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From reality TV to the Sunday barbecue, everyone seems to be talking about investing in property to build wealth.

Traditionally, Australians have invested in property outside of super using a basic investment loan. Apart from the aim of achieving capital growth, many have been attracted to the prospect of negative gearing, which enables investors to claim tax deductions when their borrowing and maintenance costs exceed the income they receive.

The major concerns in this approach have been:

  • The use of either own cash or property as collateral security
  • The requirement to fund any monthly cashflow shortfall out of your own pocket
  • Risk of funding property in the event of reduction or ceasing in income
  • Unexpected one off costs can cause huge personal savings pain
  • Potentially have to sell on short term notice should funding be an issue and could result in huge loses
  • Other assets are at risk
  • Capital gains tax

A change in legislation combined with the above issues has lead to a surge in Australian’s taking advantage of the ability to use their superannuation as a deposit to fund the purchase of an investment property.

An SMSF is a self managed superannuation fund set up for the benefit of 1-4 members who are also the trustees* of the fund. To be recognised and regulated by the Australian Taxation Office (ATO)an SMSF must comply with the Superannuation Industry Supervision Act 1993 (SISA) and other rules and regulations governing SMSF’s. If the fund complies, and remains compliant, it will enjoy significant reduced tax rates (when compared to ‘regular’ investments) during the Accumulation faze, namely:

  • 15% on the income of the fund
  • 10% on realised capital gains on investments held for more than 12 months.

It is widely commented that  the ability to borrow within an SMSF is one of the biggest opportunities to take control of your superannuation and supercharge your retirement assets.

Prior to 2007 SMSF’s were not allowed to borrow funds. This meant that property investment was not an option for most funds unless they had sufficient funds to purchase the property plus cover costs with no borrowings. Recent changes to SISA and the banks has now made it possible for SMSF’s to borrow funds under some clearly defined conditions. This is certainly not an option for every investor and all the usual warnings about carefully examining all your options still apply! It does however open up some exciting and tax efficient avenues towards maximizing your retirement income.

These can be namely:

  • Using your super as a deposit allows a lower loan amount thus lower payments compared to the negative cash flow in your own name
  • Potentially no effect on personal cash flow at all as the SMSF pays all loan payments and ongoing property costs
  • Potentially no Capital Gains and Income tax if property held to retirement
  • No use of own home as additional security
  • Potential no use of own cash
  • Full asset protection
  • Ability to make pre-tax contributions and pay the property off faster with significant tax benefits
  • All the running expenses of the property are paid by the fund, meaning you’re not out of pocket in the same way you would be with a directly-owned investment property.

Structure required

To ensure full compliance plus satisfying bank legal and lending requirements  it is essential the correct structure is established. To ensure smooth set up it requires the co-operation from the financial planner, mortgage broker, accountant, lawyer and bank – all parties that are essential in the process. Each lender is different in terms of legal requirements and it is essential to ensure the trust deed for the super fund is correctly worded so amendments do not have to be made at settlement thus causing delays and significant extra costs. To satisfy the SIS Act it is a requirement that the loan be limited recourse thus your choice of lender does not have any other recourse of any other assets of your super fund. The way this is done is by the legal owner being a bear/property trust not the super fund and this trust purchases and owns the property whilst the loan agreement is in place. The lender will take charge behind this trust not the other assets of the super fund thus fulfilling the condition of limited recourse borrowing. There is a property trust deed that confirms that upon the purchase of the Property, the Property Trustee holds the legal interest in the Property on behalf of the Super Trustee which holds the beneficial interest. The loan is in the name of the super fund and receives all rent and pays all costs in relation to the property.