HOW TO BUY PROPERTY WITHIN YOUR SELF-MANAGED SUPERANNUATION FUND

Transcription

1 HOW TO BUY PROPERTY WITHIN YOUR SELF-MANAGED SUPERANNUATION FUND

2 COPYRIGHT All rights reserved. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior permission in writing of the publisher. Copyright Bill Savellis 2012 DISCLAIMER Information published in this e-book has been prepared for general information purposes only and not as specific advice to any particular person. Any advice contained in this document is General Advice and does not take into account any person s particular investment objectives, financial situation and particular needs. Before making an investment decision based on this advice you should consider, with or without the assistance of a qualified advisor, whether it is appropriate to your particular investment needs, objectives and financial circumstances. Although every effort has been made to verify the accuracy of the information contained in this document, Infocus, its officers, representatives, employees and agents disclaim all liability (except for any liability which by law cannot be excluded), for any error, inaccuracy in, or omission from the information contained in this document or any loss or damage suffered by any person directly or indirectly through relying on this information.

3 CONTENTS INTRODUCTION... 4 A LETTER FROM THE FINANCIAL ADVISOR... 5 IS A SELF-MANAGED SUPER FUND RIGHT FOR YOU?... 6 WHY ESTABLISH A SMSF?... 7 THE GROWTH OF SMSFs... 8 WILL YOU OUTLIVE YOUR SAVINGS?... 9 BENEFITS OF USING YOUR SMSF TO BUY PROPERTY WHAT ARE THE STEPS INVOLVED? WOULD YOU LIKE TO KNOW MORE?... 15

4 INTRODUCTION Australians have been impacted by the global financial crisis which has recently ushered in a new era of personal responsibility by changing individual spending habits and making them more conscious about saving. In recent years Australians have become more aware of the importance of superannuation, and in particular self-managed superannuation funds in achieving financial security. This guide explores how everyday Australians can purchase an investment property within their superannuation funds and take greater over their financial wellbeing. Financial Services License No

5 A LETTER FROM THE FINANCIAL ADVISOR Dear Reader, Congratulations on taking your first step in understanding how a Self-Managed Superannuation Fund (SMSF) can have a powerful and positive impact in helping you achieve financial independence. This e-book will help you to gain a better understanding of how to borrow money within your SMSF to purchase an investment or commercial property. Superannuation has offered many Australians an opportunity to invest in a low tax environment for the purpose of accumulating wealth. Whilst many Australians have actively embraced this opportunity, it still remains a mystery to many others, due in part to the constant changes in legislation and the uncertainty of investment markets. In recent years, several changes have taken place, which have meant that this tax effective style of superannuation is now no longer only an option for the very affluent. The cost of operating a SMSF has become more competitive; the investment options available within SMSFs have increased, both in number and variety; and there is far more support offered by Financial Advisors and Accountants to those, who are motivated enough to take the necessary steps to secure their financial future. For further information or to organise an obligation free consultation, please feel free to call us on or visit our website Yours sincerely Bill Savellis Financial Advisor Financial Services License No

6 IS A SELF-MANAGED SUPER FUND RIGHT FOR YOU? For many people the prospect of buying an investment property within their superannuation is an exciting one. However, before jumping in and setting up a SMSF, simply to enable you to include property in your superannuation fund, you should consider whether this is an option that suits your personal situation. If you are unsure whether an SMSF will be appropriate for you, use the following criteria as a guide: You should have a minimum investment timeframe of 10 years. You should have a minimum personal superannuation balance of $200,000 or a minimum total superannuation balance of $200,000 if you combined your superannuation with any other members of your SMSF, such as your spouse (or up to 3 other family members). You should be making regular contributions to your superannuation fund, either through your employer or another stable income source. You should be prepared to accept the extra responsibilities of being a Trustee of a Self-Managed Superannuation Fund as required by Law. If you are unable to answer 'Yes' to these criteria, then an SMSF may not be the most appropriate option for you. However, if you would like to find out about other methods of securing your financial future, which are suited to you, please feel free to call us on or visit our website Financial Services License No

7 WHY ESTABLISH A SMSF? In 2012 Investment Trends conducted a survey to find out the main reasons individuals choose to establish a self-managed superannuation fund. The survey results showed that the greatest motivator was the desire to have more control over their investments and to have the ability to make their own investment choices. Many were driven by the opportunities to save money on fees and others were advised by their accountants and/or financial planners that it was an appropriate course of action. The complete results were as follows: Financial Services License No

8 THE GROWTH OF SMSFs According to data provided by the Australian Prudential Regulation Authority (APRA), in the five years to 30 June 2011, SMSFs were the fastest growing sector of the Australian superannuation industry. During this period total superannuation assets grew by 45%. The SMSF sector contributed the largest proportion with 47% of the total 45% growth in superannuation assets. Graph 1 (below) shows the breakdown of the 45% growth in total superannuation assets by fund type, based on APRA data. Graph 1: Proportion of 5 Year Total Superannuation Growth by Fund Type A review of the three years to 30 June 2011 shows the growth in total superannuation assets slowed to 17%; however the breakdown of this growth between fund types has remained relatively unchanged, with SMSFs still dominating the other sectors. Financial Services License No

9 WILL YOU OUTLIVE YOUR SAVINGS? Do you know how much you will need in your super, to be able to live the lifestyle you are accustomed to throughout your retirement years? Not just the first five or 10 years, but for the rest of your life after you retire? There has been a lot of research carried out recently, to estimate how much an 'average' person will require (per annum) during their retirement and the results are a bit of a wakeup call for the vast majority of 'average' people. The ASFA Retirement Standard Report (prepared quarterly by The Association of Superannuation Funds of Australia) benchmarks the annual budget needed by Australians to fund either a comfortable or modest standard of living in their post-work years. Figures released for the ASFA Retirement Standard show that, in general, a couple looking to achieve a comfortable retirement needs to spend $56,236 a year, while those seeking a modest retirement lifestyle need to spend $32,511 a year. The AMP Retirement Adequacy Report, which is released on an annual basis, found that for Australians aged between superannuation will only contribute $16,220 per annum to their retirement income. This means that many Australians will need to rely on the Age Pension (and any other assets acquired throughout their working lives) to partially fill their retirement income gap. The stark reality is that the 9% Superannuation Guarantee (the amount your employer contributes to your superannuation fund) will not provide most people with the finances needed to sustain their lifestyle in retirement. Furthermore, the Economic Implication of an Ageing Australia Report found that the Government s ability to support the financial needs of retiring Australians is coming under increasing pressure. In the next years, future Australian Governments will either need to consider further increases to taxation levels or drastic cut backs to the government pensions and allowances, to deal with this fiscal gap. Therefore the responsibility of providing YOUR financially secure retirement is now up to YOU. With the less-than-rosy performance of many ordinary superannuation funds over the past few years, many Australians are looking at new ways to have greater control over their savings for retirement. This, combined with the ongoing Australian love affair with property, has created a new buzz buying property through a Self-Managed Superannuation Fund (SMSF). But, of course, it is important to remember that this strategy isn t for everyone and there are rules and regulations that restrict what you can and can t do with property owned by a SMSF. Financial Services License No

10 BENEFITS OF USING YOUR SMSF TO BUY PROPERTY SMSFs are becoming one of the fastest growing wealth creation vehicles for many Australians. There are over 456,000 SMSFs currently in the market with a combined investment value predicted to reach $1 trillion by There are a number of potential benefits of investing in property through a SMSF, which we will now consider in a little more detail. It s important to note, however, that not everyone is the same and the needs of each individual need to be assessed to ensure the appropriateness of this wealth creation strategy. 1. Increase your retirement savings Borrowing through your superannuation fund boosts the actual amount of money you have to invest. Take this simple example, a superannuation fund with a balance of $200,000, which achieves a compounded rate of return on 5%, will have in 10 years a total balance of $325,778. Assuming the same rate of return and time frame, a superannuation fund with a balance of $200,000, which borrows an additional $300,000 to purchase an investment property, will achieve a total balance of $514,447 (once you deduct the initial $300,000 investment loan). That s an increase to your retirement savings of $188,699, or an increase of 94% on your original superannuation balance, in only 10 years! 2. Employer superannuation contributions to increase from 9% to 12% Consider how amazed you would be if your employer decided today that, in addition to paying your normal wages or salary, they would also make your home loan repayments. If this sounds too good to be true, then consider how your employer contributions to superannuation can assist in paying off your investment property if it was owned within your SMSF. In many cases, the combination of the contributions made by your employer, the rent received from the investment property, and the tax concessions offered by superannuation, can result in minimal, or in some cases no additional contributions from you. This allows you to focus on either paying off your home loan or living a better lifestyle. The good news doesn t end there. Currently, employers are required to pay a minimum of 9% to their employee superannuation funds; however this is set to increase to 12% by Financial Services License No

11 The contributions made by employers will increase gradually with initial increments of 0.25% on 1 July 2013 and on 1 July Further increments of 0.5% will apply annually up to Concessional tax on rental income When you hold an investment property in your own name, tax will broadly be payable based on your personal rate of tax, which could be as high as 46.5%. Similarly, if you were to hold an investment property through a company, the tax rate would be 30%. Due to the concessional tax rate that applies to superannuation investment earnings, rent received by your SMSF will be taxed at a maximum rate of 15%. And, because certain expenses related to the ownership of the property, such as land rates, property maintenance, investment loan repayments etc., will generally be tax deductible to the superannuation fund, the effective tax rate may come down even further. 4. Concessional tax on future capital gains Special superannuation tax rates also apply to any capital gain made as a result of an increase in the property's value. As a result, depending on when you decide to sell the property, any capital gain your fund makes on the sale of the property may be completely tax-free. To summarise: If you sell the property while still in the "accumulation" phase, the fund will generally pay Capital Gains Tax (CGT) of up to 10% on any growth in the property value, assuming that the property has been owned for at least 12 months. On the other hand, if you decide to sell the property after you have transferred it into the "pension" phase, any capital gain will be exempt from tax altogether! 5. Other benefits Depending on your personal circumstances, there could also be other benefits from holding property within your SMSF. For example, superannuation assets are generally protected from creditors in bankruptcy situations. So, in the unfortunate event that you fall on difficult times, holding property within your SMSF may provide you with some added protection. Further, if you are a small business owner, superannuation assets are not included when determining your eligibility for the generous small business CGT concessions that apply when you sell your business or retire. By planning ahead, you can ensure that you better qualify for these concessions. Financial Services License No

12 What else do I need to know? When the Trustee(s) of an SMSF is considering the acquisition of a property regardless of whether it is by way of purchasing a property or transferring property in specie there are a number of superannuation and tax rules to be aware of. Generally, an SMSF cannot acquire an asset from a related party. A related party includes yourself, a relative, and your business. However, this rule does not apply when dealing with property that is classified as business real property. To clarify, a business real property is one that is used wholly and exclusively in a business regardless of zoning and regardless of who is running the business i.e. it need not necessarily be your own business. So, while you can't simply transfer your current residential rental property into your SMSF, if you own property that is used in a business, you can transfer this into your fund. When transferring property into your SMSF, you may be liable for CGT and possibly stamp duty costs upon transfer. Having said that, if you currently own your own business premises and you're considering the possibility of transferring it into your SMSF, there are a number of Small Business CGT Concessions that may be available, to help manage the CGT when transferring property into your fund. There may also be stamp duty concessions available, depending on the relevant State of residence, your circumstances, and the way that your fund is structured. Once a property is owned by an SMSF, there are also rules that relate to the use of that property. In short, the property cannot be used by you personally, unless it meets the business real property requirements (as mentioned earlier). So, while your SMSF can lease an office or a warehouse to your business, you may need to shelve any ideas of buying your own holiday home on the coast using your SMSF! Financial Services License No

13 HOW TO BUY PROPERTY WITHIN YOUR SMSF It is important to realise that you cannot just rush out and buy any property and then expect to be able to transfer it into your SMSF (although in some specific cases a property can be transferred in specie). As we have mentioned before there are rules and regulations to be adhered to. Once you have set up your SMSF and before you start property hunting, you will need to establish a holding trust. A holding trust is a separate trust set up specifically to take ownership of the investment property on behalf of the SMSF. The reason for setting up a separate holding trust is to protect any other assets held within the SMSF, should there be any defaults on the loan on the investment property. A holding trust limits the liability to the investment(s) held within the trust. After establishing your holding trust, the next step is to secure finance for your proposed investment property purchase, to ensure you know the limits of your purchasing power. When purchasing property within an SMSF, you will need to apply to the bank for a Limited Recourse borrowing arrangement of up to 80% of the purchase price plus costs, and the SMSF will fund the remaining 20% from their cash in the bank. When your Limited Recourse loan is approved, then it's finally time to go property hunting. Once the property is purchased it will be owned by the holding trust on behalf of the SMSF. Any returns from the investment property are distributed to the trustee(s) of the SMSF and any expenses relating to the investment property are paid from the SMSF bank account. Financial Services License No

14 WHAT ARE THE STEPS INVOLVED? Financial Services License No

15 WOULD YOU LIKE TO KNOW MORE? Having read this ebook you can start to appreciate the benefits of having a professional financial advisor help you grow your wealth. Speaking to a professional who understands SMSFs doesn t have to be daunting or costly. Typically the initial consultation is free and it's a great opportunity to ask plenty of questions about the advantages and risks of a self-managed superannuation fund. We hope that the information within this ebook has opened your eyes to the options available to you within a self-managed superannuation fund. If you would like more information or would like to organise an obligation free consultation, please feel free to call us on or visit our website DOCUMENTS REQUIRED FOR YOUR SUPERANNUATION REVIEW These documents are required for each member. Recent statements for all superannuation funds Two recent payslips Group certificates for the current and previous Full financials and income tax returns for at least 3 years (self-employed only) Loan statements for all loans covering the last 12 months and credit card statements for all credit cards covering the last three months. Recent statement for all bank accounts, term deposits, share investments and managed funds Details or policy documents for any life, Total and Permanent Disability (TPD), Trauma and/or Income Protection insurance Rates notice and receipt of payment of rates for any properties owned Rental statements for any current investment properties Driver's license and Passports or Birth Certificates Financial Services License No