Our First Smsf Purchase - A Step By Step Guide

[BV]

What's your strategy to build up the requisite funds to build the extra box in the future? Let your contributions accumulate (+/- any surplus rent), trade shares and build funds that way?

Just curious, as at present one cannot borrow to constuct thru the super rules lending criteria. I have three development type properties in our SMSF, and I am allowing rents to accumulate for now and will use a combo of shares, cash deposits and other medium term investments to provide the funds to develop more doors and hence more income streams.......tax free in another 11 years
.

player
My Strategy is to salary sacrifice as much as possible into the SMSF and boost the balance that way.

In the future the ATO will have to allow lending for developments but until then we should lend own money to the SMSF (to use as the deposit) and save the SMSF funds for construction.

I have three development type properties in our SMSF, and I am allowing rents to accumulate for now and will use a combo of shares, cash deposits and other medium term investments to provide the funds to develop more doors and hence more income streams.......tax free in another 11 years
.

thanks for sharing your plans and your age... yes not long to go and time goes quick....

 

[The_Bludger]

Hi Bill, as mentioned, excellent post and thanks for sharing.

How is Land Tax calculated in SMSF's? If you had a few IP's in your own name, do IP's in a SMSF get added to the pool or are they treated separately? If separate, this is a great way of avoiding large Land Tax bills also.

 

[BV]

Hi Bill, as mentioned, excellent post and thanks for sharing.

How is Land Tax calculated in SMSF's? If you had a few IP's in your own name, do IP's in a SMSF get added to the pool or are they treated separately? If separate, this is a great way of avoiding large Land Tax bills also.

The bludger

Excellent point.

I have not looked into this but the property is actually in the name of the bare/custodian trust and every time we buy a property we'll have to keep it separate, & under a different company name so IMO there will be 1 land tax threshold for each property.

cheers

 

[MikeF]

The bludger

Excellent point.

I have not looked into this but the property is actually in the name of the bare/custodian trust and every time we buy a property we'll have to keep it separate, & under a different company name so IMO there will be 1 land tax threshold for each property.

cheers

IMO in NSW if the bare/custodian trust holds the asset for the sole beneficial ownership of the SMSF then the arrangement would be assessed on the basis that it is a fixed trust for land tax purposes and therefore the ultimate property owner would receive the benefit of it's own threshold ie the SMSF.

As to establishing seperate security custodians under different company names IMO this does not change things due to the fact that the properties are held for the full beneficial ownership of the super fund and this is where the land tax threshold would lie.

As each property is purchased I believe (and have been reminded by another SS forumite) that it would be better and more cost effective to have just the one security custodian entity. You would however need to have a seperate set of "bare trust" documentation for each property "owned" by the security custodian.

Please note that the above is not ADVICE and full & proper guidance should always be obtained from a qualified professional before proceeding.

 

[Propertunity]

Thanks for sharing Bill. I've been to the seminars too and read the stuff available but nothing beats doing it in real life.

In our Buyers Agency we are getting clients interested in buying thru their SMSFs and your kind of experience helps with understanding the mechanics.

I think we'll have to pop a couple of new purchases into our SMSF also

 

[BV]

Mike

It sort of makes sense, however, the SMSF is invisible in the eyes of the OSR.

I know that the security docs are written is such way as to show that the property is held for the benefit of the SMSF but the property is owned by a separate entity with a different name so how would the OSR know what the arrangement is?

 

[MikeF]

Mike

It sort of makes sense, however, the SMSF is invisible in the eyes of the OSR.

I know that the security docs are written is such way as to show that the property is held for the benefit of the SMSF but the property is owned by a separate entity with a different name so how would the OSR know what the arrangement is?

Bill

Your "Security Deed" needs to be stamped by the OSR for a number of reasons including evidencing the bare trust relationship. This is particularly important so as to not pay full stamp duty again when the property title is at some time in the future transfered back to your SMSF when the loan is fully repaid. See the following reference;

http://www.osr.nsw.gov.au/about/services/osrassist/trusts/beneficiary_resulting/

If you contact them you will find that you need to provide them with the following documents;

1/ Security Deed (some people recommend you get two copies stamped because if one goes missing you could be in big trouble later down the track)
2/ Copy of the statutory declaration that came with your deeds
3/ Copy of your Contract for Sale of Land
4/ Copy of bank statement/s proving that the SMSF paid all the money for the property
5/ Copy of the loan agreement or proof that the SMSF borrowed money
6/ Copy of your SMSF Trust Deed

 

[BV]

Mike

I thought evidence of the bare trust relationship was to be provided when the loan is paid off and we are about to transfer the title.

I did not see stamping of the security docs by OSR written anywhere and it wasn't suggested by CST or by my solicitor.

Thanks fot the info, I'll give OSR a call and hopefully they'll know what I am talking about.

cheers

 

[BV]

Mike was my broker on this purchase and a good 1 too, he's been very supportive

Mike

Now that I got your full attention I've got a question for you.
On the issue of building & landlord's insurance, I took a policy out in the name of the SMSF and not in the name of the bare/custodian trust.

I did this after careful consideration of the information supplied to me by yourself, CST and by my accountant.

My reasoning which my accountant agrees with is that the SMSF has a financial interest in the property, collects rents, pays bills, pays the interest etc and in the event of a claim, the insurer will issue a cheque which will have to be banked and it can only be banked if it's in the name of the SMSF.

Do you think I've done the right thing?

cheers

 

[MikeF]

Hiya Bill

Thanks for the kind words. As I'm not an insurance broker best check with your insurer......but your rationale does make sense.

 

[Collector]

Reading though this thread has given me some ideas...

I have read other threads about SMSF and the problems with borrowing funds.

My wife and I have about $160k in super, is it possible to set a SMSF and do a joint venture with ourselves to purchase an IP for say $300k - $160k from super and $160k from a LOC secured against our PPOR - how would this be set up, what would we need to do?

 

[MikeF]

Reading though this thread has given me some ideas...

I have read other threads about SMSF and the problems with borrowing funds.

My wife and I have about $160k in super, is it possible to set a SMSF and do a joint venture with ourselves to purchase an IP for say $300k - $160k from super and $160k from a LOC secured against our PPOR - how would this be set up, what would we need to do?

There is nothing stopping a SMSF from buying a 50% (tenants in common) interest in an investment property irrespective of who owns the other half share.

Also, and as has been mentioned before in this forum, you could also on lend your funds to the super fund so that it purchases 100% of the property.

Depends on your own circumstance I guess.

 

[BV]

Reading though this thread has given me some ideas...

I have read other threads about SMSF and the problems with borrowing funds.

My wife and I have about $160k in super, is it possible to set a SMSF and do a joint venture with ourselves to purchase an IP for say $300k - $160k from super and $160k from a LOC secured against our PPOR - how would this be set up, what would we need to do?

The way I can imagine it you would start up the SMSF, open up a bank account for it, roll over all your existing super money into the account and then buy a loan agreement from a company selling legal documents.

When you sign a contract to buy the property, you sign the loan agreement between the SMSF and yourselves the same day and then hand over a cheque for $160K to the SMSF. You then wait for settlement.

The benefit I can see from this arragement is that if you borrow the LOC funds at 5% but the standard SMSF rate from the banks is 5.79% your SMSF is obliged to pay the commercial rate so it would have to pay 5.79% and you'll benefit from this transaction.

However, the interest is taxable....

 

[MikeF]

The benefit I can see from this arragement is that if you borrow the LOC funds at 5% but the standard SMSF rate from the banks is 5.79% your SMSF is obliged to pay the commercial rate so it would have to pay 5.79% and you'll benefit from this transaction.

However, the interest is taxable....

Bill

Your correct in saying that the fund must pay a commercial interest rate however at the same time you as an individual can not benefit from the transaction.

Accordingly you making a profit on the transaction would in my view be a big no as the SMSF would fail the sole purpose test ie that the fund is being exclusively maintained for the core purposes of providing for the retirement or death benefits of the SMSF members.


IMO the interest rate would need to be the same for both loans.

 

[BV]

Mike

Valid point there. However, I was reading an article by some lawyers and they have a different opinion. They believe that we can charge our SMSF a higher interest rate and their reasoning is the personal guarantee required by some lenders.

For example, we cannot borrow from a lender requiring a personal guarantee so we are limited to borrow from those which have limited recourse loans and those are (were) more expensive.

Therefore, if we were to comply with legislation re personal guarantee we would have to get a loan from 1 of the more expensive lenders and this is the commerical rate we would use in our calcualtions.

These lawyers are not mentioning anything re the sole purpose test and I'm guessing that they don't because the SMSF is actually getting a loan at commerial rates and the fact that the trustee will benefit slightly is perhaps not significant.
If we wanted to be on the safe side we could contribute all of the interest we gain to the SMSF.

Here is that article
http://www.dealersgroup.com.au/kb/cf26--dba_butler_article-2008-06.pdf

 

[Ausprop]

so under scenario 2, whose names are actually on the title? just the super fund?

very interesting.

 

[BV]

so under scenario 2, whose names are actually on the title? just the super fund?

very interesting.

Ausprop

Yes I would think so.
If you are lending to your SMSF why would you go to elaborate schemes to hold the asset in another name?

There is no risk of the SMSF not paying you back, you are the beneficiary and the SMSF trustee at the same time.

It's like taking money from 1 pocket and putting it into another
but the movement of the funds in and out of the 2nd pocket and it's use are regulated.

 

[CG++]

Thank-you for this information, BV. I am setting up my SMSF and have been researching the forums. Does your SMSF set-up still comply and does this thread http://www.somersoft.com/forums/showthread.php?p=629591 affect your SMSF structure?

Compliancce rules are so challenging, accountants and solicitors vary their opinions that it's turned into a whale of a task. Definately not late night reading. Cheers.

 

[BV]

CG++

Yes mine still complies,
the thread you are referring to is irrelevant in my situation.

In regards to stamp duty, in NSW we have to register the purchase with the OSR and to show (using our carefully worded trust document) that we are the actual purchaser and not our bare trust.

I guess it will be similar in other states.

 

[BV]

Compliancce rules are so challenging, accountants and solicitors vary their opinions that it's turned into a whale of a task. Definately not late night reading. Cheers.

Not at all, use professionals and you'll be ok.
The only issue I had was with the personal guarantee and for this reason I chose to get my loan from ST George..

If you buy the deed docs from a reputable company and use a SMSF mortgage broker you shouldn't have any problems. If you go for the free documents you should wonder why they are free and you should check them carefully to see if they meet your current and future needs