifically for the transferor (ie property cannot be pooled with the assets of another member and no other members can obtain an interest in the property); and
▪ the property (or if sold, the proceeds) can only be held in the superannuation fund to be provided to the transferor as a retirement benefit.
If the fund subsequently fails to satisfy any of the requirements (above) full stamp duty is payable in respect of any dutiable property still held.
Nominal duty is charged under section 124 in respect of a transfer of dutiable property to the trustee of an SMSF that is an employer sponsored fund where –
there is no consideration for the transfer.
Document- ation
Application form is required – ‘Superannuation Fund Transactions – Application for Nominal Duty’.
Legislation
Duties Act 2008 (WA) Also refer to Duties Fact Sheet – Superannuation Transactions
No provision for exemption or concession from duty
General description of legislation
A transfer of property to a person who takes as trustee is deemed to be conveyance whether or not any consideration is given (except in certain circumstances regarding the transfer of family farming properties)
Where the duties office is satisfied there is no change in the beneficial ownership of the property duty chargeable on the transfer is $50. Also an exemption is available in certain circumstances regarding the transfer of primary production land.
Document-ation
For primary production see ‘Documentary Evidence requirements Guideline’, for other transfers duties office reviews each transfer on its own facts recommend seeking confirmation of eligibility prior to lodgement.
If you don’t get an exemption the the rates applicable are:
Moving Property to an SMSF is not something to be done lightly without looking at the pros and cons as well as the procedures in your state or territory.
We have design a 3 part guide to buying a property in an SMSF
Even more information and complimentary strategy ideas are available on our Property in a SMSF page. Contact Caroline for specific legal advice on your proposed strategy.
IMPORTANT
This information is current as at the date of publication but may be subject to change. This article is general in nature and has been prepared without taking into account a potential your objectives, financial situation or needs. Before making a recommendation based on this article, seek personal legal and tax advice and consider its appropriateness based on the your objectives, financial situation and needs.
Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 9899 3693, Mobile: 0413 936 299
PO Box 6002 NORWEST NSW 2153
Suite 40, 8 Victoria Ave, Castle Hill NSW 2154
Suite 4, 1 Dight St., Windsor NSW 2756
Corporate Authorised Representative of Viridian Advisory Pty Ltd ABN 34 605 438 042, AFSL 476223
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
Image courtesy of jscreationzs at FreeDigitalPhotos.net
I get calls from people frequently who mistakenly believe that their SMSF can provide them with a loan or they can access their super whenever they like. This is not the case!
I have seen people with small businesses who get in short-term cash flow problems and think they can dip in to their SMSF to fund the business over the hard time. This is the most common breach of SMSF rules and the ATO is clamping down very hard on those who contravene the rules.
Your SMSF can’t lend money or provide financial assistance to a member or a member’s relative.
Investments by the trustees in arrangements which involve the members themselves, or related parties, are restricted, and more often than not, are NOT ALLOWED.
Watch this video from the ATO for more information.
Superannuation is meant to be the sole Purpose of providing Retirement Income to the members not support for their business. Too often that initial dip leads to larger withdrawals and a downward spiral. Remember if your business is in trouble then your Superannuation maybe the only asset actually protected in the event of Bankruptcy so don’t dip in!
Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
Years after the 2008 financial crisis and some people have been slow to regain confidence in the share markets and low cash and term deposit interest rates leave them cold. A growing number of people have considered shifting their superannuation to the more self- directed option of a self-managed superannuation fund (SMSF).
Small to Medium Business owners have always been at the forefront of adopting SMSFs and they have been particularly interested in this rapidly growing area for greater control of their superannuation savings and the flexibility of investments allowed in a SMSF structure. However the ability to either transfer their business premises into their SMSF via a contribution or sale, depending on their cash flow circumstances, has been attractive to many business owners.
Current legislation governing SMSFs, the SIS Act, allows a SMSF to acquire only three types of assets from the members or a related party. These assets are business real property, widely held managed funds and listed securities (shares).
Business real property is best defined as “any freehold or leasehold interest of the entity in real property where the real property is used wholly and exclusively in one or more businesses (whether carried on by the business or not).” This definition does not allow much leeway so you should seek professional advice to ensure that your property satisfies the requirements of the “wholly and exclusively” business use test and meets the definition of business real property prior to implementing this strategy
Benefits:
Release equity to build the business – you can access superannuation funds to help fund business growth prior to retirement by way of a cash purchase by the SMSF.
Tax minimisation – the property moves in to the concessionally taxed superannuation environment; 15% tax rate while members are in accumulation phase or exempt from tax when members are in pension phase.,
Asset Protection – to protect the value of the business real property in the event of bankruptcy, litigation or changes to your industry destroying your market.
Build funds for retirement – you have a bricks and mortar investment to boost your retirement funds earning market rent at concessional rates with the ability to avoid any CGT if sold later.
If you are seeking new premises then buying in your super fund allows you the security of tenure that comes with being your own landlord.
Helps in preparing a business for transfer or sale. If the new owner or family members cannot afford to buy the business and the property, you can sell the business premises and lease them the property.
Risks:
You should always ensure the strategy meets the Sole Purpose test of providing for your retirement. It should stack up as a stand-alone investment in its own right.
If your business should fail and you can no longer lease the premises the you are hit with a double whammy with no income in your personal name and possibly an asset that is hard to lease to a new third-party
While it may be a sound investment now, things may change and your company may outgrow the premises leaving you again with a commercial property that may be hard to sell to extract equity for your next move.
Commercial, retail and industrial property is often a good income orientated investment with income well above that available from residential property but rarely sees the same degree of capital growth. You need to be aware of the trade-off and a diversified portfolio should be considered.
Once you are in pension phase you will need to fund pensions so you need to ensure liquidity in the fund. This is fine while rented or you can make contributions but remember if not working after age 65 you cannot make further contributions to help with liquidity.
Transfers of business real property purchased from related parties must be transferred at current market value as if the transaction was to occur on an arm’s length basis. This requirement allows for very little manipulation of the market value and heavy penalties could apply if any transfer value didn’t stand up to audit and ATO scrutiny.
So you have three or more options when it comes to the strategy. Your SMSF can buy the property utilising cash currently within the SMSF as a normal purchase. If your fund does not have enough cash then you can look at using a Limited Recourse Borrowing Arrangement to borrow the shortfall. More details on that strategy can be found here.
Alternatively, you can structure the deal as an in-specie transfer (a contribution of an asset, in this case property, instead of cash). You are still subject to member contribution caps but we have moved properties worth up to $500,000 in for couples and $1,000,000 where the SMSF had 4 members using a combination of concessional contributions limits and the 3-year bring forward rule on non-concessional limits.
You may also be able to use the Small Business CGT concessions in conjunction with a short term LRBA to move a property of up to $1.445,000 in to the fund with careful planning.
The whole deal has been sweetened by the fact that a number of the State Revenue Offices including NSW OSR have allowed concessional stamp duty stamp ($500) on in-specie property transfers whereby no cash has changed hands. This stamp duty saving can make transferring the business premises into a SMSF much more attractive. It should be noted that stamp duty is a state tax with no uniformity between states. Please seek legal advice always when dealing with stamp duty on property transfers and tax advice when moving assets between entities.
Remember the core philosophy behind Superannuation is that they must adhere to the Sole Purpose Test. While a strategy may help your business currently, its primary goal should be to provide for your retirement so the investment should always stand up as a viable investment regardless of your internal lease arrangements. Check out the most common mistakes people make when dealing with property, borrowing and a SMSF here:
Keep updated by putting an email address in on the left hand column and pressing the “Sign me up!” button.
Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
I trained in General Insurance in the UK after my Graduation and much of that time was in the complaints, claims and product design departments. So I know how things go wrong when people take out unsuitable policies or under-insure their properties. 24 years later and nothing has changed, so I have been recommending people use a General Insurance Broker if they are inexperienced, lack confidence or want help and advice about insuring their business, liability or property assets.
That brings me to the title of this blog and I asked my preferred Insurance Broker here in the Hills District of Sydney, who operates countrywide, to explain the insurance requirements for an SMSF buying property
Don’t skimp on your insurances because when the time comes and you have a claim, you won’t be congratulating yourself on how much money you saved on your insurance premiums.
If you have purchased property in your SMSF it is important for you to take the correct steps to insure your investment.
If you borrow against the assets in your SMSF the mortgagor will require you to have adequate cover for the asset and for the Liability obligations of the SMSF. If the assets of the fund cover the purchase in full however you are still required as Trustee of the fund to correctly insure the funds interests. The fund is not permitted to “self-insure” any assets or property. The ATO has strict guidelines regarding the duties and obligations of SMSF trustees so it is important to get your insurance program right.
The question arises: who takes out the property insurance and landlord’s protection insurance, the SMSF Trustee or the Holding Trustee? I refer to this content from Towsends Law on the matter
SMSF Trustee The SMSF Trustee is entitled to take out insurances for the property as the Fund is liable under the loan and is also absolutely entitled to the benefit of the Property.
As the Fund is ultimately the party that is detrimentally affected should anything happen to the Property, the SMSF Trustee should ensure that the Fund is able to claim for any damage that might occur.
Holding Trustee The Holding Trustee is the legal owner of the land and is entitled to insure the property against damage, and likewise for landlord insurance. Some lenders may also insist that the registered proprietor of the property holds an insurance policy for the property.
But it is important to keep in mind the nature of the arrangement between the SMSF Trustee and Holding Trustee should insurance be taken out by the Holding Trustee.
As the Holding Trustee is a bare trustee it must make sure that it does not take any action unless it is directed to do so by the Fund Trustee, who is absolutely entitled to the Property. This direction by the Fund Trustee should be done formally and in writing and confirmed by the Holding Trustee executing minutes to confirm this action. Final Decision The final answer is that both the Holding Trustee and the SMSF Trustee have an insurable interest in the land and that both are eligible to be the owner of the property insurance and landlord’s protection insurance over the property.
In both instances all amounts payable in respect of the insurance should be paid by the Fund Trustee. Obviously the Holding Trustee must hold any policy proceeds on trust for the SMSF.
From a purely administrative position it would be easier for the SMSF to hold the insurances to avoid the constant but mandatory interplay between the SMSF and its bare trustee the Holding Trustee. But the insurance company may have its own requirements as might the Fund’s Lender.
So our preference is to have all insurances for the SMSF in the name of the fund. You cannot have personal items or assets listed on a policy in your funds name, and likewise you cannot have your fund’s assets listed on a personal policy for some of your personal assets.
As with all insurances, you really do get what you pay for. The more optional extras you include in your policy the more protection you will have. Let’s go through a fairly standard Landlords Insurance policy and give some simple definitions of each section. Like your personal household insurance policy your landlord’s policy will have cover for both your Building and for your Contents. These are fairly standard; however it is important to read the definitions to determine which items come under which section of cover. You may be in for a surprise if you haven’t studied the wording properly.
Where a Landlords Insurance policy differs in comparison to your standard household insurance is in the additional covers offered.
Loss of Rent – This is to cover your lost income if you have a claim under your building and contents cover, and the property becomes uninhabitable as a result.
Strata Title Mortgagee’s Protection – This covers the mortgagee named in the Schedule as if they were “You” on the same terms as Section1 against physical loss or physical damage caused by any of the Defined Events (it does not include the Additional Benefits).
Deliberate Damage and/or Theft by Tenants – Cover for physical damage arising from deliberate, intentional or malicious acts and acts of theft to the Building or Contents by the Tenant.
Tenant Default – This cover if for loss of rent, payable by the Tenant, which arises from damage covered under the Deliberate Damage/Theft by Tenant section above or from breach of a written Lease agreement.
Chances are you’ve worked hard at acquiring your assets and building your Super for your retirement. Don’t skimp on your insurances because when the time comes and you have a claim, you won’t be congratulating yourself on how much money you saved on your insurance premiums. Instead you will be hoping your insurance policy will respond to your claim.
If you’re at all unsure on what you need, talk to an Insurance Broker. If you don’t know an insurance broker, then speak to the people you trust with your Investments and your accounts because they should be able to put you in touch with an Insurance broker they trust.
For more information please don’t hesitate to contact me.
The SMSF Coach or Verante Financial Planning do not request or receive any commissions or referral fees from recommending services from Insurance brokers, we just want the best professional advice for our clients.
For more detail on Investing in Property through an SMSF check out our previous articles
Keep updated by putting an email address in on the left hand column and pressing the “Sign me up!” button. Happy to take comments in the section below.
Bye for now.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
You recently mentioned that you it’s possible to do construction within a SMSF where there could be draw downs? Did you do an article on this somewhere that I could research?
Answer:
The following is general advice only and you should get very specific advice on your own proposed strategy before spending any money on implementing these strategies. Do not rely on general information in an article to put in place any strategy.
I wrote a general article on purchasing House and Land Packages which is linked at the end of this article. But to address the matter of draw downs in specific I will deal with it here. Yes you can engage in construction of a property under a LRBA (Limited Recourse Borrowing Arrangement) or Super Fund Borrowing as it is commonly know. It is also possible to have progress payments if the LRBA is structured properly.
The ATO provides example 10 in SMSFR 2012/1, which concerns the purchase of a house and land package by a SMSF under a LRBA. The ATO had said in that example that “because the contractual arrangement is for the acquisition of land with a completed house on it, and settlement occurs once construction of the house is finished, the deposit and the payment on settlement can be funded under a single LRBA.
This was followed up by a request for more details in a National Tax Liaison Group (NTLG) Superannuation Technical Sub=group meeting in December 2012 where they were asked to confirm more than 2 payments could be made, so not just deposit and final settlement payment but progress payments.
So they confirmed that it does not have to be only two payments. There can be multiple progress payments under the one single LRBA HOWEVER only if the terms of the LRBA allows the SMSF trustee to make multiple draw-downs for that purpose or if the SMSF funds the progress payments from its own funds.
You should also read the March 2013 minutes Section 7.5 Limited recourse borrowing arrangements and the payment of deposits. Please note NTLG minutes are for guidance by the ATO and are not binding rulings so get personalised advice..
So in summary:
The non-negotiable components of a successful LRBA for a House and Land package must include:
the single acquired asset is at all times a completed house and land, and
the security for the loan is at all times over the land and completed house, and
the LRBA must allow drawdowns for the deposit, progress payments and settlement.
As this is a very specialised process and requires specific wording to the LRBA agreement you need to work with a SMSF Specialist Advisor, experienced Mortgage Broker and a Lawyers who know how to draft personalised documentation. Do not trust a bank to provide all the documentation on a loan like this as they will only be interested in protecting their interest and that may not provide you with the documentation to meet the Section 67A exemptions.
It may be better to consider arranging a loan with an offset account (never a redraw facility as that would breach the rules) that is draw down in full initially and the excess stored in the offset account and used to fund the progress payments as the build progresses.
Why not click here to Schedule a Meeting by phone, face to face or via Skype if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or online via Skype.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
Interested in property and also running a business? Then one popular strategy used by many small business owners is to own their business premises in their self managed superannuation fund (SMSF).
Before we start let me emphasise, this is not a strategy to prop up a failing business.
There are a number of benefits in adopting this strategy:
As superannuation is generally more tax-effective than other investment entities you can have one of your major assets owned by a separate entity to yourself or your business thereby offering a greater degree of diversification of risk and ;
some asset protection as in the event of severe financial difficulty or even bankruptcy, creditors find it more difficult to get access to or create caveats over super fund investments as long as the premises were bought or transferred to the SMSF in good times, for clearly documented reasons and not deliberately to prevent creditors efforts to seek redress.
By having the premises owned by the fund rather than a third-party landlord you have more freedom to add fixtures and fittings, additional capacity and make changes to the layout without having to seek someone else’s approval and have surety of tenure that the costs can be recouped over time rather than worrying about ability to renew a lease at the landlords whim.
By accessing the capital held in a self managed super fund, your business can have more flexibility to make better use of its own capital to build or maintain the business.
It can often make it easier to sell a business later or pass it to family if they are not burdened with the capital requirements of funding a property purchase as part of the deal. This can also be a very stable income source in retirement as commercial / industrial property rents are often 7% or more.
When a SMSF owns real estate and you want to lease it back to your business which is seen as a related party of the fund the property must meet the definition of business real property (BRP).
Related parties of your fund include all its members, all their relatives and entities that those members and relatives control, or are deemed to control.
The definition of business real property is in subsection 66(5) of the SIS Act:
business real property , in relation to an entity, means:
a) any freehold or leasehold interest of the entity in real property; or
b) any interest of the entity in Crown land, other than a leasehold interest, being an interest that is capable of assignment or transfer; or
c) if another class of interest in relation to real property is prescribed by the regulations for the purposes of this paragraph – any interest belonging to that class that is held by the entity;
where the real property is used wholly and exclusively in one or more businesses (whether carried on by the entity or not), but does not include any interest held in the capacity of beneficiary of a trust estate.
Accordingly, two basic conditions must be satisfied before an SMSF, or any other entity related to or dealing with an SMSF, can be said to hold business real property :
the SMSF or the other entity must hold an eligible interest in real property; that is an interest identified in paragraph (a), (b) or (c) of the business real property definition; and
the underlying land must satisfy the business use test in the definition, which requires the real property to be ‘used wholly and exclusively in one or more businesses’ carried on by an entity.
If the property does not easily fit the definition of a BRP, then the asset will be considered an in-house asset and my advice is to not to push the limits of the ATO’s patience. Seek good legal and tax advice to ensure you understand all the implications and requirements of having or transferring a property into a a SMSF
SMSFs with in-house assets need to make sure that their fund’s total in-house assets do not exceed 5 per cent of the market value of all the fund’s assets. The 5% test is measured at acquisition and at the end of each financial year. If there is a breach, then corrective action must be taken.
Document the Lease
To keep the relationship on an arm’s length basis do not take short cuts, treat the lease like it was between 2 unrelated parties out and formal lease between the SMSF and the tenant (your or any other business). The terms of the lease should be clear and easily identified by an auditor reviewing the actions and paper trail of the trustees.
As trustee’s you are dealing with this property on behalf of the SMSF so you must be prepared to enforce the terms of the lease with the tenants. Lease payments must be paid on time and I recommend a direct debit be set up to ensure the temptation to delay or miss payments is avoided. If the business fails to meet its rental payment schedule the default penalty clauses must be enforced as they would for a third-party lease.
TIPS
For an online source to a flexible comprehensive lease agreement that ticks all the boxes you can visit DIY Legal Kits – Lease Agreements
Example
Peter the Physiotherapist is specialising in rehabilitation and water therapy and needs a property where he can install heavy equipment bolted to the floors and a hydrotherapy pool.
A suitable property is available locally for $750,000. The problem is that the business doesn’t have the capital to purchase the property or the capacity to borrow that amount.
Peter and his wife Margaret have their own SMSF which has $450,000 in the fund.
Peter & Margaret decide that SMSF should purchase the property using a Limited Recourse Borrowing Arrangement to borrow the other $400,000 plus costs leaving $100,000 liquid cash in the fund.
They must use a Holding trust arrangement to hold the property under this type of scenario.
A lease must be put in place between the SMSF and the Business
A commercially comparable rent needs to be agreed and paid from the business to the SMSF.
The SMSF is a very tax effective investment vehicle in the long-term as once the members enter pension phase, the CGT and tax on rental income can be minimised.
For more details on how borrowing to buy a property in an SMSF works please see the following 3 part series of articles from earlier this year:
Before contemplating this type of transaction is contemplated, it’s essential to consider the member’s long term retirement needs and the super fund’s investment strategy. Consider what are the impacts on the super fund in terms of liquidity, diversification, returns on the investment and what if the business fails and the property remains vacant unable to find a suitable tenant.
Keep updated by putting an email address in on the left hand column and pressing the “Sign me up!” button. Happy to take comments in the section below.
To discuss your needs you can contact me at my Castle Hill or Windsor offices or I am happy to use Skype, phone or email as suits your needs.
Bye for now.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
We constantly have people contacting us with ideas of what they want to do with an investment property once they have borrowed to purchase one in their SMSF. Some are sensible but some show no grasp of the regulations at all and include moving the whole family in to save on their home mortgage or knocking it down to build a multi-storey unit development. If you run a self managed superannuation fund, you have the ability to invest in residential property or commercial property and under certain circumstances a farm. (Note: ability to do something does not mean you should).
Repairs v Improvements
Borrowing to purchase a property in an SMSF or in the industry jargon a “limited recourse borrowing arrangement (LRBA)” has been legal since 2007 and is becoming increasingly popular with SMSF owners seeking to leverage their funds.
It should be noted that the ATO focused on borrowing to invest in property as it saw this as the most likely area people would encounter problem scenarios. They key issues that the ruling addresses are:
– defining a single acquirable asset
– property development and off-the-plan purchases.
– distinguishing between improvements vs repairs or maintenance.
– improving an asset to the extent if becomes a replacement asset.
In this article I will concentrate on the latter 2 issues as it is ok to use borrowed funds for most repairs or maintenance but you can’t use borrowed money to finance improvements. You can use your other funds in your SMSF to fund improvements so it is a matter of getting the strategy right.
The ATO has given specific meanings to the following words:
‘Maintaining’ an asset typically involves work done to prevent or anticipate defects, damage or deterioration (in a mechanical or physical sense). For example, repainting a timber house to prevent deterioration is typically maintenance
‘Repair’ ordinarily means the remedying or making good of defects in, damage to, or deterioration of, property to be repaired and contemplates the continued existence of the property. A repair replaces a part of something or corrects something that is already there and that is damaged, has become worn out or dilapidated or has deteriorated. Repair may be necessitated through ordinary wear and tear, accidental or deliberate damage or by the operation of natural causes (whether expected or unexpected) during the passage of time.
‘Improvement’ the guidance is that they mean work that:
provides something new
generally furthers the income-producing ability or expected life of the property
generally changes the character of the item you have improved
goes beyond just restoring the efficient functioning of the property
So what can you do and what can’t you do?
The following scenarios outline when an existing LRBA will continue to apply to an asset, based on the ATO’s SMSF ruling.
1. Using Borrowed Money : Repairs and Maintenance (Yes You Can) v Improvement (No You Can’t)
Work to be carried out
Repair or maintenance (Yes you Can under an LRBA)
Improvement (No you Can’t under an LRBA)
Residential property
A fire damages part of the kitchen (cooktop, benches, walls and ceiling).
Restoring the damaged part of kitchen, including addition of a dishwasher, even if there wasn’t one there before (considered minor). Yes you can
If as well as restoring the damaged part of the internal kitchen (a repair) a new external kitchen was added to the entertainment area of the house the external kitchen would be an improvement. No you can’t
Replace guttering
Yes you can
Replace fence
Yes you can
Replace house destroyed by fire
Rebuild comparable house. Yes you can
Rebuild house not comparable (although if built from insurance proceeds does not affect LRBA) No you can’t
A pergola is built to create an outdoor entertaining area.
No you can’t
The addition of a swimming pool or a garage.
No you can’t
A house extension to add another bathroom.
No you can’t
Cyclone damage to a roof
Replace roof: Yes you can
Add a second storey at the same time as replacing roof. No you can’t
2. Development while under a LRBA: Retains Same Attributes (Yes You Can) v Creates a different asset (No You Can’t)
Asset and Action
Result
1. Vacant block of land on single title. A vacant block of land is subsequently subdivided resulting in multiple titles. One asset has been replaced by several different assets as a result of the subdivision.
Different asset created No You Can’t
2. Vacant block of land on single title. A residential house is built on vacant land which is on a single title. The character of the asset has fundamentally changed from vacant land to residential premises. This is a different asset.
Different asset created No You Can’t
3. Residential house and land. A house is demolished following a fire and is replaced by three strata titled units. The character of the asset has fundamentally changed along with the underlying proprietary rights. This has created three different assets.
Different asset created No You Can’t
4. Residential house and land. A residential house is converted into a restaurant by renovations which include fitting out a fully functioning commercial kitchen. As a result of the renovation the character of the asset has fundamentally changed from residential premises to restaurant premises. This is a different asset.
Different asset created No You Can’t
5. Residential house and land. One bedroom of a residential house is converted to a home office. This would not ordinarily result in a change in the overall character of the asset as a residential house. The conversion of the bedroom into an office does not result in a different asset.
Same asset – Yes You Can
6. Residential house and land. A fire destroys a four bedroom house and a new superior residential house is constructed on that land using both insurance proceeds and additional SMSF funds. Rebuilding another residential house (whether of the same size or larger) does not fundamentally change the character of the asset held under the LRBA. The addition of a garage, for example, would also not change the character of the asset.
Same asset – Yes You Can
7. Residential house and land. While each of the following changes would be improvements each (or all) of the changes would not result in a different asset:
· an extension to add two bedrooms;
· the addition of a swimming pool;
· an extension consisting of an outdoor entertainment area;
· the addition of a garage shed and driveway;
· the addition of a garden shed.
Same asset – Yes You Can
8. Residential house and land. To allow a road to be widened, a local government authority undertakes the compulsory resumption of a minor portion of the frontage of a property which has a residence on it. While the resumption results in the existing property title being replaced, the minor extent of the resumption is such that the fundamental character of the asset, taking account of not only the proprietary rights but also the object of those proprietary rights, remains that of being the residential property.
Same asset – Yes You Can
9. Residential house and land. A ‘granny flat’ is to be constructed in the backyard of a property which already has a four bedroom residence established on it. The granny flat will have two bedrooms, a family room, a kitchen and a bathroom and will be connected to utilities such as electricity, water and sewage. The character of the asset would remain residential premises and thus the construction of the granny flat would not result in there being a different asset.
There is no doubt that this ATO ruling and the examples given are good news, and much appreciated by the SMSF industry who have to deal with enquiries every day. It provides a substantial amount of clarity around many issues that had previously been quite unclear. The common sense and commercial approach by the ATO has also been welcomed and was somewhat unexpected.
I always suggest that SMSF Trustees keep sufficient cash flow in the SMSF to finance repairs and maintenance or any expected improvements rather than using borrowed funds and risk running foul of the rules.
You should however carefully consider any strategy in the light of these rules and make sure you get a second opinion as often if you are too close to a project you can be blinded to its faults. That’s where a good team of advisors comes to the fore.
As always please contact me if you want to look at your own options. We have offices in Castle Hill and Windsor but can meet clients anywhere in Sydney or online via Skype.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
Macro Business has an excellent engaged readership and as always the comments tend to be very valuable at exploring the details of any subject just that little bit further.
Are you looking for an advisor that will keep you up to date and provide guidance and tips like in this blog? Then why now contact me at our Castle Hill or Windsor office in Northwest Sydney to arrange a one on one consultation. Just click the Schedule Now button up on the left to find the appointment options.
Liam Shorte B.Bus SSA™ AFP
Financial Planner & SMSF Specialist Advisor™
Tel: 02 98941844, Mobile: 0413 936 299
PO Box 6002 BHBC, Baulkham Hills NSW 2153
5/15 Terminus St. Castle Hill NSW 2154
Corporate Authorised Representative of Viridian Select Pty Ltd ABN 41 621 447 345, AFSL 51572
This information has been prepared without taking account of your objectives, financial situation or needs. Because of this you should, before acting on this information, consider its appropriateness, having regard to your objectives, financial situation and needs. This website provides an overview or summary only and it should not be considered a comprehensive statement on any matter or relied upon as such.
The SMSF Coach 