Property purchase using SMSF funds?

[RetireEarly]

Any of the majors doing this on standard residential mortgages?

I finally got some information out of Westpac and the products used are busines facilities, they won't deal with and individual as trustee only corporate trustees.

The costs are massive 1% approval fee min $2k, interest rate of around 10% a third party legal review starting at around $2-$3k but the amount could be much higher depending on the trust structures.

I can understand these costs, and are interested to see if the major home loan lenders jump on board as this is a massive paper chase for them and can't see how it would fit in their mass market distribution channels ..fits a lttle bit better in a private bank/business bank scenario.

Someone mentioned earlier that the majors are progressing this... interested to know if it will be availale to Joe Public.

 

[vfarr]

Ato Wakes Up Finally

Looking forward to seeing your product - i need to go in the next month and am looking closely at Calliva. When will yours be ready and where are the funds coming from?

I note the ATO has finally woken up and issued a tax payer alert on all this stuff.

Basically it says - deosnt matter whether it is a loan or a warrant as long as it complies with s67 (4A). Importantly they say that personal guarantees are not acceptable. I guess that only leaves Calliva as a provider of complying loans - all th eothers I have looked at have guarantees and the warrant guys (QUantum, Macquarie etc) want control and huge fees!

Where are you up to Pat?

See link below to ATO alert and Q&A - very informative. It really is quite simple after all.!!!!

http://www.ato.gov.au/distributor.asp?doc=/content/content/00132054.htm

 

[nonrecourse]

Personal Guarantee's are out with super property warrants

I note the ATO has finally woken up and issued a tax payer alert on all this stuff.

Basically it says - deosnt matter whether it is a loan or a warrant as long as it complies with s67 (4A). Importantly they say that personal guarantees are not acceptable. I guess that only leaves Calliva as a provider of complying loans - all th eothers I have looked at have guarantees and the warrant guys (QUantum, Macquarie etc) want control and huge fees!

Where are you up to Pat?

See link below to ATO alert and Q&A - very informative. It really is quite simple after all.!!!!

http://www.ato.gov.au/distributor.asp?doc=/content/content/00132054.htm

Hi Vfarr;
In order to obtain a limited recourse loan most banks would not touch you with out at least you injecting 50%. I have made mention in earlier posts that the banks have tried to circumvent the limited recourse loan provision by insisting that the trustee give a guarantee. This defeats the intent of the legislators and the ATO's stance is consistent.

The only way financiers would provide a limited recourse loan with only a 20% first warrant installment would be at a higher interest rate. That means you would need to purchase a blue chip property that returns a higher yield to make it work.

If you own your own business and you could afford to pay a higher rent (the rent your business pays is tax deductable) plus are also able to sublet part of the building you could make it work.

The only other way I could see that you could obtain a limited recourse loan where you only contributed an initial 20% was if you had another trust that held property or shares that were ungeared and you offered that as additional security

 

[Pat]

Thanks for the link Mry. It is an interesting discussion. I an interested in purchasing a property from my business and once purchased, we ould have to make some substantial changes. It seems like it is a 'grey area' - I hate it when my accountant uses those terms. It seems quite a trap. May people are likely to purchase a property and then some time down the track would want to do substantial renovations or rebuild or whatever. There seem to be so many reasons why one would wish to do some development work, and it the superfund instalment strategy does not support it, that must be a significant deterrent to purchasing.

What happens if the house gets termites and you decide to pull it down? Can you rebuild something better. Can I buy a couple of houses and knock them down and run my business from the site - planning approval permitting? I am quite confused!!

BigKidz

Hi Bigkidz,

If you are running your business out of a premises in Victoria you can potentially transfer the premises into your Super Fund and not pay any stamp duty or tax. If you have a loan on the property at the moment that can be extinguished as it transfers into the Super Fund with a warrant in it's place.

If you then renovate or refurb the property this must be part of your investment strategy and meet the sole purpose test of providing retirement funds. If you do refurb or renovate you could potentially charge more for rent and this will meet your objectives.

Advantages aplenty in Victoria especially with the huge tax savings. You can do this transfer in other states and potentially not pay tax but you will pay stamp duty.

 

[Pat]

Hi all,
I don't mean to hijack this thread....but after reading a lot of posts on this subject I thought it may be a good idea to hold our next SIG Meeting on this subject. Pat was unfortunately not available - however MikeF (Mike Feltscheer) has graciously agreed to front our our next Meeting on May 5th.
He will talk about financing property - but also has a very good grasp of the concept being the accouting involved as well.

The meeting is here - so Sydney people hope to see you all !!

Hi Dave,

Yes it is too busy for me in the next couple of months but MikeF knows his stuff and we are working together on a couple of warrants at the moment. I would encourage all Sydneyites to get along to that SIG meeting.

 

[nonrecourse]

Still up for CGT?

Hi Bigkidz,

If you are running your business out of a premises in Victoria you can potentially transfer the premises into your Super Fund and not pay any stamp duty or tax. If you have a loan on the property at the moment that can be extinguished as it transfers into the Super Fund with a warrant in it's place.

If you then renovate or refurb the property this must be part of your investment strategy and meet the sole purpose test of providing retirement funds. If you do refurb or renovate you could potentially charge more for rent and this will meet your objectives.

Advantages aplenty in Victoria especially with the huge tax savings. You can do this transfer in other states and potentially not pay tax but you will pay stamp duty.

Hi Pat;
If you transfer your business premises into the super fund and your born before 1964? Your equity up to $450,000 per person as an inspecie contribution attracts no CGT? I would think for those under 50 with a sizable amount of equity this wouldn't work.

Also in the super the income is only taxed at 15% and if your negatively gearing it may be best left outside the super again it would depend on your age and circumstance.

A lot of people last year took a real bath selling up property and putting the cash into the super fund and investing in shares. They paid CGT when they sold their property then 15% contribution tax putting it into super and have now had a hair cut in the share market.

It is not a good idea to invest only looking at the tax advantages that should only be the icing on the cake. The other point is if you look at the pollies record with super as time goes on and the population ages the tax free concession may change. Nothing is forever.

 

[Pat]

I note the ATO has finally woken up and issued a tax payer alert on all this stuff.

Basically it says - deosnt matter whether it is a loan or a warrant as long as it complies with s67 (4A). Importantly they say that personal guarantees are not acceptable. I guess that only leaves Calliva as a provider of complying loans - all th eothers I have looked at have guarantees and the warrant guys (QUantum, Macquarie etc) want control and huge fees!

Where are you up to Pat?

See link below to ATO alert and Q&A - very informative. It really is quite simple after all.!!!!

http://www.ato.gov.au/distributor.asp?doc=/content/content/00132054.htm

Hi vfarr,

Yes it's good that the ATO have come out and released an alert so we can all get some guidance on these matters. The banks do need to make sure these areas are covered off before they release their products.

 

[Pat]

Hi Pat;
If you transfer your business premises into the super fund and your born before 1964? Your equity up to $450,000 per person as an inspecie contribution attracts no CGT? I would think for those under 50 with a sizable amount of equity this wouldn't work.

Also in the super the income is only taxed at 15% and if your negatively gearing it may be best left outside the super again it would depend on your age and circumstance.

A lot of people last year took a real bath selling up property and putting the cash into the super fund and investing in shares. They paid CGT when they sold their property then 15% contribution tax putting it into super and have now had a hair cut in the share market.

It is not a good idea to invest only looking at the tax advantages that should only be the icing on the cake. The other point is if you look at the pollies record with super as time goes on and the population ages the tax free concession may change. Nothing is forever.

Hi Non-Recourse,

There is potentially no CGT for business premises transferred into Super via the small business CGT concession and the general discount for CGT working together then the taxable amount being rolled in tax free. For a couple this is limited to $900,000 as non-concessional in specie-contributions.

This is particularly beneficial for those investors who have their business premises positively geared or owned outright.

Those people who sold property pre 30 June 2007 paid CGT but the money went in as an undeducted contribution ( no tax ). In fact I have one client who did this with $900,000 and has been too busy to visit a financial planner. I congratulated him on his busy schedule even though the Commissioner recommended him to diversify out of cash and into a more diversified portfolio. The Commissioner didn't predict the January 2008 ASX carnage but he would prefer that our clients put money in many places when sometimes cash is an excellent Investment Strategy ( my client is 63 ).

I agree you shouldn't invest purely for tax purposes but when tax advantages alone make a big difference to your cash position then you can't ignore it. If the ATO close warrants in a couple of years it will be because they are just too good and the ATO is leaking too much cash but the Grandfathering Provisions that will need to be put in place at that time will protect those people who have invested.

 

[Bigkidz]

Developing business premises and transfering later

Hi Bigkidz,

If you are running your business out of a premises in Victoria you can potentially transfer the premises into your Super Fund and not pay any stamp duty or tax. If you have a loan on the property at the moment that can be extinguished as it transfers into the Super Fund with a warrant in it's place.

If you then renovate or refurb the property this must be part of your investment strategy and meet the sole purpose test of providing retirement funds. If you do refurb or renovate you could potentially charge more for rent and this will meet your objectives.

Advantages aplenty in Victoria especially with the huge tax savings. You can do this transfer in other states and potentially not pay tax but you will pay stamp duty.

Hi Pat

The other option for us is to purchase the properties, develop them, and then rent them out to my business, and then transfer them into my super fund at a later date with an instalment type arrangement. This sounds cleaner at the moment thought there might be some confounding things.
1. Does it matter if the owner of the building now is not myself personally. For example, if I purchased the building via a unit trust with a corporate trustee, would I then be able to transfer it to our super funds without CGT or stamp duty?
2. What happens if the building ends up being valued at $3 million and their are two couples with 50% ownership each? It is over the $900000 limit you mentioned.

I have not bought the building yet - I have a clause that says myself or nominee and I was going to do it in my super fund but it seems difficult because of the lowish LVR's and higher interest rates. I might be better to buy the properties, build the building, and transfer it later with my business paying is generous rental for the gorgeous new building;-))

BigKidz

 

[coastymike]

I've been telling people for months that advice from our counsel was that personal guarantees are a breach of the SIS Act. Now the Taxpayer Alert from the ATO says that one of their concerns is

"The Tax Office considers that arrangements which exhibit one or more of the features outlined in paragraph 6 above may give rise to taxation and superannuation regulatory issues, including whether:

a personal guarantee of the type outlined in paragraph 6 (d) above may result in recourse being made to the assets of the SMSF other than the asset acquired (or any replacement) in the event that the guarantee is enforced against the trustee as the principal debtor, contrary to the intent that the exception in subsection 67(4A) of the SIS Act only applies to limited recourse borrowings"

 

[Pat]

Hi Pat

The other option for us is to purchase the properties, develop them, and then rent them out to my business, and then transfer them into my super fund at a later date with an instalment type arrangement. This sounds cleaner at the moment thought there might be some confounding things.
1. Does it matter if the owner of the building now is not myself personally. For example, if I purchased the building via a unit trust with a corporate trustee, would I then be able to transfer it to our super funds without CGT or stamp duty?
2. What happens if the building ends up being valued at $3 million and their are two couples with 50% ownership each? It is over the $900000 limit you mentioned.

I have not bought the building yet - I have a clause that says myself or nominee and I was going to do it in my super fund but it seems difficult because of the lowish LVR's and higher interest rates. I might be better to buy the properties, build the building, and transfer it later with my business paying is generous rental for the gorgeous new building;-))

BigKidz

Hi Bigkidz,

If you purchase it in a Unit Trust then the Corporate Trustee would need to be the same as the corporate trustee of the SMSF if you want to transfer in the future. This will be particularly difficult if you have a business partner.

The stamp duty exemption is only available for in-specie contributions up to $900,000 for a couple as you have mentioned. Under your scenario if there was a $1,500,000 loan then the net equity for each couple would be $750,000 and this could be potentially transferred in-specie with no stamp duty.

It would be advisable to purchase in individual names or a Partnership of family trusts if you want to transfer later to super because the Unit Trust structure will drag in two families sets of assets for the small business CGT concessions whereas individual names or a Partnership of family trusts will seperate the assets for each family and will also enable two SMSF's to be setup for the in-specie transfer because I assume you do not want one super fund with your business partner?

 

[Bigkidz]

Property purchase and later transfer

Hi Pat.
Great advice for me to consider. Thanks for presenting it with such clarity.

Andrew

 

[SMURF]

Calliva offer

Hi All

Good conversation on guarantees.

The Calliva offer says 70% LVR for a limited recourse loan to a SMSF (ie. without guarantees by members) but in the real world they generally can not get anywhere near the 70% because of the serviceability requirements they have. These are:

"Rent must cover 80% of the unstressed debt service assuming P&I."; and
"Income must be 1.15x the stressed debt service"

Brokers out there know that this is tough!

It is not clear what shading they put to the actual rent but let's be generous and assume they use all of it. Most lenders do not, as others have pointed out.

If nett rental yield is 6% on a $1M property then rental income is $60,000pa.

If debt is $700,000 (ie 70% LVR) and interest rate is 10% then the P&I repayment over 20 years is $82,000pa (approx - depends on calculation method) but for serviceability you need 1.15x or $94,500. Now the rent must cover 80% of this or $75,000pa.

So, actually you need a nett yield of ~7.5%.

If interest rate is higher and/or the lender shades the rent then you need a higher yield again.

So if your real yield is 5% then your available LVR through Calliva is more likely to be 50%. Hmmmmmmm.

Maybe with property prices dropping this sort of yield will be more achievable soon.

All the best
SMURF

 

[asdf]

Calliva's target business is commercial hence the higerher yield required. Not many residentials will work in this enviroment.

 

[Pat]

Hi Smurf,

I think you will find that for the income requirement of the fund you have used 1.15 x the unstressed debt service whereas it should be the stressed debt service which would be more like $106,500. Also " Rent must cover 80% of the unstressed debt service" which for your example would be $65,600 so a 6.6% yield would get you over the line.

To meet the income level of $106,500 this investor would have to make up income from one or all of other Super Fund Assets, 9% Employer contribs or Further Super Fund contribs by the members. This is where Calliva have a restrictive requirement of another $100,000 in your SMSF, apart from the funds required for the warrant, before they will even look at you. This is too restrictive and allows little scope for those with less Super but high income.

Investors require a decent amount of personal income to contribute extra super and/or more assets in their SMSF portfolio to earn extra SMSF income to meet the stressed interest cover test.

For Residential Investors these amounts are even more important and it's an excellent, tax effective product for investors who meet the criteria but many will be disappointed because of the income requirements of the fund.

 

[nonrecourse]

Commercial property held in super is viewed more favourably

Calliva's target business is commercial hence the higerher yield required. Not many residentials will work in this enviroment.

Owning property in a super fund has always been slanted towards Business real property even prior to the 1th of August 1999 ban on acquiring property through a unit trust also known as a Trevisan Trust. This was a famous high court decision that rolled the ATO's administrative appeals finding, see this explanation ;
http://www.a4companies.com.au/trevisan.pdf and;
and the ATO full history
http://law.ato.gov.au/atolaw/view.htm?locid='JUD/91ATC4416'&PiT=99991231235958