SMSF - Purchase Of Investment Property

[Clean]

Good Morning Everyone

I've been given the advice by my accountant that I should purchase future investment properties using a SMSF.

I'm 30 years of age and have about $25k in my Super. I currently own a home and one investment property.

He suggests that I should salary succrifice as much as I can into a SMSF and once I've accumulated $100k, I'll be able to utilise it to purchase investment properties.

Has anyone done this? What would be the difference in purchasing an investment property using a SMSF and through the "normal" means.

 

[NedKelly]

Let me give you a few reasons why you might not want to do that.

1. The administration burden of an SMSF is much higher than an ordinary trust. Basically you need a full audit every year. Great work for accountants if they can get it.

2. If the SMSF gets sued then all the assets of the superfund will be at risk.

3. You are not allowed to borrowing in an SMSF although the rules on this keep changing and I am not up to date on this.

4. You can never occupy the property, this would be a violation of the rules of the superfund.

But best to check with your accountant first I am sure he knows a lot more than me about these things.

 

[Clean]

Thank you for you comments NedKelly

This is all new to me. The accountant was highly recommending that I use a SMSF to purchase IPs. He's my accountant and I'm sure (well, I'm hoping) his views objective, but I wanted to hear what the thoughts of others where.

Really appreciate it.

 

[BV]

clean

buying in a SMSF it's a good idea but would depend on your individual circumstances.
Since you've got your existing properties paid off, from the tax management point of view, if it was me I'd have at least 1 more property.

However, Unfortunately this gov, reduced the amount we can salary sacrifice into super so you can only put in $50k before July and $25K next year.
With this in mind if you don't put in $50K before July, it will take you 3 more years to reach $100K in your super and by that time you would have lost the opportunity cost of buying an IP at a discount.

I don't know your financial situation but a lot of people if they don't salary sacrifice they will be paying 40% tax. so if they don't put that $25K into their super they will be paying $10K in tax and would be left with $15K to invest.

But if they put the $25K into super, that amount will be taxed @15% so they will be better off by $6650 and if they also have family and kids they will be reducing their taxable income so their family tax benefits will increase and could end up getting all of their tax back.
Not everyone pays 40% tax but those who are on a lower salary have additional benefits, eg. if mum n dad both reduced their taxable income sufficiently not only they'll get an increased centrelink payment but they could also qualify for the gov's super co contribution so for $1 they put into super the gov will be contributing another $1

So IMO there is merit in salary sacrificing.
Also, considering that the share market is going to recover, its probably a good idea to put as much money as possible into super but buying property with it or not would depend on what you buy and where you buy.

btw, I could be wrong but it seems to me that the NT property market could be in a bit of a bubble atm so I'd personaly stay clear of more NT property.

 

[Propertunity]

Let me give you a few reasons why you might not want to do that.
2. If the SMSF gets sued then all the assets of the superfund will be at risk.

Not going to happen. the assets of the Super Fund are some of the most protected in the county. Asset protection is one of the major benefits of using a SMSF to invest in property.

3. You are not allowed to borrowing in an SMSF although the rules on this keep changing and I am not up to date on this.

No not true, I'm happy to report. You are out of date as you suspected. Do a google search on SMSF and borrowing.

 

[see_change]

The Audit of our SMSF was $357 last year.

Yes you can borrow.

The property is held in a seperate trust to the SMSF and the liability for any borrowings from the bank are limited to what is in that seperate trust . The rest of you money in the SMSF are not at risk. There is a debate about the benificiaries providing a garantor and I'm not sure whhere that debate is at the moment.

I'm in two minds as to buy at this stage or wait until the current ongoing review on super is completed , supposedly in Nov ( I think )

I had been planing on buying three IP's in super and then using contributions over the next years to pay them down , but the decrease in additional contributions have made this slightly less practical , but we will be doing something later on this year ( after FHOG cuts down )

Cliff

 

[Cherry Pro]

Not everyone pays 40% tax but those who are on a lower salary have additional benefits, eg. if mum n dad both reduced their taxable income sufficiently not only they'll get an increased centrelink payment but they could also qualify for the gov's super co contribution so for $1 they put into super the gov will be contributing another $1

BV ...can you pls clarify ...if taxable salary is brought down to $40k after our property deductions and I salary sacrificed to super, would I be eligible for Govt co-contribution ?

Cliff .. can you pls share how much set-up of SMSF cost you, annual audit of $357 seems reasonable. Are there any other ongoing annual fees ?

Thanks,
Amelia

 

[Qlds007]

In addition to Ned's incorrect comment about you not be allowed to borrow in your SMSF this statement is also inaccurate.

4. You can never occupy the property, this would be a violation of the rules of the superfund.

As a related party you cannot occupy the property assuming it is residential and to rent it off the SMSF or occupy it rent free is a breach of the SISA.

Look the forum is an excellent place to gain other members views and comments and to generally share information but please only take advice from a licensed professional and not the fella up the pub.

 

[Clean]

From your responses, I take it that there isn't much restrictions with purchasing using a SMSF and the "normal" purchase of an IP?

 

[Qlds007]

Not at all as long as it isnt rented to you or other member of the SMSF.

One consideration is the cost of establishing the Warrant and Corporate Trustee in order to purchase the property as well as the limitations in regards to competitive interest rate and lvr when it comes to financing the deal.

 

[rugrat]

I think SMSF's can be great BUT one of the biggest risks with purchasing in a super fund is that you are still quite young and that leaves alot of time for the rules to change about what you can or cann't do in regards to that investment. You also cann't access it until quite a late stage in the game.

 

[josko]

Another thought:

There are two ways to borrow using your SMSF.

1. A Warrent
2. A Joint Venture.

I went the JV way. I had one of my trusts borrow the money for the property and my SMSF went into a JV with mith my Trust. I have also heard it was the cheaper way.

In saying that though, you are best to ask your accountant about the two different ways and clearly understand the option you choose. As mentioned above, SMSF's are audited and you need to be very careful about how you handle the use of them.

Regards JO

 

[NedKelly]

Not going to happen. the assets of the Super Fund are some of the most protected in the county. Asset protection is one of the major benefits of using a SMSF to invest in property.

Are you telling me that if an SMSF holds a property and there is an action against the SMSF as a result of it owning the property then the rest of the SMSF assets are safe. I would like to see that in writing. The SMSF assets are safe if the beneficiaries are being sued but I cannot see how the SMSF assets are safe if the SMSF is sued.

 

[NedKelly]

....this statement is also inaccurate.

4. You can never occupy the property, this would be a violation of the rules of the superfund.

As a related party you cannot occupy the property assuming it is residential and to rent it off the SMSF or occupy it rent free is a breach of the SISA.

I don't see the difference

 

[NedKelly]

The Audit of our SMSF was $357 last year.

Cliff, does that include the administration as well?

 

[Propertunity]

Are you telling me that if an SMSF holds a property and there is an action against the SMSF as a result of it owning the property then the rest of the SMSF assets are safe. I would like to see that in writing. The SMSF assets are safe if the beneficiaries are being sued but I cannot see how the SMSF assets are safe if the SMSF is sued.

As it has been explained to me, the lease agreement is between the trustee of the SMSF and the tenant. So effectively the SMSF itself cannot get sued. The trustee can be a $2 company.

 

[NedKelly]

As it has been explained to me, the lease agreement is between the trustee of the SMSF and the tenant. So effectively the SMSF itself cannot get sued. The trustee can be a $2 company.

I do not believe it has been explained to you properly.

"If the trustee of an SMSF is sued, all the assets of the SMSF are at risk. The risk of potential plaintiffs is much higher for SMSFs that hold direct property. Consider the tradesperson cleaning your investment property’s gutters who falls, or the tenant who trips.

Although insurance should come to the rescue, this isn’t always the case.

The answer can be to hold fewer eggs in any one basket. If SMSF 1 holds two properties, and a plaintiff sues over an injury occurring on property 1, both properties might have to be sold to cover any court order for damages, etc. If, however, SMSF 1 holds property 1 and SMSF 2 holds property 2, only property 1 would have to be sold."

from: http://www.interprac.com.au/Newsletter/Corporate/Corporate_newsletter_Mar_2007_Online.htm

 

[BV]

BV ...can you pls clarify ...if taxable salary is brought down to $40k after our property deductions and I salary sacrificed to super, would I be eligible for Govt co-contribution ?

Thanks,
Amelia

That's what I was told by a SMSF specialist
From memory, you can be eligible even if you earn more than $40K but it progressively cuts off.
Until now the co-contribution was $1.50 for every $ we put in but KRudd is changing it to 1$

 

[MikeF]

That's what I was told by a SMSF specialist
From memory, you can be eligible even if you earn more than $40K but it progressively cuts off.
Until now the co-contribution was $1.50 for every $ we put in but KRudd is changing it to 1$

Hi Bill

I think you'll find that the co-contribution payment is based on gross total income not taxable income and cuts out at $60,342-

The ATO co-contribution calculator can be found at;

http://www.ato.gov.au/individuals/content.asp?doc=/content/44186.htm

 

[BV]

thanks Mike

I only heard of this a couple of months ago.
Has this changed recently?
If not, I should get hold of the info and then go to 1 of his seminars and embarrass him in front of all his clients

I can't mention his name but it's a guy who is selling online SMSF deeds
and charges $240/h to give you advise