1. Alex, as one of our senior advisers, what investment trends have emerged particularly in the superannuation environment?
Since the commencement of the Global Financial Crisis we have seen a significant move towards high yielding cash and direct property.
2. Would you say that equities have become less popular since the Global Financial Crisis?
Marginally, however our experience centres on a client database which is dominated by retirees. We have found that whilst many clients have become wary of international equities, there is still significant interest in the Australian share market. To date, the large banks and resource companies which dominate the Australian Stock Exchange continue to produce strong earnings and franked dividends, which are attractive to retirees in a tax free environment.
3. There has been a rise in individuals wanting to setup a DIY Super or SMSF, why do you think people are moving this way?
In my opinion DIY Super was always a popular alternative when it came to managing one’s retirement needs, on the basis that it offers effective control and maximises investment flexibility. The trend that emerged since the Global Financial Crisis shows that individuals are concerned with where their superannuation monies are invested and who is managing it. Other benefits include maximising tax efficiency through the placement of life insurance within the fund and more options in regard to estate planning.
4. There has been much recent publicity about borrowing to purchase property in super. Have SMSF always been able to purchase property?
Yes, purchasing property through super has always been available. A SMSF can purchase property outright if it has sufficient funds available or it may purchase a property in conjunction with a member in a partnership arrangement.
5. Could you please elaborate on how someone could purchase property in conjunction with a member in a SMSF?
This strategy would involve the SMSF purchasing a property as a tenant in common with members of the fund. If the members do not have sufficient cash for the portion of the property, they can take out a loan. Since the property cannot be used as security of the loan, the members will have to use other assets as security. Many people will choose to use their principal residence as security for the loan.
6. Why would you purchase as tenants in common?
If a property is purchased jointly by a SMSF and its members, the property must be owned as tenants in common. This means that if the members die, their share won’t be inherited by the fund, instead their estate will inherit their share. A SMSF cannot own an asset as a joint tenant. SMSFs that own assets as joint tenants are in breach of the SIS Act.
7. What are the taxation implications of the above strategy?
Generally speaking, the rental income of the portion owned by the SMSF will be taxed at 15%. Some expenses will be deductible including repairs, depreciation and the building allowance if applicable. If the property is held for at least 12 months, any capital gains will be taxed at 10% if the property is sold.
The rental income of the portion not owned by the SMSF will be taxed at the marginal rate of tax. The owner will also be able to claim the usual expenses as deductions, and importantly, will also be able to claim the interest on the loan as an expense. If the property is held for at least 12 months, any capital gains will be taxed at half of the owner’s marginal rate of tax.
8. So what are the risks?
Aside from not meeting the SIS Act Regulations as they pertain to the sole purpose test, in house asset rules, suitable investment strategy etc., the normal risks associated to borrowing apply, such as the potential for default, which would put their security property at risk.
9. Can Econ Financial Services assist with all aspects of the above strategy?
Econ Financial Services has a range of suitably qualified professionals that can advise on the setup of the SMSF through to advice in securing funding for any potential purchase.
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Hi, what if my SMSF currently owns 75% of a commercial property and I personally own the remaining 25%. Can I borrow in the name of the SMSF to help fund the remaining 25% purchase price to my SMSF. Can the Bank take the whole property as security or only 25%.
Thanks
Hi Steve,
Like any mortgage, the banks will assess the superannuation fund’s ability to borrow. What they will look at include income the fund may receive as well as expenses that go out and determine how much the superannuation is capable of borrowing.
In regards to mortgaging of the property, the banks will secure a mortgage against the entire property.
Steve, if you are contemplating doing the above, could I suggest you come into our office for a quick chat. As this area is still relatively new and complicated, we would like to ensure that it is done right.
Thanks Alfred. I thought the Bank was forbidden from taking other assets of the fund as security, other than the asset being purchased. The confusing issue here is, it’s the same asset but part of it is already owned by my SMSF. How can I gain comfort that this doesn’t breach the super laws.
Hi Steve,
As you quite rightly pointed out. Loans that are taken out by a superannuation fund are limited recourse in nature (i.e. the lender cannot take any other asset of the fund except the secured asset should the superannuation fund default on the loan).
As as your situation is rather unusal (i.e. the asset is one of the same),your scenario will need to be presented to the bank to determine if this situation can potentially breach any super laws. Keeping in mind, the bank and their legal team will need to assess it and get it ticked off by their compliance team as well.