Purchasing Practice Premises & Investment Property through your SMSF

Transcription

1 Purchasing Practice Premises & Investment Property through your SMSF Presented by: Kathy Evans August 2014

2 Disclaimer While all reasonable care is taken in the preparation of this presentation, to the extent allowed by legislation Crowe Horwath Financial Advice Pty Ltd accept no liability whatsoever for reliance on it. All opinions, conclusions, forecasts or recommendations are reasonably held at the time of compilation but are subject to change without notice by Crowe Horwath Financial Advice Pty Ltd. Crowe Horwath Financial Advice Pty Ltd assumes no obligation to update this presentation after it has been issued. You should seek professional advice before acting on any material. Any advice in this presentation has been prepared without taking into account your objectives, financial situation or needs. Please read the relevant Product Disclosure Statement before acquiring any financial product. Past performance is not a reliable indicator of future performance. Crowe Horwath Financial Advice Pty Ltd does not guarantee the performance of any financial product. Crowe Horwath Financial Advice Pty Ltd is the holder of Australian Financial Services Licence number ABN

3 Today s presentation Superannuation Today & in the Future (what is all the hype about?) What is a Self Managed Superannuation Fund (SMSF) & How can it be Advantageous Owning Property in your SMSF (Including your Practice Premises) Limited Recourse Borrowing Arrangements Tips and Traps Other Alternatives for Property into Superannuation 3

4 Superannuation Today $1.62 trillion in Superannuation across Australia* Over $506bn resides in SMSF* SMSF marketplace now represents 31% of all super* The number of SMSFs grew by 7.1% to 509, 362 during 2013 financial year* Last year 35,776 new SMSFs established^ Average SMSF fund is $929K^ Average Trustees in the Super Fund is 1.9^ $76bn is in direct property market^ Sources: * APRA Annual Superannuation Bulletin June 2013 ^ ATO: SMSF statistical report June

5 Superannuation in the Future The establishment of SMSF s is growing^ An average of 34,000 for the last two years. Total fund assets grew by $66bn last year^ Growth of Super Guarantee phasing 9% to 12% (currently 9.5%) July 2013 require a Licence to be able to recommend to set up Insurance requirement to consider in Super Investment Strategy must be reviewed annually Sources: ^ ATO: SMSF statistical report June

6 What is a Self Managed Superannuation Fund (SMSF)? Designed for people looking for greater control, flexibility and choice over their retirement savings Sole Purpose Test An SMSF has 4 or less members All members are trustees (or directors thereof) & all trustees are members (with the exception of single member funds) Trustees are responsible for the operation of the fund and need to ensure that the fund complies with relevant legislation (SIS & Tax) The Fund must maintain a current investment strategy and this must reflect the investments of the fund 6

7 Setting the scene What is a SMSF? 7

8 SMSF what and who is involved in running It? Trustees Appointed to hold the assets of the SMSF and to ensure the SMSF is operated in accordance with the trust deed Trust deed Legal document setting out the rules for operating the SMSF Investment strategy Document setting out how the SMSF s investments are made Members Individuals for whom contributions are made and for whom benefits will be paid Auditor Investment Managers Bank Australian Taxation Office Fund Administrator Actuary 8

9 Advantages of a SMSF More control over the management and investment of your super Access to a broader range of investments (e.g. direct property, non-traditional assets) You can make in specie transfers (e.g. listed securities, managed funds, commercial property) Potential to reduce the amount of tax paid by investing in assets paying franked dividends Minimise capital gains tax using a pension Ongoing and portable Estate planning Confidentiality 9

10 Owning Property In Your SMSF (including your Practice Premises) Must fit within investment strategy Must be in name of the Trustee ATF the Superannuation Fund Residential and/or Commercial (including Practice Premises) Be aware of related party rules (can only purchase Business Real Property) Consider all costs stamp duty, acquisition costs, running costs Potentially significant tax benefits (income and capital gains) Potentially fast track the growth of SMSF SMSF can own business premises and related party can rent from SMSF at market values 10

11 Limited Recourse Borrowing Arrangement 11

12 Quick Check List for Property Borrowing suitability Minimum balance $400 K (combined) Contributions expected of $25kpa Business real property preferred (residential requires exemption request) Lease on commercial Terms Borrowing LVR Conservative at 50-60% Obligation (Interest and fund costs) coverage of at least 1.5 times including contributions Corporate trustee for both SMSF & Bare Trust Trust Deed and investment strategy allows for borrowing Statement of Advice provided by accredited adviser Preferred lender is external Tax sign off required SMSF includes a risk statement If related party, SMSF trustees have obtained tax advice on structure Our advice to clients requires us to act in their best interest and if the investment/structure is not appropriate for them, we will say so. 12

13 Advantages of Acquiring Direct Property with Super Tax efficient, year on year savings on investment income All assessable income taxed at 15% (generally) Deductibility of expenses The SMSF, whilst in the accumulation phase, can claim a deduction for all expenses it incurs (e.g. interest on the loan) Capital Gains Tax (CGT) No CGT triggered when the SMSF acquires legal ownership of the asset after the loan is repaid No CGT upon sale of asset whilst in pension phase Opportunity to increase balance held within super Particularly relevant with recent decreases in the superannuation contributions caps Ability for SMSF to own business premises & lease to related party Greater certainty with commercial property lease renewal as it is held by your SMSF 13

14 What You Need To Know Key Tips & Traps 14

15 Risk management issues Investment strategy: update to reflect the change in investment structure Trust Deed: update to allow for borrowing Interest on loan: Commercial rates Capitalisation of interest permitted with conditions Personal guarantees: allowed but may be considered a contribution in some situations Corporate Trustee for both SMSF and bare trust Detailed documentation to be put into place Specialist advice at each stage 15

16 Single Acquirable Asset Structure Money applied for the acquisition of a single acquirable asset can include refinancing can include repairs and maintenance but not improvements (more later) SMSF has right to acquire legal ownership of asset by making one or more payments Borrowed money must be for a single acquirable asset. What if there are multiple titles? The ATO may still accept it s one asset where (SMSFR 2012/1): Physical reason assets must be dealt with together or Legal reason assets must be dealt with together 16

17 Subdivisions, improvements and repairs What can be done to the property if an LRBA is in place? Borrowing for repairs and maintenance OK Borrowing for improvements not OK OK to improve using non-borrowed SMSF cash However, generally if asset is replaced with a different asset (e.g., by being fundamentally changed) not OK LRBA exception would cease to apply Example: An SMSF uses LRBA to buy vacant land Can SMSF use non-borrowed money to build a property? No the land with residential premises is a different asset solution? Pay off loan first 17

18 Steps involved in Implementation of an LRBA Step 1 - Fact find completed Step 2 - Provide examples of servicing Step 3 - Meet with client and complete detailed fact finding Step 4 - Present strategy to client (SoA) Step 5 - Sign off on SoA & applications & rollovers Step 6 - Company and Trust deeds applied for Step 7 - SMSF, and ATO applications made Step 8 - Documents provided to clients for execution Step 9 - Client executes documents & establishes SMSF Bank Account Step 10 - Loan Application submitted for pre- approval Step 11 - Appropriate risk insurances are put in place prior to rollover Step 12 - ABN received & Rollover submitted Step 13 - Loan preapproval provided to client Step 14 - Rollovers received commence search for suitable property Step 15 - Suitable investment property found Step 16 - Get bank to value property & gain approval & loan Docs Step 17 - Legal vets contracts and assist exchange of contracts Step 18 - Documents executed Step 19 - Settlement of property suggest min 45 day settlement Step 20 - Security agreement stamped with state statutory body 18

19 Other Alternatives for Property into Superannuation Tenants in Common Non Geared Unit Trust Geared Unit Trust 19

20 Tenants in Common SMSF can buy property as Tenants in Common with another investor (e.g. a related party) Perhaps SMSF cannot afford asset alone E.g. related Family Trust may use other property it owns as security to raise money to buy equity in the new property with SMSF Any pitfalls? If the property is residential, SMSF cannot purchase a greater share from the related party 20

21 Non Geared Unit Trust Using a Non Geared Unit Trust gets around this problem Creeping acquisition with Non Geared Unit Trust 21

22 Non Geared Unit Trust Good for structures involving only one family group: e.g. SMSF invests along with related Family Trust On face value, this is a related trust, causing potential In- House Asset problems. However, Non Geared Unit Trusts are excluded from In-House Asset Rules SMSF can acquire units in Non Geared Unit Trust from a related party this is allowed even if Non Geared Unit Trust holds residential property The general prohibition on SMSFs acquiring assets from a related party does not apply where the SMSF's investment is in a unit trust that complies with certain requirements 22

23 Geared Unit Trust A Geared Unit Trust is possible when structuring an investment with two or more unrelated family groups E.g. Bex Family SMSF buys 50% of units, Jones Family SMSF buys 50% of units One member from each family is a director of the unit trust trustee Shares in the unit trust corporate trustee are also split 50/50 with no casting vote, etc The unit trust can borrow money, use its assets as security, etc This is a simple option versus an LRBA 23

24 Geared Unit Trust Is 50/50 structure sailing too close to the wind? ATO said in March 2013 that a 50% interest does not by itself give rise to control of a unit trust Thus, ATO accept that a 50/50 unit trust between two unrelated parties, can be a Geared Unit Trust Easy to drop in a unit trust structure and corporate trustee where deed and constitution do not allow for casting vote or provide any extra power to either party 24

25 Geared Unit Trust What traps for the 50/50 structure? Unit trust deed should be a fixed trust, not give more power or control to one side Entities from each family group may be linked under various SISA provisions not always obvious! Links can arise if Two natural persons are in partnership together (including joint receipt of income from a passive rental property or horse syndicate) Member(s) from each family group have an SMSF together One is accustomed or obliged to act in accordance with the directions, instructions or wishes of the other However, being a shareholder or director in the same company with another person by itself is not enough to link (Can also use a Geared Unit Trust more safely with three or more family groups) 25

26 Geared unit trust $ security Lender Stan s SMSF STAN Stan s family trust 50% 50% If handled carefully, unit trust can borrow (full recourse), acquire land, develop, rent, sell, repeat 50% 50% Kyle s SMSF KYLE Kyle s family trust Unit trust: runs medical business 26

27 How We Can Help Tax Strategy Property Gearing in Super FP Advice Audit Administration 27

28 How We Can Help We can help you assess if a SMSF is appropriate for you, including the potential to borrow and invest within your SMSF, based on your needs and objectives We can provide ongoing advice relating to your SMSF We can help you in your duties as trustees in: implementing and reviewing your investment strategy for ongoing appropriateness ensure your SMSF meets its yearly obligations fees, approved audit, tax returns, rollover statements etc. We are well supported by our accounting and business services divisions to provide better advice for a better life We can also assist and advise on borrowing to invest within your SMSF or investigate other avenues 28

29 Crowe Horwath Part of your Advice Dream Team! Purchasing Property and any associated Borrowing arrangement needs to be a collaboration between a number of specialists. It is important you have an experienced team of people to assist you through the process. Crowe Horwath will work with you, and the appropriate specialists (such as BOQ), to assist you to achieve your goals in this area. 29

30 Summary An SMSF allows greater control, flexibility and choice over how super is invested Potential tax benefits More cost effective as fund size increases Important to be aware of your compliance obligations It is a new opportunity but not for everybody Property into your SMSF may work for you There are various options for using your SMSF to invest in property Crowe Horwath can work with you and your professional specialists to assist with SMSF and related transactions This strategy is not for everyone so it is very important to seek professional advice 30

31 Questions? 31

32 Our Service Offering Audit Tax Advisory Financial Advice Audit and Assurance Accounting Business Advisory Estate and Succession Planning Corporate Governance Internal Audit and Risk Consulting Customs and Excise International Tax and Expats Research & Development Specialist Tax Advice Transfer Pricing Corporate Finance Forensic Accounting Performance Consulting Financial Advisory and Wealth Management Lending and Finance Risk and General Insurance Superannuation and SMSF Tel The relationship you can count on Disclaimer Crowe Horwath Financial Advice Pty Ltd is a member of Crowe Horwath International, a Swiss verein. Each member firm of Crowe Horwath is a separate and independent legal entity. Crowe Horwath Financial Advice Pty Ltd and its affiliates are not responsible or liable for any acts or omissions of Crowe Horwath or any other member of Crowe Horwath and specifically disclaim any and all responsibility or liability for acts or omissions of Crowe Horwath or any other Crowe Horwath member. Crowe Audit Horwath Tax Financial Advisory Advice Wealth Pty Ltd Management is the holder of Australian Financial Services Licence number ABN

33 Introducing BOQ Specialist Self Managed Super Fund (SMSF) Luke Truscott Financial Specialist

34 Disclaimer The issuer of these products is BOQ Specialist Bank Limited ABN , AFSL , Australian Credit Licence (BOQ Specialist). All finance is subject to our credit assessment criteria. Terms and conditions, fees and charges apply. We reserve the right to cease offering these products at any time without notice. BOQ Specialist is not offering financial, tax or legal advice. You should obtain independent financial, tax and legal advice as appropriate. *If you do not wish to receive marketing material please call or Self managed super fund

35 Benefits from a finance perspective Limited Recourse Borrowing - The property is the sole security of the loan. In the event of default, the lender only has the right to the property. The lender cannot claim against other assets held by the SMSF Tax-deductible personal super contributions, salary sacrifice contributions, and compulsory super guarantee payments made into your SMSF, as well as any rent your fund receives on the property, can all be used by your SMSF to help cover the loan repayments. Self managed super fund

36 Things to consider Due to the loan being a limited recourse borrowing arrangement, the lender may ask for a personal guarantee over the property from the Trustee/s The SMSF must be able to service the loan and any associated expenses. This may be through such avenues as rental income, member contributions, arm s length lending by the member/s, investment earnings etc. The property must be for the sole purpose of investment and pass the sole purpose test. Investment property can be leased from the SMSF on commercial terms. With respect to commercial property, the tenant can be a related party such as a family business or an unrelated party under lease. For a residential property the tenant or resident must be an unrelated party Self managed super fund

37 Key points for a SMSF loan Interest rate options: Variable Fixed Split Rate (Combination of Both) Factors that determine interest rate: Type of property (Residential or Commercial) Loan to Value Ratio (LVR). Higher the LVR, higher the rate Key note: Remember the contribution limits could change so you need some flexibility in your strategy Self managed super fund

38 Key points for a SMSF loan Loan to Value Ratio for mainstream banks: 65 or 70% for Commercial Property 80% for residential property Key notes: Beware of paying down the loan too quickly as you cannot redraw funds You cannot borrow to improve the property You cannot use unencumbered assets of the SMSF to secure new acquisitions Self managed super fund

39 The Borrowing Structure Self managed super fund

40 The extra benefits of purchasing your practice premises through your SMSF: Low risk tenant (you) Savings plan Locking in your rent at the purchase price Business Advantages Self managed super fund

41 Case Study Practice Premises Assumptions: The purchase of a commercial property (practice premises) through a Self managed super fund The purchase price of the commercial property is $500,000 Assume the SMSF needs to borrow 90% of the purchase price The property is purchased as a vacant possession Self managed super fund

42 Case Study - Continued Approximate costs to purchase the commercial property through a SMSF: 10% Deposit = $50,000 Lenders Fees (Includes Application Fee, Valuation Fee and Lenders legal fees This can range between $4,000 and $5,000) There will probably be some small misc. costs on settlement like title search fees etc. Assume say $100 Government charges will apply. They will charge probably $102 to discharge the current mortgage if the vendor has one and $102 to register the lenders Mortgage. Self managed super fund

43 Case Study - Continued The NSW stamp duty on a purchase price of $500,000 is $17,990 The mortgage stamp duty on a 90% loan would be = (450 16) x = $1,741 The GST on the purchase is $50,000 Assume the cost to set up the Asset Trust is $2,000 Assume the cost to set up the corporate trustee of the Asset Trust is $700 Assume the costs from your solicitor is $1,500 Assume the cost to set up the tenancy lease is $1,000 Indicative total costs across the deposit, government charges, GST, solicitors fees and bank fees = $130,235 Self managed super fund

44 Case Study - Continued Self managed super fund

45 Case Study - Continued Self managed super fund

46 What will be needed to organise the finance Last 2 years financials Asset & Liability Statement Proposed Rental Income Statement Evidence of funds to pay deposit, GST (if applicable), stamp duty and misc costs Original certified copy of the SMSF trust deed Original certified copy of the bare trust deed For practice purchases - Copy of the executed tenancy agreement between the SMSF and the practice entity. Valuation (generally based on the lesser of the purchase price or valuation) Certificate of Currency over the subject property with the banks interest noted Executed contract of sale Copy of the current investment strategy for the superannuation fund Self managed super fund

47 The steps to getting your SMSF Loan 1. Lender gathers information: Personal details and SMSF details (Trust name and trustee name) Asset & Liability Statement Last 2 years financials Property details (if known) Proposed rental details (if leased to an unrelated party) 2. Lender organises conditional approval 3. Lender communicates with solicitor and accountant in regards to requirements Self managed super fund

48 The steps to getting your SMSF Loan 4. Lender organises valuation 5. Contract of Sale signed by vendor and purchaser 6. Accountant forwards the following documents to the Lender: Original certified copy of the SMSF trust deed Original certified copy of the bare trust deed For practice purchases - Copy of the executed tenancy agreement between the SMSF and the practice entity Copy of the current investment strategy for the superannuation fund Self managed super fund

49 The steps to getting your SMSF Loan - Continued \ 7. Solicitor forwards the following documents to the lender: Full copy of the contract of sale with all terms and conditions Copy of the contract signed by the vendor Copy of the contract signed by the purchaser 8. Forward a bank statement of the SMSF to the lender showing it has the remaining funds needed to make settlement Self managed super fund

50 The steps to getting your SMSF Loan - Continued 9. Lender s legal team to review all deeds etc. and produce loan and mortgage documents 10. Documents are executed 11. Client to forward to the lender the certificate of currency for the property with lenders interest noted. The lenders interest only needs to be noted if the property is Torrens Title 12. Settlement occurs Self managed super fund

51 Thank you Luke Truscott