Act quickly! The Financial System Inquiry 2014 has recommended that the government bans borrowing by Self-Managed Super Funds.
Find out more here: Gov. Direct Borrowing Publication
If property is your thing, did you know that you can use a self-managed super fund (SMSF) to purchase an investment property? Well, now you do!
Owning a property portfolio is something many Australian’s dream of, but one thing that stands in their way is being able to save up or release enough equity in order to start this. The great thing about using a SMSF is that it allows up to four investors to pool their money in order to start investing in property.
Some things to consider first
- There are many penalties and taxes that may be applicable by getting things wrong. Make sure you get financial advice before you start the process of investing.
- Setting up the proper structures that allow borrowing to take place can be tricky.
- Any funds that are borrowed must be used to acquire a ‘single acquirable asset’.
- You will need to do proper research into the right kind of property that will suit the investment characteristics that you desire.
How does borrowing in super work?
The important regulations that deal with borrowing are in Section 67A of the Superannuation Industry (Supervision) Act 1993.
Under this section, the trustees of a regulated superannuation fund are not prohibited from borrowing money, or maintaining a borrowing of money where:
- Funds are borrowed in order to purchase a ‘single acquirable asset’, inclusive of expenses incurred in the acquisition of the property, but not expenses used to improve the asset.
- The asset must be held on trust, allowing the superannuation fund to acquire a beneficial interest in the acquirable asset.
- The trustee has a right to acquire legal ownership of the acquirable asset by making one or more payments after acquiring the beneficial interest; and
- The rights of the lender must be limited only to recourse against the acquirable asset only, and not to any other asset held by the SMSF.
What are the advantages?
- Using a LRBA, a self-managed super fund is able to use more money to invest than it would ordinarily be able to. This means that any returns made by the asset are proportionally higher than they would have been if you had only used your starting balance.
- If your asset starts to become positively geared, any surplus income is taxed at a maximum of 15%, rather than your current marginal tax rate (up to 48.5%)
- Upon reaching retirement you can potentially shift your assets into pension phase and reduce capital gains tax to nil.
- You can invest in an asset not normally available to industry or retail superannuation funds.
- Business owners are able to purchase their own properties, and lease them to themselves.
This list is by no means exhaustive!
What about disadvantages?
As well as the disadvantages discussed in my recent blog article on self managed super funds, there are others to consider:
- Release of death benefits. As your SMSF may have most of its assets held in potentially illiquid assets, if a member were to pass away unexpectedly you could be in a situation where the fund has to sell the acquirable asset very quickly in order to pay a death benefit.
- Costs of investing. There are many costs involved with investing in property. These include (but are not limited to) financing costs, maintenance costs, insurance premiums and agents fees. You should do your research first to ensure these fees allow you to generate a suitable return.
- Inability to improve asset. Under a LRBA, the trustees are unable to improve the asset, though they are able to make repairs as detailed in ruling SMSFR 2012/1 (http://law.ato.gov.au/atolaw/view.htm?Docid=SFR/SMSFR20121/NAT/ATO/00001)
- Potential funding issues. This strategy is extremely sensitive to the inflows and outflows of capital into the SMSF. If your financial situation changes or if there are significant increases to the cost of finance, your SMSF may be unable to afford to maintain this strategy.
- Timing issues. Putting in the offer of purchase is a tricky business, and you should ensure that the correct structures are in place before any offer is made to purchase the property.
Clearly, there are many things to consider when implementing such a complex strategy. We recommend taking up the advice of several professionals in order to do so, including financial advisers, accountants, lawyers, and mortgage brokers.
These professions are well placed to provide you with all of the information that you will need to set up your strategy successfully.
