D.I.Y. Superannuation and purchasing property using warrants

[Dareyou2]

Hi Pat

From what your saying I wait in anticipation with the product you have outlined.

l just wanted all somersoftians to full understand the full implications of what where talking about here.

The new as of today taken from a trustworthy source is this:

"SUPERANNUATION funds have taken a $55 billion hit on the back of the worst share market streak Australia has seen since the mid 1990s.

The share market is down more than 15 per cent from its peak last October.

The falls have hurt thousands of investors directly but millions indirectly through their superannuation accounts. Australia's trillion dollar superannuation nest egg has taken a $55 billion hit from the carnage of the past nine days.

Pauline Vamos, chief executive of ASFA, the Association of Super Funds of Australia, said yesterday superannuation portfolios were still showing healthy profits but had lost some gloss in the past six months."

I honestly believe that with the right structure,and people with the right
"set up" ($120,000 in super & commitment,knowledge ) with full understandings of an SMSF can do better.As ive said l went to the experts and have learnt more searching and talking to professionals such as your self to be guided by.

Thanks for all your input reguarding this matter, and everyone who's contributed on this subject because i strongly believe you will see more and more people taking control of their own futures.

 

[mazoongoo]

I thank you

I have just read through these comments and it has been extremely informative. IU guess we'll see a multitude of products popping out. I have heard that RESI are close to releasing one as well. It's all good and I look forward to more info. Paul

 

[House_Keeper]

It may be possible to purchase property through an SMSF, but is it really worth it?

As far as I can see, the benefits are:
1. Lower tax on income
2. No CGT tax on selling (if selling is your strategy)
3. Lower risk using non recourse loan

Yet the disadvantages are:
1. No negative gearing benefits
2. Higher interest rate: 1-1.5% higher
3. Higher deposit required: 30%

If I am going to purchase a neg geared high cap growth property to hold on to using LOE, I am not sure that a super structure is the best.

Cheers,

 

[mazoongoo]

House Keeper Reply

It may be possible to purchase property through an SMSF, but is it really worth it?

As far as I can see, the benefits are:
1. Lower tax on income
2. No CGT tax on selling (if selling is your strategy)
3. Lower risk using non recourse loan

Yet the disadvantages are:
1. No negative gearing benefits
2. Higher interest rate: 1-1.5% higher
3. Higher deposit required: 30%

If I am going to purchase a neg geared high cap growth property to hold on to using LOE, I am not sure that a super structure is the best.

Cheers,

Hi - my thoughts are different from these disadvantages:

1. You get gearing benefits if you are contributing to a fund or if there are earnings / profits gained in fund e.g. cash interest, earnings other than share dividends, rent etc

2. Yes interest is higher but it's pre tax money in most cases. This is traded off as you get nil capital gain if asset is sold at right time. Indeed you can transfer a property to a fund member later if it's something you have as a retirement aim.

3. Not yet sure if it's 20 or 30% deposit

4. Your leveraging outside of shares so diversifying the fund. Most funds can't afford to hold property direct.

Paul

 

[Dareyou2]

Advantages

There are potentially big tax advantages to investing in property through a super fund compared to a straight property investment in a person's own name outside of super.

Capital gains tax can be minimised and even eliminated if the property is held until the pension phase (age 60). Tax on rental income is 15 per cent maximum and you might effectively receive a tax deduction (via salary sacrifice) for principal loan repayments.

A key element of the rules is that any debt incurred in the investment must be "limited recourse'' and no more than 80 per cent of the purchase price of the investment.

Limited recourse means that if there was a default and recovery action by the lender had to be taken then the maximum amount that can be recovered is the value of the investment.
Unlike a traditional mortgage, where a lender can repossess and sell your house and still demand repayment of any remaining amounts over and above that, a limited recourse loan limits the lender's recovery to the property alone.

"The thing I really like about it is, say you like the look of a place at Apollo Bay for example, you can buy it in your super fund, then when you retire you can transfer it to yourself as a lump sum payment.''
Take a balanced approach

The Risks

Although there are great tax benefits and an opportunity to leverage into direct property the following risks need to be considered:

Investment risk: While borrowing to invest can magnify returns it can also magnify losses if the investment makes a negative return.
Diversification: An integral part of an investment strategy in superannuation is diversification to minimise risk; having only one investment in super would not comply with this rule.

Loan structure: An ordinary home loan will not be allowed under new rules and as such it is imperative that you seek professional advice from an adviser when structuring your finance within super.

Cash flow: If the property is negatively geared, you need to ensure that the super fund has adequate cash flow to meet interest payments. Apart from the investment property rent a great source of cash inflow are super contributions such as the compulsory 9 per cent employer super contribution.
Legislative risk: Of course, the law can always change to prohibit borrowing in super, but, generally, when super law changes they provide existing investors with some exemptions.

Preservation: Don't forget that you cannot access your superannuation until you meet a condition of release, which for most people is being over 55 and retired.

Super rules: Apart from your commercial property you cannot buy existing property from yourself or your relatives and you cannot live in the property or use it for your own enjoyment, eg. holiday house.

Penalties

There are complex rules around this type of investment and big penalties for SMSF trustees that do not comply, so good advice is probably a requirement for people contemplating this type of strategy.

 

[nonrecourse]

Dark skies and thunder ahead

It may be possible to purchase property through an SMSF, but is it really worth it?

As far as I can see, the benefits are:
1. Lower tax on income
2. No CGT tax on selling (if selling is your strategy)
3. Lower risk using non recourse loan

Yet the disadvantages are:
1. No negative gearing benefits
2. Higher interest rate: 1-1.5% higher
3. Higher deposit required: 30%

If I am going to purchase a neg geared high cap growth property to hold on to using LOE, I am not sure that a super structure is the best.

Cheers,

Having purchased two commercial properties back in 1995 and 1996 through our super fund I would disagree that the super structure is a poor option. In our case it has turned out to be a goose that lays golden eggs

What has stopped us in our tracks about purchasing another property in our super fund or in another trust is the subprime debacle and the credit crunch. The excess cash that is generated in our super funds may be needed in the next 2-3 years if the brown stuff hits the fan.

I may be sounding like chicken little ..... I rate the chance of a soft world wide depression at about 40%. With Bush talking about handing out 150 billion or 1% of the US GDP to stimulate the economy. That means the dollar which is already devalued is just another fiat currency.Gold bullion will have its turn again if there is a world wide contagion

The days of going out and borrowing up to 120% of the value of a prospective property using the equity of our existing portfolio is over.

The advantage with holding property in a super fund that is generating income with little or no mortages is that it is out of the reach of creditors if the world does indeed go pear shaped.

 

[Pat]

It may be possible to purchase property through an SMSF, but is it really worth it?



Yet the disadvantages are:
1. No negative gearing benefits
2. Higher interest rate: 1-1.5% higher
3. Higher deposit required: 30%

Hi,

Keeping House in a SMSF with gearing is a no brainer for those who love direct property.

1.The negative gearing benefits are all tied in to salary sacrificing your income at 31.5, 41.5 or 46.5 cents in the dollar. You just need to see the negative gearing from a different angle. A bit of Edward deBono required there.

2. The higher interest rate is a risk factor the banks require for the loan being non-recourse. This is the fullest asset protection you can get, and I think for many people that is worth the extra cost.

3. The Minimum Deposit required is 20%.

If you have $150,000 in Super, would you rather it growing at 9% on a $450,000 property or 9% on the $150,000 without any gearing? We're all on the forum because we all come up with the same answer there.

If you love property investing you don't stop investing outside super so you will continue to purchase in your existing structures but why not start in Super as well?

And by the way if you have 3 investment properties outside super already and one of the loans is P&I then get it back to Interest only like the other two and pay any extra Principal money off the loan in the Super fund because the ATO will help give you a tax benefit that can't be received outside Super.

Cheers

 

[TOO FLY]

Developing Commercial property with Instalment warrants

HI, i have a need to develop my vacant commercial land.
I have just signed up on this forum and i am seeking some help regarding my $100,000 in Super and if i can utilsie this to begin the initial planning and devopment work for a shopping complex on the site.Thanks.

 

[Pat]

Hi Too Fly,

Firstly if you want to build on this land within your Super Fund the Land would need to be transferred or bought by your Super Fund. Then a Construction loan would need to be applied for and a number of other issues would need to be addressed.

 

[TOO FLY]

Thanks for the speedy reply Pat.
I have an offer to purchase this land which is a significant offer which i am considering, however i believe in the site so much that i think i would be better of developing it so what do i need to do........i need to move quicky, as in NOW, cheers Brad.

 

[nonrecourse]

Does it comply with ATO rules for SMSF's?

HI, i have a need to develop my vacant commercial land.
I have just signed up on this forum and i am seeking some help regarding my $100,000 in Super and if i can utilsie this to begin the initial planning and devopment work for a shopping complex on the site.Thanks.

Dear TOO FLY;
I am not an accountant, real estate agent or an investment advisor. I have had an SMSF/Unit Trust/Commercial real estate for 13 years.

My understanding of SMSF funds is that with regard to property your super fund cannot be involved in trading, i.e. running a business. That means you cannot develop a property such as you suggest for a shopping complex.

Having said that if your investing via a property warrant and a unit trust held by the banks is this a loophole? You would need to run that past your gaggle of trust solicitors/accountants/investment advisors

 

[geoffw]

My understanding of SMSF funds is that with regard to property your super fund cannot be involved in trading, i.e. running a business. That means you cannot develop a property such as you suggest for a shopping complex.

However, I have heard about the possibility of a joint venture between an individual (or more than one) and an SMSF.

It may be that the person gets a loan to buy a property. But it needs renovation (or development). The person and the SMSF enter into a JV, where the SMSF provides an amount of money, in return for a bigger amount of money (perhaps a percentage of profit) when it is sold.

Rob Balanda was talking about that a few years ago. I don't know if Googgle could shed some light on this arrangement.

 

[Xenia]

For those in Adelaide, Pat will be doing a presentation regarding the use of warrants at the Real Estate Investor's Network meeting on 11th March. I will be contacting people on our mailing list with details closer to the date.

Contact me at [email protected] if you want to be included (and are not already).

Thanks Pat

 

[asdf]

Heard the ATO is going to have a closer look at this seeing property punters have jumped on board the bandwagon since the legislation came out which had intended to be used for instalments over shares and listed asset class. Doubt they will repeal anything in a hurry as the govt will have better things to do now. However you will not find a product ruling with these things, at any rate the ATO never advises on suitability of an structure to SMSFs but you know if you refer to the suitability aspect on a PR for say the deductibility of interest, they'd let you know if they are not happy about references to SMSF suitability. Bottom line is I would thread with caution as all you will be relying on from the providers is some law firm's paid advice who would've incidently also plastered a miilion and one disclaimers in the fine print to seek your own professional advice.

 

[agent007]

Hi Too Fly,

Firstly if you want to build on this land within your Super Fund the Land would need to be transferred or bought by your Super Fund. Then a Construction loan would need to be applied for and a number of other issues would need to be addressed.

Hi Pat,

My HDT owns a block of residential land. Can I transfer ownership of the land (sell it to), to my SMSF and then, apply for a property warrant to proceed with building construction?. Will the in house rule apply in this case?

Thanks,
James

 

[nonrecourse]

Heard the ATO is going to have a closer look at this seeing property punters have jumped on board the bandwagon since the legislation came out which had intended to be used for instalments over shares and listed asset class. Doubt they will repeal anything in a hurry as the govt will have better things to do now. However you will not find a product ruling with these things, at any rate the ATO never advises on suitability of an structure to SMSFs but you know if you refer to the suitability aspect on a PR for say the deductibility of interest, they'd let you know if they are not happy about references to SMSF suitability. Bottom line is I would thread with caution as all you will be relying on from the providers is some law firm's paid advice who would've incidently also plastered a miilion and one disclaimers in the fine print to seek your own professional advice.

Hi asdf;
Its not only the ATO that is having a closer look at the property warrants issue. An article in the financial review I think it was a few days ago alluded to the fact that some sections of the new Rudd government are not happy with the fact that the restriction on borrowing through a super fund has been altered.

I would suggest that the retail super industry is at it again, white anting the SMSF's new won priviledge by lobbying treasury and government policy makers as this change strikes at their vested interests.

Most investors would be unaware of the real reason behind the changes with warrants. For years the big end of town has been using warrants for their well to do clients to get around the embargo on super funds borrowing to purchase shares. When the ATO started sniffing around about 2002 they released a discussion paper warning of their concern. It took until 2006 for the ATO to act. My understanding was a number of senators from both sides of the house may have been involved with the use of warrants for purchasing shares through family held super funds?

During the senate hearings a number of submissions were made by private individuals regarding the illogical restrictions placed on SMSF's with borrowing to purchase a commercial property. As was pointed out before 1 July 1999 many business people had purchased their business property through a unit trust that was controlled by their super funds and the returns knocked the socks off any other investment by comparison.

When the SMSF's unit trust option to borrow was closed off in the late 1990's this was largely due to the retail super industries skullduggery in convincing policy makers that SMSF's were somehow rorting the system. There was never any proof. As the Nazi Gobbles? was once quoted "if you repeat a lie often enough it becomes fact".

The reality was the super inquirey was left with no choice but to treat shares and property equally much to the consternation of the retail sharks.

As for obtaining legal advice that is plastered with disclaimers that depends on whom you obtain your legal advice from. If you go to your solicitors and have them draw up a brief that is then passed onto to a QC that deals specifically with the area that concerns you..... my experience has been

 

[Pat]

For those in Adelaide, Pat will be doing a presentation regarding the use of warrants at the Real Estate Investor's Network meeting on 11th March. I will be contacting people on our mailing list with details closer to the date.

Contact me at [email protected] if you want to be included (and are not already).

Thanks Pat

Cheers Xenia, looking forward to presenting the material which can now allow those who qualify, to gear into direct property in Self Managed Super

 

[Pat]

Hi Pat,

My HDT owns a block of residential land. Can I transfer ownership of the land (sell it to), to my SMSF and then, apply for a property warrant to proceed with building construction?. Will the in house rule apply in this case?

Thanks,
James

Hi James,

A SMSF cannot purchase residential property off a related party ( your HDT ). Only business real property can be purchased by a SMSF off a related party. This is spelt out in the SIS ( Super Industry Supervision ) Act rules.

 

[Pat]

;

Heard the ATO is going to have a closer look at this seeing property punters have jumped on board the bandwagon since the legislation came out which had intended to be used for instalments over shares and listed asset class. Doubt they will repeal anything in a hurry as the govt will have better things to do now. However you will not find a product ruling with these things, at any rate the ATO never advises on suitability of an structure to SMSFs but you know if you refer to the suitability aspect on a PR for say the deductibility of interest, they'd let you know if they are not happy about references to SMSF suitability. Bottom line is I would thread with caution as all you will be relying on from the providers is some law firm's paid advice who would've incidently also plastered a miilion and one disclaimers in the fine print to seek your own professional advice.

Hi asdf,

I am quoting this straight off a Federal Government Website for Tax Legislation update 25 September 2007.

" Tax Laws Amendment Act No.143 of 2007 - this Act will allow investment by superannuation funds in instalment warrants that are of a limited recourse nature, over any asset a fund would be permitted to invest in directly"

It couldn't be clearer than that and when something is legislated you do not need to tread warily as long as the setup is correct from the start. Advisors can only advise on current legislation.

asdf, all those big super payouts the Coalition Honchos received when they were kicked out in November, I think they are about to be invested in Instalment Warrants not some big Retail Fund.

As Non-Recourse is alluding to, those fat fund Managers in all those lovely high rise towers in the CBDs of Sydney, Melbourne and Brisbane will be lobbying Mr Rudd harder than my 3 year old lobbies me for ice cream on a hot sunny day.

You've got to feel for them , burnt pants in the Share Market in January and Rollouts lined up for the Punters to setup SMSF's and gear Property in February and March.

 

[agent007]

Hi James,

A SMSF cannot purchase residential property off a related party ( your HDT ). Only business real property can be purchased by a SMSF off a related party. This is spelt out in the SIS ( Super Industry Supervision ) Act rules.

Hi Pat,

What if the HDT transfer the land to a Unit trust. In that case, would the SMSF be able to purchase from it?

Thanks again,
James.