Clients often ask me whether they should leave their industry super fund and set up a Self Managed Super Fund (SMSF) to buy a property.
My answer is usually something like this:
Purchasing a property in super needs to be a strategic decision depending on the size of your superannuation balance, your tolerance to risk and need to accommodate any pension payments.
You would also need to set up your own self-managed superfund (SMSF) which can have a maximum of four members.
The ability to borrow in superannuation together with the lower tax rates has made it very attractive for many to purchase property in super.
When borrowing the banks would normally take into account rental income and your super guarantee contributions (up from 9.25% to 9.5% 1 July 2014) and we find that banks normally lend on an 80% loan to valuation ratio but at a slightly higher interest rate then if outside of super.
There needs to be a formal loan agreement and you can even lend to your own super from either cash or from say an equity balance using appropriate loan documentation.
The costs of set up will include the SMSF plus a holding trust (as you cannot buy directly within the SMSF if there is debt/security on that property) and loan documentation.
The annual costs of running an SMSF for property needs to be compared to the costs of your existing funds which are not always readily apparent when looking at your statement. Having said that the ability to borrow greatly increases the size of your asset which grows (hopefully) while the debt stays constant.
The ability to pay down debt in super is more effective as the 15% income tax rates in super is much lower than what most people pay on their wages.
For many therefore the costs of setting up and running an SMSF is more than made up by being able to leverage within super.
If you become unemployed your SMSF would still need to make property repayments and without any contributions from yourself the SMSF would need to rely on internal cash reserves.
The same issue would arise if the property was purchased outside of super as you would still need to make repayments.
There are some other restrictions within super when purchasing a property and they are that you cannot refinance and borrow against the equity and you cannot redevelop the site while there is still an outstanding debt. You can how ever do cosmetic renovations and small improvements.
A 5 stage process:
We recommend a five stage process when looking at purchasing property in super and these are:
- Speak to a qualified specialist property accountant and or financial planner to confirm that the type of property you are contemplating is allowable.
- Speak to a qualified financial planner for advise on the rollover of funds from industry/retail funds to the SMSF as this may trigger CGT and you may lose insurance coverage.
- Seek in principle loan approval
- Complete the relevant paperwork and set up of the SMSF and holding trust including any rollovers as well as completing an SMSF Strategy
- Go shopping for the property. If you purchase first without setting up the appropriate structures you cannot then “on sell” as an SMSF is prohibited from purchasing a residential property off a member.