Property purchase using SMSF funds?

[futuregrowth]

I hope you can assist with some advice regarding SMSF and the fund purchasing property.
Since I am not sure what is possible, I am not clear on which direction to take regarding SMSF structure, and the ownership details of the property to be invested in using SMSF funds.

Situation; I have about $100000 in a managed super fund, that can probably be better utilized with greater return, in the property market.

I refer to API magazine from January 2008, under 'retirement strategies' on page 26.

The super Fund isn't allowed to be the legal owner of a borrowed assett.
What does this mean? Is it that the actual purchased property is not to be under the super fund's name? I would be purchasing a property under my company entity, then using the SMSF funds to invest into the property (pay down the bank loan). Is that possible? Or would the SMSF be borrowing the funds, and contributing the rest from its own funds?

The assett held by the super fund has to be held in trust, while there's a loan against it, with the fund acquiring a beneficial interest in the assett.
Not clear on how this works in lay terms.

When the loan is paid out and the assett is transferred from the trust to the fund, no CGT is payable provided the trust isn't an 'active' trust.
When can the loan be paid out? When transferring from trust to fund, do government duties apply, as a property sale would entail? What is an 'active' trust?


...requirement for the trustee to be a 'mere nominee' (to avoid adverse CGT consequences) is that trust not be an "active holder" of the assetts"
So how should this be setup?

For a real estate asset, the trust must not be responsible for the management of the real estate. Rather a manager must be appointed to manage the real estate.
There are ways that this can be done I guess. Would it be permisible for me to be the 'manager' or my wife, or does it need to be a duly authorized Real Estate Property manager?



Also on page 27, it states that "....an investor can tap the power of a property's capital growth and - after the age of 60 - gain full access to it without paying any CGT..."
In this case, I take it that since the property / SMSF funds are invested, they cannot be accessed until after retirement age. Is there a limit as to how many times this could be done? If the SMSF funds were split up (depending on amount in the fund, and purchase price of properties), then would it be possible for multiple properties to be purchased this way, knowing that their sale after retirement would be CGT free?

 

[Pat]

Hi Future Growth,

Attached is my article in the December issue of API. Have a read and see if this answers some of your questions.

If you have anymore questions then I am happy to answer.

Cheers

 

[Pablo]

Hi Pat, Futuregrowth

Nice article. This is an area I need to do some further research into as well.

Here is a thread that goes into warrants fairly indepth.

http://www.somersoft.com/forums/showthread.php?t=37030

Cheers Pablo.

 

[nonrecourse]

SMSF's controlling a unit trust tips and traps

Hello Future Growth;
My first question is how old are you and how many years until you retire? You mention selling the property/ies in the super fund after the age of 60. With property the hold time usually is at least 10 years +++ because of the state government stamp duty that you pay on purchasing.

As a general rule investing solely for the tax benifits usually results in disappointment. If your investing your super in property you need to be very careful because it is much different from purchasing a home which is largely an emotional rather than an investment mindset.

How much experience have you had with purchasing investment properties, specifically commercial properties? You mention that you have $100,000 invested in a managed fund. Someone else has been managing your money and you are now looking at becoming an active investor.

Do you have the time to learn about, SMSF's, Unit Trusts, Property Warrants and commercial property investing?

Setting up an SMSF and getting the maximum benifit means you are actively involved. You must be prepared to pay out money for advice but in the end its your call with what you do with that advice.

Besides this site there is a wealth of information on the internet and in the property investing section of any good book store.

 

[Francine]

this all baffles me

this all baffles me would a property accoutnant know what to do an organise this in the best way.

Paula.

 

[alexlee]

this all baffles me would a property accoutnant know what to do an organise this in the best way.

Paula.

But how would you be able to tell whether the accountant was competent? You need to understand at least the basics. It's worth it.
Alex

 

[bogie]

Please explain

Hello Future Growth;

Can someone explain to me what state government stamp duty has to do with holding onto a property for 10years +++++ ?????

 

[bogie]

loans

Hi Future Growth,

Attached is my article in the December issue of API. Have a read and see if this answers some of your questions.

If you have anymore questions then I am happy to answer.

Cheers

how easy / hard is it to get loans under SMSF?

 

[asdf]

Any brokers out there who are aware of banks offering this already? Information is rather sketchy but apparently theres some solicitor's whos preparing their practice by developing docs and setting up the trust structure AND helping you to organise funding as well. I am interested to find out if the full recourse nature of the loan is secured by way of a personal guarantee from the director of the SMSF corp trustee?

Any eagles care to comment on this? Running a structure like this appears to be a direct slap on legislators face that prohibits or limits SMSF borrowings.

 

[Mry]

I've spoken to some bank guys and they are still writing their programs. We should see some products on the market soon. The costs will be high and the LVR may be less than what the legislation provides for.

I would add that it will be interesting to see how the market treats these warrants. I don't think the industry super funds will like this as SMSFs will benefit from this greatly and we may see more SMSFs being propped up. Banks have a new opportunity to make money here, but some will have a vested interest it making it more difficult to access.

 

[Qlds007]

There is no retail banking lender offering such a product to the general public yet however they are available to a Max Lvr of 85% for residential and 78% for Commercial.

Property needs to be a capital city or large regional town (not all are accepted) and establish fees and valuations are generally slightly higher than the normal. Loans can full doc or lodoc (interest rates higher for lodoc)

We have settled several and have another couple of applications in the pipeline.

Yes a personal Guarantee is required to be given by the Trustees.

 

[buzzlightyear]

I thought I read very recently that Macquarie Bank is offering a product for SMSF's to borrow to purchase property but were limiting it to approximately 50-60% LVR.

 

[Humphrey]

fyi, BIG have Pat Mannix from Gatherum-Goss & Assoc. talking about this tomorrow night.

http://www.big.org.au/index.php?option=com_content&task=view&id=70&Itemid=1

 

[Pat]

Hi

For Residential Property the retail banks will lend to 70% without a personal guarantee but will go to 80% with personal guarantees from the trustee directors. As Mry has mentioned the banks are starting to come out with their products and Westpac seem to be leading the pack. NAB, ANZ and CBA are a little further behind.

As Buzz mentioned MacQuarie have brought out their Property Lever where they will lend to 55% and are taking a more conservative approach.

The non-bank lenders are being left out due to their difficulty in raising funds since the sub-prime melt down so the big banks seem to have the whip hand in lending.

Lawyers who are entering this market and offering structures where you organise your own finance are setting up a structure that is possible under the current law change but the pressure from the lobby groups will most likely close this type of structure down sooner rather than later.

It's best to stay with third party providers including finance.

 

[redsquash]

Pat,
I infer that you for see changes in the SMSF from your last post.

Are you suggesting it best to set up a structure before the lobby groups succeed?
If I set up a SMSf and buy or sell nothing the first year what total fees could I expect, including govt and accounting.

Could I just submit the tax return myself , thus at least having a structure in place, which down the track I may not have the advantage to do. .
Have I mis read your thread

 

[Pat]

Hi Redsquash,

No I'm suggesting that those Lawyers who are setting up trusts and then advising that related party loans can be used for finance may have a limited life with this law change. I may be wrong but from my research the authorities see this as too wide an application of the wording of Section 67 (4A) of the SIS act.

The structures relying on third party trustees and third party finance are in the spirit of what the law was put in for.

No rush on setting up a SMSF

 

[nonrecourse]

50% deposit

With the credit crunch I would not be surprised to see the super fund's requirred to provide 40% and even 50% when dealing with commercial property with the big four banks for a limited recourse loan.

The retail super funds are screaming blue murder over the SMSF's borrowing. The financial review run a hatchet job last week on SMSF's with a round robbin of experts..... all these were directly tied to retail funds

 

[MikeF]

SMSF Borrowing

This SMSF space is starting to attract a lot of attention. With many different questions asked today in this thread I thought that I would add my thoughts to some of the questions raised:

Yes there are banks (yes real banks) offering products now but only through select offices and select distribution channels. For obvious reasons they do not want people getting the wrong/incorrect information and want to ensure that borrowers are properly advised ie qualified financial planner/chartered accountant.

Whilst the legislation says that the loan must have limited-recourse to the SMSF's other assets/income there in nothing stating that the SMSF members can't/should not provide their personal guarantee.

On this point all lenders that we are dealing with are insisting on a personal guarantee from all members.

In a very limited number of senarios with low LVR's they have said they will consider no guarantees. The thought process on this issue is that as the lender can not/does not have recourse to any other SMSF assets then any servicing/repayment shortfall (loan payment amount less net rental income from the asset to be purchased) needs to be covered by the members one way or the other. In most cases the logical way is for the member/s to top up their SMSF contributions via salary sacrifice etc. This can be done via deductible/non-deductible contributions. And so for a lender to take this into account they must take a personal guarantee.

On the new structure required to comply with the new legislation, the legal eagles are circling and there may be some different points of view regarding the "Bare/Investment" trust that holds the asset for the benificial interest of the SMSF. As I'm not a lawyer, I will not comment further on this point.

This style of lending will take some time for all to get accustomed to and until such time as it becomes mainstream (and I believe it will) it will only be available via dedicated lenders & approved distribution channels.

The banks that we have been dealing with on this topic all agree that its' not for everyone and borrowers/trustees need to consider their own situation/investment strategy. Accordingly, an appropriate SOA from the SMSF's advisors and legal/taxation advice is/will be manditory.

In summary --- there are lenders (main stream as well as others) now doing deals based upon the new legislation.

Yes Macquarie are doing their "Macquarie Property Lever" product but there are what I believe far better deals available. Hopefully with more to come.

For example Resi property purchase 80% LVR at 8.95% pa variable, P & I or Interest only (5 yrs) with max total loan term 30 years. No ongoing fees with 0.5% application/approval fee plus valuations plus legals plus document preparation costs. The latter being in additional to costs associated with setting up the structure including a new Bare/Investment Trust.

Summary - this type of gearing is only for those that FULLY understand and are properly advised by professionals.

 

[nonrecourse]

Reg ansett's advice to his son never give a personal guarantee

Whilst the legislation says that the loan must have limited-recourse to the SMSF's other assets/income there in nothing stating that the SMSF members can't/should not provide their personal guarantee.

On this point all lenders that we are dealing with are insisting on a personal guarantee from all members.

In a very limited number of senarios with low LVR's they have said they will consider no guarantees. The thought process on this issue is that as the lender can not/does not have recourse to any other SMSF assets then any servicing/repayment shortfall (loan payment amount less net rental income from the asset to be purchased) needs to be covered by the members one way or the other. In most cases the logical way is for the member/s to top up their SMSF contributions via salary sacrifice etc. This can be done via deductible/non-deductible contributions. And so for a lender to take this into account they must take a personal guarantee.

Hi Mike;
My take on this is if my super fund earnings along with the income from the property held in Trust by the banks is not sufficient to cover the warrant payments you would be mad to give a personal guarantee. With the credit crunch a 40 or 50% equity position with a non recourse loan is a much smarter option. If you can't do this then just don't

 

[MikeF]

Hi nonrecourse

I understand your point however;

If your not prepared to guarantee your position with 40%-50% equity why would you put that amount of equity at risk in the first place? Sounds like the your "investment strategy" in this instance is purely speculative and obviously not suited to a SMSF.