05 Dec Self Mangaged Super Funds (SMSF)
For most people this all sounds too complicated. Will it work work for me? is the question often asked.
In real terms it takes just a little organising with your accountant for the SMSF, and the rest you can leave up to us. After that, all you have to do is find the commercial or residential property!
How does SMSF work?
Your SMSF borrows the funds to acquire an investment property and a separate trust (Bare Trust) is established to hold legal ownership of the property on behalf of your SMSF until the loan is completely paid.
You will need to open a SMSF Bank Account with your bank and then you can deposit part or all of your old super funds into the account you have opened. Your accountant may assist you in this process with the rollover funds transfer. The funds in your SMSF Bank Account will become part of the deposit for the investment property purchase. These funds in the SMSF will also cover legal costs and stamp duty.
The SMSF borrows the remaining funds to purchase the residential or commercial investment property through the bare trust. The commercial property can also be an existing property that is already owned by the members of the fund or related entity.
The maximum loan amount you can borrow to purchase a residential property is 80% of the value of the property, while commercial properties allow up to 70% of the value of the property.
The SMSF then manages the property in the same way as you would any other real estate investment.
The loan is a limited recourse loan and only the property is used as security. In the event of a loan default, the lender only has recourse to the property in question. They cannot claim on any other assets of the SMSF.
The property is leased from the SMSF on commercial terms. Rental payments and other income (other superannuation contributions) enable the SMSF to meet the loan repayments and expenses associated with the property. This can be your own business as long as it is all done at arms length basis.
When the loan is repaid, legal ownership of the property can be transferred from the trust to your SMSF with no additional stamp duty or Capital Gains Tax!
How it is structured?
The below diagram illustrates how this can be structured. As long as the transaction is on commercial arms length terms this can be a great way to boost your superannuation investments and provide a good rental solution for your business.
How does it work in practice?
Sue and Bill both aged in their 40’s run a strip shop newsagency’, their premise has come up for sale and they want to look at the possibility of purchasing the property and becoming their own landlord.
Commercial Property is selling for $500,000
Deposit Required 30% $150,000
Balance in SMSF for Sue and Bill $180,000
Surplus in SMSF $30,000
Note: The surplus will more than cover the settlement, setup and borrowing costs.
Your SMSF will then borrow to complete the purchase $350,000
At 8.00% this will cost in interest per annum to the SMSF $28,000
Sue and Bill’s Newsagency will continue to pay rent to the SMSF $30,000
Sue & Bill can between them also contribute a maximum of $50,000 into their SMSF. This will allow a faster repayment of the loan and the ability to start to buy more property or other investments such as shares and gold to diversify their portfolio within superannuation to provide for their retirement.
The longer term benefits once the business is sold are that the superfund can then enjoy the rental return which can help pay a pension entitlement for you into retirement while you also enjoy any capital growth on the investment property overtime.
We can assist in mapping out this strategy and whether this is suitable for you – please contact our office.
The information provided on this article is of a general nature only. It has been prepared without taking into account your objectives, financial situation or needs. Before acting on this information you should consider its appropriateness having regard to your own objectives, financial situation and needs.
Martin Rambow firstname.lastname@example.org is Director of Finance For Life (ph: 1300 88 95 11) a fee for service advice firm who are authorised to provide financial with authorised financial planners through PATRON Financial Advice AFSL 307379 under the Corporations Act 2001.