Property investing within a SMSF

DisclaimerThis presentation provides general advice only. No direct or implicit recommendations are given in this document. This means that the general advice provided has not been prepared taking into account an individual’s financial circumstances (i.e. investment objectives, financial situation and particular investment needs). You should assess whether the advice is appropriate to your individual financial circumstances before making an investment decision. You can either assess the advice yourself or seek the help of an authorised representative through an Australian Financial Services License (AFSL) holder.[Your Company] believes that the information in this presentation is correct at the time of compilation but does not warrant the accuracy of that information. Save for statutory liability which cannot be excluded, [Your Company] disclaims all responsibility for any loss or damage which any person may suffer from reliance on this information or any opinion, conclusion or recommendation in this presentation whether the loss or damage is caused by any fault or negligence on the part of presenter or otherwise.

About this sessionWhat we will cover:Ways to invest in property using a SMSFStructuring requirements (“how to”)Key IssuesQuestions

What ways can a SMSF invest in property?

Strategy 1 – Buy outrightA SMSF can acquire either residential or commercial property. This can be outright within the fund or as tenants in common.Think about trustee structureAppropriate ownership on titleOwning property inside superIndividual MTR vs. Super Tax Rate (15%)Pension Phase (0%)Personal tax deductions (building allowance)• Capital growth Pension Phase (0%)Can acquire BRP from a related partyBusiness Real Property (commercial)Potential use of Small Business Concessions to reduce or eliminate CGTSome states have stamp duty exemptions/concessions availableCannot transfer residential property into a SMSFSMSF should be in existence prior to acquisition

Strategy 2 – Ungeared Unit TrustA SMSF can acquire units in an ungeared unit trust to acquire residential or commercial property. This strategy is commonly used where a SMSF has insufficient capital to acquire an asset and includes other unit holders (i.e. individual).Looking to acquire land to develop• subdivisionBusiness Real Propertycan use to acquire own business premisestransfer units across to SMSF over timeDoes allow for the transfer units to SMSF with residential property• must meet strict requirements outlined within SISR 13.22CCommon arrangement for development

Example(3). Unit trust acquires property with $600,000 of subscribed capitalUnit Trust(Ungeared)Tenant(inc. related party)(1). SMSF applies for #300,000 @ $1.00 units = $300,000 (4). Lease agreement between Unit Trust and tenant (can be related party for commercial property)(2). John & Jane redraw against own home (investment loan) and apply for #300,000 @ $1.00 units = $300,000(5). Distribution paid to unit holdersSMSF(6). Repayments made back against redrawn equityEmployer

Key Requirements SISR 13.22C (ungeared unit trust)Fund must have < 5 members (SMSF or SAF); andAsset cannot be leased to a related party unless it is business real property (BRP); andLease agreement must be legally binding with a related party; andThe trust does not have outstanding borrowings; andThe Assets of the Trust do not include either:An interest in another entity; orA loan to another entity, unless it is a deposit with an ADI; orAn asset in which there is a charge; orAn asset acquired from a related party after 11/08/99 unless BRPAn asset that was owned by a related party since the later of 11/08/99 or 3 years before the date in which it was acquired

Strategy 3 – Limited Recourse Borrowing ArrangementsA SMSF can now borrow to acquire property using an SMSF Limited Recourse Borrowing Arrangement (LRBA). This strategy allows for individuals to leverage inside superannuation and use income and contributions to service the debt, plus obtain tax concessions ordinarily available within super.Section 67A (SIS Act)The borrowings must be for the acquisition of a single acquirable assetCan include expenses in connection with the borrowingThe asset must be held on trustAsset is held on trust so that RSF Trustee acquires a beneficial interestin the acquirable assetRights of the lender or any other person are limitedto the rights relating to the acquirable assetWhen the borrowing is fully repaid, the Fund has the rightrelating to the acquirable asset to become an asset of the SMSFSection 67B – Replacement Asset

How does it workPersonal guaranteeBare Trust

What can the bare trust hold in custody for the SMSF?Custodian (Bare) TrustCustodian (Bare) TrustCustodian (Bare) TrustCustodian (Bare) TrustThe Custodian can only hold a ‘single’ asset or collection of assets in the same way that they apply to a single asset (e.g. #1000 BHP shares)

Gearing in Super – Lender OptionsSuperannuation law allows for a SMSF to borrow money from any lender (including you), as long as the loan is on ‘commercial terms’.SMSF Bank loansMainstream product from lending institutionsResidential LVRs up to 80%Commercial LVRs up to 70%Borrowing must be for the acquisition of a single assetBanks will not lend on land Will almost always require a personal guarantee

Gearing in Super – Lender OptionsSuperannuation law allows for a SMSF to borrow money from any lender (including you), as long as the loan is on ‘commercial terms’.Related Party LoanYou can lend money to your SMSF from existing equity i.e. your own homeDealings must be arms-length (section109, SIS Act)Greater flexibility in terms & conditionsNo personal guaranteesRefinancing issues

Example(6). Rent paid to SMSF as beneficial owner of propertySMSF(2). SMSF borrows money from related party on arms-length basis(1). Individual redraws on equity in own home to provide a loan to his SMSF(7). Repayments made by SMSF back to lender (principal and/or interest) – subject to terms of loan(5). Lease agreement between SMSF and tenant (can be related party for commercial property)Custodial Trust (Bare Trust)Lender to SMSFTenant(inc. related party)(3). SMSF acquires property in name of Custodial Trustee using an SMSF LRBA(4). Lender’s rights in the event of default are limited to the property only.(8). Lender makes repayments back to own bank where money originally drawn.

Gearing in Super - Strategy applicationsBelow are a range of strategies that can be used in an SMSF Limited Recourse Borrowing arrangementBusiness owners renting or wanting to upgradePay more into super (as rent) above the contribution caps and get a tax deduction for your businessCan do using a special purpose SMSF vehicle with business partnersBusiness premises held outside superAbility to turn non-deductible (i.e. home loan) into deductible debtResidential and Property InvestorsIncluding property developmentPre-retirees planning a sea changeRefer to the last recorded Webinar for examples of these strategies

What you need to consider?There are a range of factors that need to be considered should you wish to undertake an SMSF limited recourse borrowing arrangement to acquire property.These include:YieldCapital growthLoan-to-value ratio (LVR)Bank Loan or BYO BankerServicing requirements (cash flow)Ability to contribute (contribution caps)Insurance requirements (taking on debt)

Important Property Issues with LRBAsAppropriate structuring of a SMSF limited recourse borrowing arrangement is required to meet the stringent requirements of sections 67A & 67B of the SIS ActYou need to be aware of the following key issues around LRBAs with property:Multiple titles with apartments, office buildings and farmlandScope to include where incident ancillary assets of very small value (a cark park does not necessarily qualify in ATO’s view)ATO will consider the particular facts on case-by-case basis (use SMSF specific advice)No ability to subdivideWould be a replacement asset and there does not qualifyBorrowing to buy ‘off-the-plan’Is the asset an ‘improvement’ or a purchase of a completed apartment?Need to consider how the property development is structured (timing & financing requirements) for purchase/completionStamp duty requirementsNeed to appropriately document the transaction to avoid ‘double duty’; show beneficial owner as being the SMSFImportant to seek professional advice

How can you deal with these issues?

Gearing in Super to develop propertyYou have the ability to combine strategies 2 & 3 to borrow to acquire land and or property to develop, including subdivision and off-the-plan. SMSF Limited Recourse Borrowing Arrangement to invest in an Ungeared Unit Trust13.22C related ungeared trustTypically will only apply to related-party loan onlyBanks won’t lend without wanting to take a charge over the property, which is not allowed.Related Party (BYO lender) will take a charge over units in unit trust

SMSFExample(2). SMSF borrows money from related party on arms-length basis(1). Redraws on equity in own home to provide a loan to SMSF(6). Rent paid to Unit Trust(5). Lease agreement between SMSF and tenant (can be related party for commercial property)(8). Repayments made by SMSF back to lender (principal and/or interest) – subject to terms of loanCustodial Trust (Bare Trust)Tenant(inc. related party)Lender to SMSF(3). SMSF acquires in ungeared unit trust units in name of Custodial Trustee using SMSF LRBA(7). Distribution paid to SMSF as beneficial owner of units in unit trustUngeared Unit Trust (SISR 13.22C)(4). Lender’s rights in the event of default are limited to the property only.(9). Lender makes repayments back to own bank where money originally drawn.(4). Unit Trust acquires land and uses additional funds to develop site

SummarySMSFs provide a range of opportunities for individuals to consider using property as part of their retirement plans.Buy it outrightIncludes tenants in common‘Pooling’ family members super moniesUngeared Unit Trust• Not quite enough in super• Wish to consider developing propertyGearing in Super – SMSF Limited Recourse Borrowing ArrangementLender options are available to youInsurance considerations (taking on debt)You can develop property by combining with strategy 2

Property investing within a SMSF

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