[intro music] Hi I’m Stephen Vick and in this video we’re going to discuss buying property within your superannuation We’re also going to confront some of the myths and misconceptions surrounding the strategy. The first thing you will need to do to buy property with your super is to establish a Self-Managed Super Fund. And so long as you’re 18 years or older, an Australian resident, not bankrupt, and don’t have a criminal record Relating dishonesty offences you’re eligible to become a trustee to your own Self-Managed Super Fund I’m just going to call it an SMSF from here on You can have up to 4 members of an SMSF effectively pooling your resources to buy larger assets And whilst we usually see a husband and wife team the four members can be siblings, adult children, friends or really anyone who’s eligible. Each member’s relative balance is quarantined within the fund so you’re always able to identify individual balances, even when there’s borrowing involved. With the recent changes to the Bank’s lending policies, all members will now need a combined minimum super balance of between around $150k to $200k to get started. This will depend on a few things such as the value of the property, your income, and the bank you choose. There’s only a handful of banks that do SMSF lending and they all have their quirks. I’d seek advice from an experienced SMSF mortgage broker to calculate your fund’s borrowing capacity. In this example, Mum and Dad combine their super balances of $150,000 and $80,000 and roll them out of their existing funds and into the SMSF. If you’re a government employee or don’t have choice of where your super gets paid, you can usually transfer the majority of your funds into the SMSF, leaving just the minimum balance required in your existing fund. So Mum & Dad decide to invest $130,000 of the fund into a combination of shares and cash and use the remaining $100,000 as deposit and costs on a new investment property. $80,000 of which will go towards the deposit and $20,000 will go towards the stamp duty and costs. They’ll then apply for a $320,000 limited recourse loan from a bank – meaning the bank takes security over the property only and not the balance of funds in the SMSF. This will give them $400,000 to spend on an investment property. Now this investment of course earns an income in the form of rent, which is paid back into the SMSF cash account. All Employer contributions and any dividends from shares also get paid into the SMSF cash account. While all ongoing costs associated with the property ie. mortgage repayments, maintenance costs, insurance etc are paid out of the cash account. If structured correctly with the right assets, the fund will continue to a have a positive cash-flow and will never require any additional personal contributions to sustain the structure. This should be a long-term set and forget strategy with minimal stress or involvement. There are significant tax concessions for any assets held inside super, and this includes property: Rental income is taxed at a maximum rate of 15% within your SMSF and not at your personal tax rate. This 15% can be reduced even further by claiming all property expenses against the income. Your Life and Income Protection insurance policies can be paid for by the fund and these premiums can also off-set the assessable income. In some circumstances these deductions can reduce the income tax payable by the fund to zero. So it is possible to negatively gear inside Super whilst still maintaining a positive cash-flow to the fund. In addition, the Capital Gains tax rate on the sale of assets in accumulation phase is a maximum of 10% if the asset is held for more than 12 months, and reduces to zero if sold in retirement. So you can see that buying property in super can mean saving hundreds of thousands of dollars in tax over the long-term. Let me start this segment by saying there are a number of rules that relate to Self-Managed Super Funds generally, and it’s worth watching our video entitled ‘Self Managed Super Funds Made Easy’ to understand your obligations as trustee of the fund. Firstly, I should explain that you can’t take money out of your super to buy property in your own name. Your super monies must stay within the superannuation environment until you meet a condition of release. When it comes to buying property within super, not all properties are compliant – for instance… Penalties for not complying with these rules are severe and should be taken seriously. On top of all that, the Vendor or Developer you’re purchasing from must accept SMSF transactions. SMSF property purchases aren’t as simple as normal property transfers and usually require longer settlement times. Lack of experience in this area often causes lengthy delays and can prove costly for the uninitiated. When you join any industry or retail super fund you’re usually given a selection of 5 fund profiles to choose from… ranging from very conservative to high growth. Most people will fall into the balanced category and should expect returns of about 4.4% pa paid as dividends and about 2.8% pa capital growth. As you can see from the following graph… after twenty years the SMSFs net value, that’s after
repayment of the loan, has grown to over $1.5m compared to just over $1.1m for the Industry fund. That’s over $400,000 difference in favour of the SMSF strategy. In this case study the property would have to grow at under 3.15% pa on average for the SMSF value to finish below that of the Industry fund. Now having said that, in an environment whereby property only grew at 3.15% pa, you might be forgiven for assuming that returns on the shares in your industry fund would also be lower. On the upside, if the property grew at a rate of 7% pa and not 5% the funds value would grow to a whopping $2.1m giving you a difference of over $1m in profit in favour of the SMSF strategy. And remember, this profit is free from capital gains tax in retirement. Property in Super is not for everyone, but having the ability to leverage your existing super monies, combined with the favourable tax treatment, makes it undeniably one of the most powerful and tax effective wealth creation strategies available. This brings us to the final question… Who can set this up for you? Firstly, let me just say – I think the term Self-Managed Super Fund is probably the worst name you could give it. I would never recommend anyone try to manage their own SMSF. The complexity and the costs of getting it wrong make it too risky to go it alone. You will definitely need help from professionals. And this is where a lot of myths and misconceptions about the strategy originate from. I’ll explain what I mean shortly but first let’s look at who does what in this strategy: It’s generally the financial planner who will model the strategy, explain the rules, and establish the Platforms and Cash Accounts for the new SMSF. They can also set up the trust deeds, effect the rollovers, help meet your insurance obligations, and close old funds. But here’s the thing… you may not be aware, but about 80% of all financial planners in Australia are owned or licensed by the Big Banks or Institutions. These Institutions make their money by managing share portfolios, and are not licensed real estate agents. Therefore, they may try to talk you out of running your own fund – as of course will the financial planners from your existing Super fund. A SMSF to them simply means losing control of your money. So look behind the name, you may find your adviser is partially owned or licensed by a bank. An Accountant can also set up the trust deeds and explain your obligations, but they’re usually not qualified to set up your insurance and investments, do the rollovers, or settle any transactions. You’re simply left to your own devices here. The ongoing administration, audits, and tax returns can be
organised by an Accountant or a specialist SMSF administration team. However, ongoing advice in relation to your investments and insurance obligations remains the domain of a qualified financial planner. A Mortgage Broker is the best person to chose the right SMSF loan and liaise between the vendor, the bank, the financial planner, and three or four sets of solicitors to effect settlement. But the Mortgage Broker must be authorised and have experience in SMSF lending. Depending on the bank you chose, a qualified financial planner or independent solicitor, that’s not your conveyance solicitor, will often be required to sign off on the loan documentation, to acknowledge that you’re aware of your obligations as Trustee. Of course we all think of Real Estate Agents when it comes to buying property, but most agents are restricted to only a handful of suburbs and usually don’t have access to new projects. Buyers Agents are a better solution here but you’ll still require a financial adviser or accountant to calculate the net yield and impact on the SMSF cash-flow to know if the property fits within your SMSF strategy. Beware the Property Spruiker who is simply using SMSF and the services of an ‘add-on’ financial adviser to sell their own properties. Most people aren’t aware that their superannuation is not covered by their Will. And given that a lot of our Life insurance policies are held in super, the absence of a superannuation Will or death benefit nomination can mean all sorts of problems for your loved ones on your departure. SMSFs are a fantastic vehicle for Estate Planning purposes and can be used for asset protection, reducing tax to beneficiaries, or even dealing with issues facing troubled or blended families. An Estate Planning solicitor is best placed to give this advice but it should be done in the context of your overall wealth management and protection plans. So, to set up and run this strategy effectively, usually requires an Accountant, Financial Planner, Mortgage Broker, Real Estate Agent, and Solicitor. For optimal results, they should all be working together in a strategic and collaborative way. In my opinion, the only group of professionals that do this well are, independently owned and licensed, Private Wealth Managers. If you don’t know what Private Wealth Management is, then watch our video entitled ‘What is private wealth management’. But essentially Private Wealth Managers bring together all of the financial services required to build and protect personal wealth. It’s almost impossible to implement this strategy yourself without making mistakes that end up costing you more than it would if you’d just paid the professionals do it. Enlisting the help of experienced and qualified specialists is the best way to ensure the transactions are implemented in a cost effective and compliant way. Having said all that, if appropriate for your circumstances, this is a strategy that can make an enormous difference to the end balance of your super fund in retirement. Of course, you won’t be able to access your super until you turn 60 so it’s important to build wealth outside of the superannuation environment as well – especially if you plan on retiring early. Go to the resources page of our website for more videos and e-books on wealth accumulation. And Happy Investing.