Presentation on theme: "Welcome SMSF OPPORTUNITIES WITH PROPERTY Presented by Nic Ellis."— Presentation transcript:
Welcome SMSF OPPORTUNITIES WITH PROPERTY Presented by Nic Ellis
Price Versus Cost OUTSIDE SUPER $187.50Cost (Gross Income) $87.50Tax (46.5%) $100.00Price (Net Income) INSIDE SUPER $118.00Cost (Gross Income) $18.00Tax (15%) $100.00Price (Net Income)
Seminar Purpose The purpose of this seminar is to educate you that you now have a choice to be able to create real wealth for your family using an SMSF. Surrounding ourselves with good advice and people who provide good advice is an important part of this process of achieving real choice and moving towards financial freedom.
Key Issues Why purchasing investments inside of superannuation is often a better fit – due to the significant tax advantages that exist – than the traditional way of purchasing assets outside of super in your own name, a company, or a trust. I will demonstrate 3 significant advantages. Lower tax, better cash flow and better asset protection.
Key Issues Cont. We will provide details on how Superfund's and more specifically how SMSF’s can borrow. We will show you how an Average Australian Family with potentially as little as $100K in Super can leverage into the property market and how this property(s) may be a self sustaining investment that you may never pay any lump sum tax on.
Aussie Love Affair with Property As Australians, we tend to have a love affair with property. We prefer bricks and mortar to equities, it makes us feel safer. For example, how many of us avoid salary sacrificing into super because we don’t have true control of our super. We know that contributing to super is a good thing but its a hard thing to force ourselves to do when our super is locked into the market and the market is so erratic. But we can have our cake and eat it too by owning property in our own family super fund.
2007 Sweeping Changes to Superannuation Laws How many of you knew you could buy property in your SMSF and borrow against the security of that property? As a result, we have been explaining the structures and strategies surrounding SMSF borrowing for Property to Australian Families for almost 3 years now.
Recent Research Morningstar spin off rainmaker research recently acknowledged that more than 75,000 SMSF’s will examine purchasing direct property through limited recourse borrowing arrangements in the next 12 months… food for thought. I wonder how many Australians without an SMSF will also consider this strategy..
Shares Versus Property Based upon unbiased opinion i.e. shares and property return the same over the longer term, let’s take a look at the following scenario: You take $1 of superannuation as secure leverage to purchase property, the bank lends you an additional say $3, so you buy a $4 property. In 10 years the property doubles, you take your $8 and pay the bank back $3 and you are left with $5. you have turned your $1 into $5 a 500% return over 10 years. Let’s compare and contrast this with shares, where the bank/financier will only lend dollar for dollar against the security of shares. So, you are able to buy $2 worth of equities, and they double in 10 years and you are left with $4, you then pay the bank back the $1 you owe it. You are left with $3. You can clearly see that it is the leverage by using a long term secure growth asset such as property that has provided up to an additional 200% return on our money in this example.
Myth Average Australians can be very confused when it comes to their superannuation choices. This has in part been due to the myth that certain financial media commentators have populated. Super has often been espoused as an asset class and industrialised against Property. With the typical comment often made – ‘should you place your money into super or property’? Super is in fact a tax structure. Property is an asset class. All investors deserve to have their choice of tax structure and their choice of asset class within the tax structure. So you can hold property in super. More specifically you can choose to ‘cherry pick’ your choice of direct property within an SMSF. This choice is often not widely understood and information withheld by certain financial sectors for their own vested reasons.
Opportunity Created Section 67 (4A) of The Superannuation Industry (Supervision) Act, 1993(“SIS”) What Does This Mean? A SMSF can now borrow to acquire direct property assets with an exception to this general rule. Such a change to the rules has provided significant opportunities for ‘savvy’ individuals to leverage into property through their super.
How can I take Advantage of these Amendments? By taking control of your super and setting up a Self Managed Super Fund (SMSF). Buying property through your SMSF not only enables you to leverage your current superannuation assets, it also provides the added benefits of both asset protection and tax efficiency.
Benefits of an SMSF CONTROL A SMSF is your very own super fund in which you are in control of. You have the cheque book and with the help of your accountant or advisor run the fund and make decisions on suitable investments.
Asset Protection Assets in a Superannuation fund can protect those assets from commercial and litigation risks that may otherwise face the members.
Benefits of an SMSF OWNERSHIP The structure allows for the title of the property to be held in trust through a trustee company that you control, so that the growth and future income of the property may be enjoyed in a safe, secure and Bankruptcy Act friendly environment.
So what’s so great about SMSF’s being able to Borrow to Invest in Property? The simple answers are: Is that you now don’t need to have the available cash in your fund to obtain an interest in a long term investment asset class such as property. Up until the recent changes in SIS, many superannuation portfolios were devoid of the many potential benefits of direct property investment due to their inability to borrow property.
So what’s so great about SMSF’s being able to Borrow to Invest in Property? As a result, many Australians have had no choice but to invest in real estate outside of the tax-efficient superannuation domain and had lacked the ability for their superannuation portfolio to potentially generate greater returns through a geared SMSF investment strategy. SMSF’s may now borrow up to 75% for some property purchases. By super gearing the real rate of return will increase. For example a 5% yield and 5% capital growth p/a equates to a real gross return of 40% pa in your SMSF.
How does it all Work? Your choice of property is purchased in name of the trustee of a bare trust that is setup with you in control as trustee Directors. This trust is the legal owner of the property. Your SMSF is of course the beneficial (or real) owner of the property.
How does it all Work cont. An agreement – called a limited recourse property agreement is entered into between the bare trust Trustee and your SMSF. Stamp duty is paid as per normal on the purchase of the Property but not in relation to the Declaration of Trust or subsequent transfer of the Property to the SMSF.
Mortgage of Property LENDERS INSTALMENT TRUST PROPERTY SMSF SMSF beneficial owner of property and entitled to income from the property Limited Recourse Loan (LRL) Personal Guarantees (Commercial Lenders) Legal Ownership Money to purchase property SMSF money & LRL Structure
Legal Does the SMSF actually enter into contract on the property its purchasing? No, a special property trust (often known as a bare trust is created (this trust should have a corporate trustee to act for it), this becomes the legal owner of the property. The SMSF is the beneficial owner of the property. The property Trust and SMSF enter into an agreement between them, this is commonly known as an Instalment Warrant Agreement etc. An instalment warrant gives a person, in this case the SMSF trustees, the right to acquire a property but not the obligation to acquire the property once a pre-determined condition has been met. The condition that has to be met is the debt on the property has been repaid. Normally when buying a property we would make an initial payment, a deposit. When the acquisition is via an instalment warrant, this initial deposit is called an instalment.
Legal Issues The Lender who lends your SMSF the funds is granted a charge over the SMSF’s beneficial interest in the property, this is a limited recourse loan and does not subject other property or assets as security for the loan.
Case Study James is 45 years old and earns $70K p/a and his Industry Super Fund balance is currently $50K. Jill, James’ wife, is also 45 and earns $30K p/a. Her industry superfund balance is also at approximately $50K.
They wish to use their equity and purchase an Investment Property (Cost $350K) JAMES & JILL’S PROPERTY OPTIONS 1: Negative Gearing or 2: Instalment Warrant SCENARIO Property is sold in 10 years for $700,000 THE FACTS Negative Gearing Effect: Tax payable on sale: $100,000 (Depreciation and CAP Build W/O, added back by ATO). IW Effect: Tax payable on sale: Nil THE RESULTS $100,000 better off by choosing option 2 If property is sold after age 55.
Price Versus Cost Price vs. CostOutside SMSFInside SMSF Purchase Price (of Investment Property)$500,000 Deposit (Price)$140,000 Deposit (Cost)$261,682$164,706 Loan (30 Years)$360,000 Total Repayments (Price)$302,060 Total Repayments (Cost)$649,592$355,365 Total Cost$911,275$520,071 Advantage$391,203 Property Value$1,000,0001,000,000 CGT$116,2500 Overall Advantage$507,453
Other Benefits to You Get more skin in the game! With the purchase of a long term growth asset of your choice, by taking control of your existing super. Increase the real rate of return on your super by leveraging. Super gearing rather than negative gearing is good debt. Take on good debt in super as opposed to negative gearing, where you fund a loss.
Other Benefits to You cont. Let someone else pay off your loan. Use a combination of the rent on the property and your SGL (if a PAYG earner) to pay off the property. Salary Sacrifice for further benefits and to build a surplus of cash in the fund and continue to accumulate suitable assets in a SMSF. Leveraging with Property in your super fund can be substantially better than leveraging into equities, based on both asset classes achieving the same positive return. Banks will lend at a higher LVR for property. Pay a lower than 15% tax rate on super contributions, even nil.
More Benefits to You Quarantine any capital gains on investment assets to nil. Purchase now and sell after age 55, no tax. There is a maximum of 10% capital gains tax on the sale of your property if it is held for over 12 months in the accumulation phase i.e. sell prior to age 55. Build up a portfolio of assets that will work for you in retirement – no tax on the earnings or growth of assets held in super after age 55.
Benefits of an SMSF By salary sacrificing into your SMSF, you effectively receive a 100% tax deduction at your full marginal rate of tax on contributions made up to your contributions cap (note: salary sacrifice contributions may be subject to up to 15% tax. The interest expense along with other property related expenses including any depreciation allowance become 100% tax deductible within the superannuation fund and may potentially reduce the amount of your 15% contribution tax to NIL. This is not possible in a non SMSF super structure.
More Benefits of an SMSF You may potentially receive a more tax effective retirement income as compared to property investment held outside of superannuation as once you are over the age of 60, there is ZERO TAX on withdrawals and pension income from your superannuation; Your SMSF, as the beneficial owner of the property asset, enjoys the Land Tax Free Threshold in each Australian State.
How it Works 1 Set up a SMSF and trustee company 2 Set up the legal owner of the property, the Bare Trust 3 Find the right loan 4 Find a property that matches your selected criteria 5 Draft the IW Agreement 6 Vetting of commercial loan documents 7 Preparation of a Statement of Advice 8 Conveyancing team complete conveyancing and attend to settlement
SMSF Property Development Q. Can an SMSF develop property? A. Yes. Nic’s opinion: No PD does not breach the sole purpose test of the SIS Act. Old ITAA was harsher – no longer applies.
SMSF Property Development Cant develop a property purchased through a Limited Recourse Loan ( i.e. borrowing) – or can you? We do know a way you can and will advise on case by case basis. Under the new ATO post July rules as this would seemingly create a separate asset. How to get around? Do a JV with the SMSF. 3 OPTIONS: Use a Unit Trust Use a Company Use a Tenants In Common structure.
SMSF Property Development Use a JV Deed to avoid partnership liability risks. Careful with borrowing? Gearing may need less than 49% family ownership to meet control tests for underlying asset owned by SMSF. Complex area – need specific advice.
Q&A What is the minimum amount recommended for setting up and buying property using your SMSF? I really don’t believe in a minimum as some financial commentators do. It really depends what you have set the fund up to accomplish. i.e if you can use advanced strategies such as in specie transferring in a business premise etc for tax deductions or a cash release – then the balance you have in super to begin is irrelevant as the strategy benefits more than cover costs etc. To be able to buy property and borrow, the minimum would be $100K. But as you can have up to 4 members you don’t need a lot to be able to use this effective discretionary tax structure.
Q&A Can you buy overseas property using your SMSF...if so are there any special requirements? Yes you can. No special requirements other than the trust deed and investment strategy of the SMSF allowing it. Usually you can’t borrow from a 3rd party lender to buy overseas assets as the type of loan is a limited recourse loan and only Australian banks offer these and Aussie lenders won’t lend on non Aussie property etc. If you have equity you can borrow on that equity and on-lend to your own SMSF – for example for USA property purchases etc this negates the need to use external finance.
Q&A Can you buy a property using a combination of SMSF and Personal Borrowings? It would be possible to use a unit trust structure that you don’t have control of (i.e. less than 49% of ownership) and have the unit trust pledge the asset it wants to purchase as security and borrow against. It's not possible to pledge the same asset to say a SMSF and an individual unless in the structure I mention above (under the rules). However, equity may be borrowed against individually and topped up into the SMSF.
Q&A How much do I need in super to do this? Banks will lend at approx. 70% LVR for residential property. So you need 30 cents in the dollar + costs etc. So with $150K in super – a $400K property could be purchased. Up to four individuals can pool their funds through an SMSF – so you don’t need a lot of super to begin with – to make it achievable.
Q&A Why would I consider purchasing property in a superfund? There are three really strong reasons: Lower cost of purchase Lower cost of servicing debt Lower tax on rental returns and any capital proceeds of the property. Cont. next page..
Q&A Potentially no tax if you are structured and advised correctly. The combination of these three factors can mean investors ‘get more bang for their buck’. A typical property that is purchased at say $350K and then sold ten years later at double that price will have the investor on average over a hundred thousand dollars better off than purchasing the same property outside of super.
Q&A What type of loan do I need to negotiate to be able to do this? The loan is known as Limited Recourse Loan. This means that the lender only has recourse( ability to take) over the actual property pledged, not the other assets of the superfund. This means the banks have more risk, thus the LVR of 70% is lower than traditional loans, which may be at an 80% LVR for residential property. Commercial property LVR’s are slightly lower at 65%. Cont. next page..
Q&A The loan market for these type of loans is still quite immature. As its only been around for a short time. Three major players exist. Westpac, St. George and the NAB. The other thing to keep in mind is that banks wont lend at a retail level to individuals. I.e you cant walk into a branch and negotiate this type of loan yourself. It is a loan that you need someone like the 2020 Group to arrange for you as part of the process- i.e banks lend through wholesale affiliates and the broker sorting the loan out needs to have the skills qualifications and licensing to do the deal.
Q&A I’ve heard its actually quite a complex to put this in place? What are the steps involved to be able to do this? It can certainty be complex if you don’t go about it the right way. My firm has been regularly involved in fixing up deals for clients who have got part of the way through the process and ended up with issues. You actually need an accountant, financial advisor and solicitor. The skills and licensing of these three disciplines of practice to achieve the end result. We have a national turnkey solution to borrowing to buy properties in super. Cont. next page..
Q&A Setup a SMSF, with corporate Trustee( if you don’t have one) if you do, the Deed and investments strategy of the fund need to be updated/checked to ensure the fund is able to borrow to purchase property. Setup a 2nd Company to act as trustee for the property trust, this is actually the entity that enters into contract on the property. So don’t make the mistake (as is common) of just setting up the SMSF and entering into contract with the SMSF – as you wont be able to borrow or will have to rescind and renter into contract. Rollover any existing super holdings to the SMSF bank a/c setup. (Consider replacing or holding appropriate risk insurance directly in the SMSF – prior to the rollovers) Cont. next page..
Q&A Pre-qualify the SMSF with suitable lender for maximum lend, this involves looking at available cash resources initially in the fund and what may be available ongoing to get into the SMSF i.e. SGL or SS amounts. Find a suitable property(s). Have legal draft the bare trust and instalment agreement (specific for each unique property and state purchased in). Financial and legal sign off process prior to bank providing finance. Conveyancing on property and settling the IW Deed with the appropriate State regulatory body. So you can see that without having a ‘champion’ of this process things can get mixed up and run off the rails. Separate legal, financial and accountants often won’t get you the smoothest or most efficient result and costs can duplicate – so I strongly advise dealing with a firm that specialises in the process and can do the lot.
Q&A Once the superfund has purchased the property – are there any restrictions on what can be done with it? i.e does it need to be held for a certain period of time? One of the strong advantages of taking control of your super and rolling to an SMSF – is that you have control. So there are no real restrictions. Whatever you or I can do as natural individuals – so can your SMSF. If you want to buy and sell property and turn them over in super you can. There are some strong tax advantages in holding property to age 55 – i.e. no tax – but we have lots of client who will buy and sell and develop etc. Maximum tax is 15% in the superfund and 10% if the property is held for 12 months under the relevant CGT exemptions. Cont. next page..
Q&A A member can lend to his SMSF on commercial terms; A SMSF can purchase any asset including real estate. However, the same in-house rules apply as prior to new legislation, such as; you cannot sell residential property to your SMSF and no associates can live in a residential property owned by the SMSF etc. If you take a loan from a third party, the third party can have a charge over the asset purchased by the Property trustee, however cannot put a charge over any other asset of the SMSF. Cont. next page..
Q&A Our SMSF can deal with the property however and whenever they like, in the same way as investors can deal with “normal” investment properties (e.g: lease, renovate, repair, or sell) (subject to the terms of the relevant loan and mortgage). All rents are paid direct to the SMSF. Loan repayments are made in the ordinary way from the SMSF. The SMSF can pay out or reduce the mortgage at any time (subject to the terms of the relevant loan). When the mortgage is paid out in full, title to the property can be transferred to the SMSF or the bare trustee can continue as registered proprietor. No CGT will trigger on the transfer of the property to your SMSF – this means CGT has been quarantined at a nil rate of tax if the property assets is held until after age 55.
Q&A If it’s so good to hold property in Super - Can I then transfer my existing investment property(s) into an SMSF? Not usually. If the property in question is just a domestically rented investment – then no. it needs to be Business real property, due to the ATO rules. BRP includes commercial property, farm land, or property that is used dominantly in a business. Is usually someone does not live in the property. If your lucky enough to already own BRP, your SMSF can purchase this from you /your trust/Company and release cash to pay off mortgage etc. Often ( in some states) no stamp duty is payable on the transfer or capital gain if the property has been used in your business. So there are various strategies you can employ to move assets around to benefit lower tax and better asset protection once you have an SMSF.
Q&A Are there other advantages in considering setting up an SMSF and purchasing property? Yes there are many advantages. Once of the ones you may wish to consider is being able to reduce the 15% contribution tax rate you have to pay on taxable contributions in any other type of superfund. The end tax result can be as low as nil or over positive depending upon your situation. As property often enjoys paper deductions – i.e. depreciation and capita building write off. Cont. next page..
Q&A Making a paper loss on a property investment in your SMSF will flow sideways in a positive fashion and dilute tax payable on contributions. We have many clients who are then actually able to salary sacrifice into their SMSF and not pay tax on the super contributed. This means they can pay their property off much quicker and this is a much more tax efficient way than attempting to reduce debt outside of super as you have to earn the wage or business income and the pay tax and you can only use the remaining net amount. By using the SMSF you may be able to use the whole dollar to create wealth – rather than the residual.
Thank you We hope this seminar has been of some benefit to you and perhaps opened your mind to the possibilities that exist with strategic planning. The opportunity is yours for the taking! We further hope that you may consider forming a strategic alliance with our firm and that we may be of assistance to you in the future.
Disclaimer Please Note: Although all care has been taken to provide the most up to date information, no guarantee is given as to the accuracy of this information. These examples shown herein do not constitute financial advice of any kind. They are provided solely for the purpose of illustrating and contrasting the effects of using super as a general strategic strategy.