There are many sites where people can read about SMSF's but I have not seen anywhere a simple to follow step by step guide so here it is.
First of all I should say that I find SMSF’s fascinating and I believe that it’s a powerful concept we should all be exploring.
To give you an idea of my background, I am not an accountant, a financial advisor or anything like that but I've done a lot of reading, I've gone to multiple SMSF seminars (and to some of them twice) and asked many questions so I have a good idea of what can be done in a SMSF and what structure to use.
We created our SMSF early this year and myself and my wife are the 2 and only trustees. We could have created a company to be the trustee but a SMSF is cheaper to establish and operate with personal trustees.
Having personal trustees limits our options from the lending point of view but we had decided that our lender was going to be ST George because they did not require personal guarantees and they are happy to lend to SMSF’s with personal trustees.
The SMSF setup was done though my accountant who basically bought the deed docs online and got us started.
We then opened up a bank account for the SMSF and rolled over most of our super into our SMSF. We left some money in our old super fund because we had insurance cover and income protection with them and it was cheaper that way.
When we opened up the SMSF's bank account we looked at several banks and the interest rate they offered and 1 of our essential requirements we had was the availability of a cheque book facility. This makes it easy to pay SMSF bills, buy a property at auction etc
We decided to buy an IP which would be cash flow neutral or slightly negative. First we had to decide on how much we could spend.
So we approached StGeorge and asked for a preapproval.
The approval came through for a loan up to $365K
Next we had to decide where to buy.
We looked up the coast, down the coast, east, west and finally decided on western Sydney because that's where we could see value and there wouldn't be shortage of tenants either.
It took us a while to find the right property, we made a few offers but
the type of property we were after was very popular. There was too much competition from first home buyers and/or developers.
We didn't give up and finally managed to buy our first IP in Casula for $323K (a house on a 700+ sq m block).
Why did we buy this particular property?
Because it was affordable, it will rent with only a minor reno, it's in a good spot, it meets our requirement for walking distance to everything and it has potential for redevelopment.
It wasn't a rushed decision but it was an easy decision.
We also looked at our recent super performance (+5% in cash), we took our preferred retirement age into account did the calcs and decided that our super without gearing wasn't going anywhere in a hurry so we bit the bullet and signed the contract.
However, recent super performance was not our only consideration.
We also looked at our finances this year and we saw that we'll be paying a lot of tax because all of our IP's are either cash flow neutral or cash flow +ve so we've decided to do something about it.
We’ve decided to sacrifice into super 25% of our salary.
This will not only save us tax (pay 15% tax instead of 40%) but will also reduce the IP loan considerably.
I anticipate that interest rates will stay low for quite sometime so I can see ourselves doing the same next year.
But even if we did not salary sacrifice, by my calcs and using $91K deposit,
the property will be cash flow neutral from day 1 and our 9% employer contributions will be a bonus
I've also read somewhere that we can also claim depreciation so this could reduce the SMSF tax considerably.
Coming back to the IP purchase, I should point out that our IP was purchased in a bare trust which is basically an arrangement where the security trustee (a company) is holding the property in a separate trust.
This is done to satisfy the tax office that the asset is not at risk.
The property is bought in the name of the company which will be formed at the time of creation of the bare trust.
In our case the bare trust and the company were created 2 days after we bought the property. so we had signed a pre-incorporated contract.
For us this was not a problem because under the corporations act
a company can have a meeting and ratify a pre-incorporated contract but if you live outside NSW check with your solicitor to make sure the same rules apply in your state.
The bare trust is created when you purchase the property and ideally on the same day so it's best to get your accountant to decide which bare trust docs he is going to buy, then get their application form ready and signed and wait for the IP purchase.
Once you find the IP and sign the contract, tell your accountant the property details and ask him to fax the application form in and to do a last minute check on the availability of the company name you are going to use.
When you buy a property remember to get building insurance straight away (accidents do happen. You don't want to be stuck with a burned down property and a contract which you can't get out of)
Also, remember to buy it in the name of the company you are going to create and make sure the name doesn't already exist (get your accountant to check and pick a name which won't be common).
for example, if you had named your super fund
LORRAINE AND STEVE BOLTON SUPERANNUATION FUND you could name your company LSSF PROPERTY HOLDINGS P/L and its VERY UNLIKELY that someone else will pick the same company name on the same day you buy your property.
What name you choose doesn't really matter but be careful not to buy your IP in another company's name. Also, buy your deed docs from a firm which has experience with these issues such as www.cst.com.au
and if you don't understand something ask questions and they'll give you advise.
Anyway, I can't say that the exact same process and strategy will work for everyone but I've used a real life example here so it should give people an idea of how to buy an IP in their SMSF. and if anyone has questions I'd be happy to answer them.
Best of Luck
First of all I should say that I find SMSF’s fascinating and I believe that it’s a powerful concept we should all be exploring.
To give you an idea of my background, I am not an accountant, a financial advisor or anything like that but I've done a lot of reading, I've gone to multiple SMSF seminars (and to some of them twice) and asked many questions so I have a good idea of what can be done in a SMSF and what structure to use.
We created our SMSF early this year and myself and my wife are the 2 and only trustees. We could have created a company to be the trustee but a SMSF is cheaper to establish and operate with personal trustees.
Having personal trustees limits our options from the lending point of view but we had decided that our lender was going to be ST George because they did not require personal guarantees and they are happy to lend to SMSF’s with personal trustees.
The SMSF setup was done though my accountant who basically bought the deed docs online and got us started.
We then opened up a bank account for the SMSF and rolled over most of our super into our SMSF. We left some money in our old super fund because we had insurance cover and income protection with them and it was cheaper that way.
When we opened up the SMSF's bank account we looked at several banks and the interest rate they offered and 1 of our essential requirements we had was the availability of a cheque book facility. This makes it easy to pay SMSF bills, buy a property at auction etc
We decided to buy an IP which would be cash flow neutral or slightly negative. First we had to decide on how much we could spend.
So we approached StGeorge and asked for a preapproval.
The approval came through for a loan up to $365K
Next we had to decide where to buy.
We looked up the coast, down the coast, east, west and finally decided on western Sydney because that's where we could see value and there wouldn't be shortage of tenants either.
It took us a while to find the right property, we made a few offers but
the type of property we were after was very popular. There was too much competition from first home buyers and/or developers.
We didn't give up and finally managed to buy our first IP in Casula for $323K (a house on a 700+ sq m block).
Why did we buy this particular property?
Because it was affordable, it will rent with only a minor reno, it's in a good spot, it meets our requirement for walking distance to everything and it has potential for redevelopment.
It wasn't a rushed decision but it was an easy decision.
We also looked at our recent super performance (+5% in cash), we took our preferred retirement age into account did the calcs and decided that our super without gearing wasn't going anywhere in a hurry so we bit the bullet and signed the contract.
However, recent super performance was not our only consideration.
We also looked at our finances this year and we saw that we'll be paying a lot of tax because all of our IP's are either cash flow neutral or cash flow +ve so we've decided to do something about it.
We’ve decided to sacrifice into super 25% of our salary.
This will not only save us tax (pay 15% tax instead of 40%) but will also reduce the IP loan considerably.
I anticipate that interest rates will stay low for quite sometime so I can see ourselves doing the same next year.
But even if we did not salary sacrifice, by my calcs and using $91K deposit,
the property will be cash flow neutral from day 1 and our 9% employer contributions will be a bonus
I've also read somewhere that we can also claim depreciation so this could reduce the SMSF tax considerably.
Coming back to the IP purchase, I should point out that our IP was purchased in a bare trust which is basically an arrangement where the security trustee (a company) is holding the property in a separate trust.
This is done to satisfy the tax office that the asset is not at risk.
The property is bought in the name of the company which will be formed at the time of creation of the bare trust.
In our case the bare trust and the company were created 2 days after we bought the property. so we had signed a pre-incorporated contract.
For us this was not a problem because under the corporations act
a company can have a meeting and ratify a pre-incorporated contract but if you live outside NSW check with your solicitor to make sure the same rules apply in your state.
The bare trust is created when you purchase the property and ideally on the same day so it's best to get your accountant to decide which bare trust docs he is going to buy, then get their application form ready and signed and wait for the IP purchase.
Once you find the IP and sign the contract, tell your accountant the property details and ask him to fax the application form in and to do a last minute check on the availability of the company name you are going to use.
When you buy a property remember to get building insurance straight away (accidents do happen. You don't want to be stuck with a burned down property and a contract which you can't get out of)
Also, remember to buy it in the name of the company you are going to create and make sure the name doesn't already exist (get your accountant to check and pick a name which won't be common).
for example, if you had named your super fund
LORRAINE AND STEVE BOLTON SUPERANNUATION FUND you could name your company LSSF PROPERTY HOLDINGS P/L and its VERY UNLIKELY that someone else will pick the same company name on the same day you buy your property.
What name you choose doesn't really matter but be careful not to buy your IP in another company's name. Also, buy your deed docs from a firm which has experience with these issues such as www.cst.com.au
and if you don't understand something ask questions and they'll give you advise.
Anyway, I can't say that the exact same process and strategy will work for everyone but I've used a real life example here so it should give people an idea of how to buy an IP in their SMSF. and if anyone has questions I'd be happy to answer them.
Best of Luck
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