SMSF PROPERTY PURCHASES KEY TAX AND OTHER ISSUES

SMSF PROPERTY PURCHASES KEY TAX AND OTHER ISSUES
Copyright© Superior Super Solutions 2014

Would You Like Extra Money For Retirement
Then Consider This ….. THEN CONSIDER THIS …. Copyright© Superior Super Solutions 2014

Example: Your SMSF has $200,000 to invest over 20 years
THE Power of Leverage with Property Example: Your SMSF has $200,000 to invest over 20 years INVEST IN MIXTURE OF SHARES AND MANAGED FUNDS $170,000 say, doubles each 10 years (??????) INVEST IN PROPERTY (BORROWING TO PURCHASE) $170,000 is used to purchase a property for $450,000 Borrow 70% $315,000 SMSF contribution towards purchase $135,000 Purchase costs and set up costs $ 35,000 Copyright© Superior Super Solutions 2014

THE Power of Leverage with Property CONT…
$450,000 say, doubles in 10 years…. 20 years later, your property is now worth $ 1,800,000! GROSS CAPITAL GAIN IS A STAGGERING (before any CGT discount) $ 1,350,000 Assuming tax is paid at 10% ... (discussed later) (after allowing for CGT discount) $ 135,000 Extra money for retirement in 20 years … $ 1,350,000 (Being $1,800,000 LESS $315,000 Debt LESS $135,000 Tax) Copyright© Superior Super Solutions 2014

So what does $ 170,000 get you with shares and managed funds ?
THE POWER OF LEVERAGE WITH PROPERTY cont… So what does $ 170,000 get you with shares and managed funds ? Copyright© Superior Super Solutions 2014

THE Power of Leverage with Property cont…
$170,000 say, doubles in 10 years…. 20 years later, your shares / managed funds are now worth $680,000! GROSS CAPITAL GAIN IS (before any CGT discount) $510,000 Assuming tax is paid at 10% ... (discussed later) (after allowing for CGT discount) $ 51,000 Extra money for retirement in 20 years … $629,000 (Being $680,000 less $51,000 Tax) Copyright© Superior Super Solutions 2014

A PROPERTY PURCHASE WITH LEVERAGE THAN SHARES & MANAGED FUNDS COULD!
THE POWER OF LEVERAGE WITH PROPERTY cont… THEREFORE – A PROPERTY PURCHASE WITH LEVERAGE COULD PROVIDE YOU $721,000 MORE FOR RETIREMENT THAN SHARES & MANAGED FUNDS COULD! Copyright© Superior Super Solutions 2014

FUNDAMENTALS OF SELF MANAGED SUPER FUNDS
You can actively manage your own superannuation. Trustees hold and invest the assets for the benefit of members. Has four or fewer members. The members themselves act as Trustees. Trustees cannot receive remuneration for being a Trustee. Allow 1 to 2 weeks for a fully set up SMSF. (although allow 28 days for ATO to issue the SMSF’s TFN and ABN) Corporate Trustee preferred. Each member must be a Director and Shareholder of the Company. The sole purpose of the Fund is to provide retirement benefits to members. Copyright© Superior Super Solutions 2014

FUNDAMENTALS OF SELF MANAGED SUPER FUNDS cont…
A SMSF can be set up with only one member. As a Trustee, you must act according to the Fund’s Deed and all relevant super rules. Money belonging to the SMSF cannot be used for personal use. Main types of contributions into the SMSF: Employer (9.50%) Salary sacrifice Self employed Government co-contributions Personal Rollovers – A SMSF can accept a rollover of your $ balance from a super fund that you are a member of currently, outside your SMSF. Copyright© Superior Super Solutions 2014

Reporting and Compliance obligations: Prepare Financials and Tax Return and lodge with ATO yearly. Have the Financials and Tax Return audited yearly. All SMSFs must formulate in writing and sign an “Investment Strategy”, which should be regularly reviewed. Pay the ATO their yearly levy of $259 (for 2016 & 2017 tax years). (First year levy is $518). Keep the following records for at least 10 years: Minutes of Trustee meetings and decisions. Records of all changes of Trustees (including declarations). Members written consents to be Trustees. Copyright© Superior Super Solutions 2014

Taxation and Rates: SMSFs are taxed at the rate of 15%. If the SMSF sells an asset that it has owned for >12 months, CGT is paid at the rate of 10%. If the SMSF is in 100% pension mode when it sells the asset, $NIL tax is payable. If Gross Rent – Interest Paid – Other Property Expenses – Depreciation Claims = <0 (negative or loss), the loss carries forward to the next year (where not in full pension mode). When in 100% pension mode, the income AND the deductions are IGNORED or EXCLUDED from the Tax Return. No Capital Gains or losses occur when in 100% pension mode. Copyright© Superior Super Solutions 2014

fundamentals of bare trusts
What are Bare Trusts? Mechanism that allows SMSFs to purchase properties with the aid of finance (that is, leverage). Property’s title is legally held by “Bare Trust” until loan is fully repaid. SMSF is still the beneficial owner (explained further later). Copyright© Superior Super Solutions 2014

fundamentals of bare trusts cont…
What are Loans available for? Investment purposes only. Refinances. Loans secured by first mortgage only. Copyright© Superior Super Solutions 2014

Key considerations with loans The SMSF borrows the money and pays back the interest and/or principal. Loan can only purchase a single asset and any costs of acquisition (such as legals, stamp duty, loan setup costs, etc.). Asset bought must be one that a SMSF can buy (for example, residential property not currently owned by members). Copyright© Superior Super Solutions 2014

Other loan facts The loan is non-recourse (that is, in default, lender can only sell the asset bought to meet any money owing). This type of finance will typically attract higher interest rates and have higher set up costs. LVR’s can now be up to 70%. Lender may have postcode restrictions for allowable purchases. Best to avoid any personal guarantees (may not be possible). Copyright© Superior Super Solutions 2014

Bare Trust key considerations Asset bought held on trust for the SMSF whilst loan is repaid. Needs a corporate trustee – ALL members of the SMSF must be directors and shareholders. This company should not trade either. The trustee of the SMSF MUST be different to the trustee of the Bare Trust. Should only play minimal role (that is, hold legal title only). Copyright© Superior Super Solutions 2014

Bare Trust key considerations cont … No bank account No TFN No Tax Return Avoid the Bare Trust being active in any way at all costs. No GST registration required if Bare Trust is not active. Copyright© Superior Super Solutions 2014

Who signs contract to purchase? Each State has different requirements regarding who is noted on the purchase contract as well as Stamp Duty requirements for Bare Trust deeds at settlement. It is the trustee of the Bare Trust who buys the property legally. Please complete purchase contracts with care. Copyright© Superior Super Solutions 2014

Avoiding double Stamp Duty If name of purchase on contract is noted correctly AND the Bare Trust deed is used and signed and stamped correctly THERE SHOULD BE NO MORE Stamp Duty charged when legal title of property passes to SMSF (that is, when the loan is fully repaid). NOR SHOULD THERE BE Any Capital Gains Tax when legal title of property passes to SMSF (reinforces the need for Bare Trusts not to be active) Appropriate legal advice sought for – review of SMSF Deed, Bare Trust Deed & signed contract, stamping Bare Trust Deed & settling property (with appropriate searches, etc.). Copyright© Superior Super Solutions 2014

Lease agreements Bare Trust should be named on the lease. Property agent should pay the rent direct to the SMSF. Our preference is for monthly rental statements. Have the agent pay as many running costs as possible (for example; council rates, water rates, insurance, repairs, etc.). Copyright© Superior Super Solutions 2014

Insurance Requirements of insurers may vary. If insurer requires the policy in name of Bare Trust, the policy should record that the SMSF has a beneficial interest in the property. All premiums should by paid by the SMSF. Policy should also note the lender’s interest too. Copyright© Superior Super Solutions 2014

General ongoing considerations (beneficial owner) SMSF receives the rent. SMSF pays all running costs such as – interest, council rates, water rates, insurance, repairs, body corporate fees, agent’s commission, etc. (like a normal landlord). If property sold, any CGT is payable by the SMSF (rates of CGT discussed earlier). Copyright© Superior Super Solutions 2014

General ongoing considerations cont … SMSF can claim depreciation too (please get a Quantity Surveyor to work out the depreciation entitlements). We only recommend one Quantity Surveyor – who is a leader in the industry by a mile (in terms of report layout AND $ claims calculated). Copyright© Superior Super Solutions 2014

summary of process to purchase a property in a self managed super fund
Obtain pre-approval for the loan from a financier (if possible, if not get an indicative approval), to ensure that your loan and rollovers give you enough funds to buy the property (including associated setup costs, stamp duty and lender’s costs). If you do not have a SMSF, set up a SMSF (ensure it has the power to borrow and buy a property) – allow 1 to 2 weeks. If a new SMSF is established, arrange to rollover your current super into your new fund’s bank account (being careful not to rollover your funds fully without having the appropriate insurances in place first in your new SMSF). If you have an existing SMSF, check the deed (to ensure the fund can borrow and buy property). Copyright© Superior Super Solutions 2014

If the deed does not allow for this, get it amended. The fund must review the Investment Strategy to ensure that it caters for a property purchase. Amend the Investment Strategy, if required. The Bare Trust and Corporate Trustee are established – allow 1 to 2 weeks. Find a suitable property and sign the contract, paying the relevant deposit from the fund’s bank account (after you have banked the relevant rollover(s)). Send the signed SMSF Deed, signed Bare Trust Deed and copy of the purchase contract to a solicitor for thorough review and to commence settlement process. Copyright© Superior Super Solutions 2014

Provide additional documents required by lender to obtain finance. At settlement: - Loan advanced by financier. - Balance of funds provided from Fund’s bank account. - Bare Trust Deed should be stamped (ensure it is stamped ASAP after deed is setup and signed, prior to settlement and after contract is signed - is preferred). - Mortgage of property is registered. - Property will be rented out (after settlement). Copyright© Superior Super Solutions 2014

100% Australian Owned and Operated You are in safe hands
Superior Super Solutions is locally-based in Frankston We are registered with ASIC, ATO, the NTAA and CPA We provide fully audited accounts to SMSF owners every six months You are in safe hands We are one of only a few experts in property purchases in SMSFs Copyright© Superior Super Solutions 2014

SMSF PROPERTY PURCHASES KEY TAX AND OTHER ISSUES

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SMSF PROPERTY PURCHASES KEY TAX AND OTHER ISSUES

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