SMSF & property

Don’t try to cut corners, because the consequences could be costly

QHow much do I need to have in my super fund to use it to invest in property? This depends on the property asset. These days SMSFs can invest in property via listed or unlisted property trusts or syndicates or by crowdfunding. For these types of property investments an SMSF usually does not need a lot of capital. However, if it wants to invest directly into a property, the capital requirements are higher. For direct property the amount of money required depends on the price and whether the investment will be geared or bought off the plan. Either way you will need to have money for the deposit, usually 10%, the stamp duty (if applicable) and legal fees and charges. Then if the property requires initial repairs or renovations, the fund must have the money to cover these expenses. ANDREW YEE

QWhat fees are involved in buying a property through my SMSF? Will it cost more than buying outside super? If you don’t already have an SMSF you need to consider the establishment costs and ongoing compliance costs, along with adhering to annual compliance and administration obligations that include the preparation of financial statements, a tax return and audit. These costs can vary depending on the complexity of the fund and the service level provided by the SMSF administrator you choose. On average, establishment of an SMSF with a corporate trustee and no financial advice shouldn’t cost you more than $2000, including a $479 ASIC incorporation fee. Ongoing administration fees including an audit can range from $2000 to $5000 a year. There are cheaper alternatives but you get what you pay for, so make sure their service offering is right for you, your understanding of SMSF rules, what you have in your SMSF and its level of complexity.

If you are able to purchase a property outright in your SMSF, without the need for borrowings, then really the only cost differential when comparing with doing the same outside super is the ongoing compliance costs of running the SMSF.

However, if you require finance to complete the purchase of a property, then you will find it a more expensive exercise than doing so outside super.

The only way an SMSF can borrow is via a limited recourse borrowing arrangement (LRBA). This involves the creation of additional legal entities (a trust and corporate trustee) that then hold the property on trust for the super fund while there is a mortgage over the property. These costs are similar to those of setting up an SMSF with a corporate trustee.

Obtaining finance for your SMSF is much tougher than applying for an investment loan personally. As well, interest rates are generally higher for an SMSF due to the “limited recourse” nature of the borrowing arrangement.

There can be additional bank fees and charges given the specialised nature of the borrowing, and the banks may also require you to obtain verification from a licensed financial adviser that borrowing to purchase property is a suitable and viable option for you and your SMSF – this can cost an additional couple of thousands dollars.

Stamp duty is applicable, as with any property dealing. However, if the paperwork involved in setting up the custodian trust to hold the property for the SMSF and the purchase contract is not dealt with properly, you may be up for additional unnecessary stamp duty.

The moral of the story is it will cost you more in an SMSF. So spend the money on good advice and experienced specialists to assist you with the process because cutting costs here may result in unnecessary costs later due to failing to set up the arrangement correctly from the start.

KIMBERLEE BROWN

QAre SMSF property loans different from normal loans? SMSF loans for commercial and/or residential property share many features in common with other residential and commercial lending. However, there are also very significant differences, making the product a challenge for providers to deliver, restricting availability to a narrow group of borrowers and consequently adding to the cost.

Lending is non-recourse – the lender cannot touch superannuation assets beyond the loan security. This requires a higher minimum deposit (typically 30%), a guarantee from the trustees and complex credit assessment and documentation.

Lending is available for genuine investment purposes only, including funding of your business premises, but must comply with related party, private usage and other restrictions of superannuation.

All this means it comes at a greater cost. Loan set-up costs paid to your solicitor and to the bank will be significant, and the average advertised variable rate for SMSF loans against residential security is 6.34%.

SMSF borrowing comes with challenges. STEVE MICKENBECKER

QWhich institutions offer SMSF loans and what are the best products? Canstar’s website lists 11 lenders that offer loans to SMSFs: AMP Bank, Bank of Melbourne, BankSA, bcu, Commonwealth Bank, Hume Bank, IMB, Mortgage House, Reduce Home Loans, St.George Bank and Westpac.

This is quite a contrast to the 100-plus home loan lenders that Canstar lists and reflects the small market for SMSF loans and the degree of difficulty in providing the loans.

Canstar researches and rates SMSF loans based on the total cost of the loan to the borrower, including interest rates over six months, fees and six feature categories.

Two providers, Westpac and Commonwealth, have achieved five-star ratings for their variable rate products. Commonwealth Bank, Hume Bank and IMB Bank have been awarded five stars for a range of fixed rates from one to five years.

STEVE MICKENBECKER

QAre there any restrictions on what property I can buy? You cannot buy a residential investment property from yourself, your spouse or any related party. There are exemptions for properties used 100% for business purposes. If

Obtaining finance for your SMSF is much tougher – and more expensive – than applying for an investment loan personally

the property is acquired at less than market value, the difference between the market value and the amount actually paid should be recorded as a contribution.

If you are borrowing to buy a property then it must be a “single acquirable asset”, which means it must all be on one title in one contract. Many packages are divided in separate land and the building contracts will not qualify, but developers are now adapting some house and land contracts to meet this requirement. The same may apply where you buy a unit and it comes with a car space or garage on a different title.

LIAM SHORTE

QCan I buy my business premises if I am a small business owner? Generally, an SMSF is prohibited from acquiring property from its members. However, there are some exceptions. The relevant one here is business real property, which broadly means property used mainly for business purposes. Provided the asset is business real property and is acquired at market value, the SMSF can acquire (either as a purchase or in-specie contribution) the business premises from the member.

To avoid compliance issues, standard conveyancing processes and procedures should be followed. It is also recommended that the trustee speak to the SMSF’s adviser to ascertain the stamp duty and capital gains tax implications of the transfer of the business premises before proceeding.

If the property is located in

NSW, Victoria or Western Australia, the transfer of property may qualify for concessional transfer duty if the requirements for the concession are met (these vary from state to state). JULIE

HARTLEY

QCan I live in the property now or even at retirement? You cannot live in the property while it is owned by the SMSF. Neither can any related party such as a child or parents. If you want to live in the property in retirement then you can take it out of the SMSF as a lump sum commutation once you meet a condition of release, such as leaving one employer after age 60 or once you reach age 65. You may have to pay stamp duty depending on which state the property is in. Some people buy an investment property in their SMSF and then when they retire they sell their home and use some of the proceeds to buy the SMSF property at market value from the fund when in pension phase. The capital gain on sale after retirement could be nil if the strategy is implemented properly. LIAM SHORTE

QCan I rent out the property to family and friends? Business use of real property by a related party of the SMSF is permissible provided that the rent charged on the property is at a market rate in accordance with the arm’s length requirements under the Superannuation Industry (Supervision) Act.

Other compliance issues to be considered include the sole-purpose test and whether the arrangement amounts to providing financial assistance to family members.

If the terms of the lease are more for the benefit of the family members than for the SMSF, then this may be in breach of the sole-purpose test, as the trustee is not managing the SMSF for the sole purpose of the benefit of the members.

Also, if the terms of the lease are favourable to the family members to the extent that it amounts to using the SMSF’s resources to give them financial assistance, then this may also be in breach of the prohibition contained in the act.

JULIE HARTLEY

QCan I subdivide or develop a property owned by my SMSF? Yes. However, the costs of subdivision or development, such as payments for materials and labour generally, can only be made by the fund and not by the fund member or a related party. If any of the labour is carried out by the fund member or a related party (for example, the fund member is a builder), this must be authorised by the trust deed. Furthermore, these people should have the appropriate skills to carry out the work and they would need to be paid a commercial rate for their services. If the property is acquired by the fund with borrowings, then the SMSF rules do not allow further borrowings to finance the cost of the renovations. Under this scenario, the renovations would need to be financed by the existing funds of the SMSF, or additional contributions made by the fund members. Therefore such a project may not be suitable for an SMSF, given the limits on contributions. ANDREW YEE

QWhat are the tax implications when I sell a property owned by an SMSF? If an SMSF is in accumulation phase (not paying an income stream/pension), capital gains tax is applicable to the sale of assets held by the fund.

If the property has been held for less than 12 months, any gain made on the sale will be taxed at 15%.

If the property has been held longer than 12 months a discount of 33% will be applied to the capital gain prior to it being taxed at 15%, effectively a capital gains tax rate of 10%.

To demonstrate, an SMSF purchases a property in 2010 for $300,000. The property is sold in 2018 for $570,000. A capital gain of $270,000 is made. As the property has been held by the fund for longer than 12 months, the $270,000 is discounted by 33% to $180,900. A tax rate of 15% is then applied to the discounted capital gain of $180,900, resulting in $27,000 tax payable. That is, 10% of the $270,000 capital gain.

If the SMSF is in retirement phase (paying a pension to its members), then there is no tax payable on any earnings of the fund. This tax-exempt treatment of fund earnings includes capital gains. Using the example above, a gain of $270,000 on the sale of a property in a fund that is in 100% retirement phase will not attract any capital gains tax. KIMBERLEE BROWN

Visit moneymag.com.au/smsfproperty questions for the answers to more questions about property and SMSFs, including how to decide if buying a property through your SMSF is right for you; the advantages and risks of investing in property through your SMSF; whether buying a property through an SMSF is a good idea if you’re close to retirement; whether you can buy overseas property; if you can renovate the property; and what happens when you want to sell.