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Using your SMSF for Property Investment

It became possible for SMSFs to borrow money to fund a direct property purchase. And, SMSFs have become an increasingly popular choice for Australians in recent years.

 If you are considering buying a property through SMSF, it is necessary to make sure you know what to do. Here is a guide to use your SMSF to buy a property.

What Is a Self-Managed Super Fund (SMSF)?

A self-managed super fund (SMSF) is a savings account for your retirement that you manage yourself, rather than one that is managed by a superannuation providers (such as Australian Super, REST Super etc). You will be able to pool your existing super balances to your SMSF and invest under your own discretions.

 So, when considering investing in property through a self-managed super fund (SMSF), it is important to learn about SMSF property rules. Investing in the property market using a self-managed fund enables you to select all kinds of property, including residential, commercial, and industrial. However, you also need to consider what is the best option for you since different types of properties have different investment rules.

Residential Property Investment

It is important to make sure that you can’t buy residential property through your SMSF if you intend to live in it, or for any other trustee or anyone related to the trustees – no matter how distant the relationship.

 You cannot invest in a residential property rented by you, or any other trustee or anyone related to the trustees, or any family members.

 Please keep in mind that the SMSF trustee, as well as their relatives and the fund’s members, cannot benefit from the property invested through SMSFs.

Also, you cannot consider an existing residential investment property you want to transfer it into SMSF.

 In short, you can invest in a residential property, but only to rent it out to the market.

Commercial Property Investment

Compared with the limitation of residential property investment through SMSFs, investing in commercial premises through an SMSF has some advantages.

Holding commercial properties in an SMSF can be open to all SMSF trustees. To buy a commercial property in an SMSF, a fund may apply for a specific SMSF loan. Nevertheless, the requirements are stricter than traditional lending with tighter loan to value ratios.

Many small business owners use their SMSF to buy business premises and then pay rent direct to the SMSF. Holding business premises within an SMSF can provide asset protection against any future claims or liabilities that could result from operating their business, which means if the business goes belly up, their properties are still safe. It is important to note, the rent paid must be at the market rate (no discounts) and must be paid promptly and in full at each due date.

Further, since the property is held in your SMSF, you can secure your business’s tenancy for the longer term. It will have benefits of asset protection.

What Benefits Can You Acquire?

Apart from some advantages of commercial property investment, there are also other benefits when you consider purchasing a property through SMSFs.

1. Tax Benefits

There are significant advantages to owning property through an SMSF. First, your super fund will be taxed at 15 per cent on rental income or 10% on capital gain (subject to CGT discount rules), which is considerably lower than most people’s personal tax rates.

Second, your capital gain tax will also be discounted if the properties are held for longer than 12 months.

If the property is purchased through a loan, the interest payments are tax deductible to the fund. If expenses exceed income there is a taxable loss that is carried forward each year and can be offset on future taxable income, but please keep in mind that any tax losses cannot be offset against your personal taxable income outside the fund.

2. SMSF Funds Can be Investing 100% into Commercial Premises

When investing in commercial properties, SMSF funds have the option of investing 100% into commercial premises if a member of the fund runs a business. This is an attractive advantage for small businesses who want to own the premises from which they run. Investors or businesses which already own a commercial property can contribute the property to the SMSF. But please note that transferring property may have capital gains, stamp duty and tax implications, so always get advice before making plans.

When you are thinking of leasing the property to a related party, it must be done on the same terms as it would with an independent third party. If you were leasing to an independent third party, a lease arrangement needs to be in place, clearly outlining the terms and conditions of standard commercial agreements. Market rate rent will need to be paid regularly into the SMSF bank, and the property will need to be periodically independently valued.

3. SMSF Funds Can Borrow Money to Invest

SMSF can be leveraged via loans to acquire assets. There are many loan products from different banks and private lenders, max LVR of 70% can be achieved. Borrowing to buy property through an SMSF is achieved through a limited recourse borrowing arrangement (LRBA).

 When implementing leveraged strategies within SMSFs, it is important to document the assets correctly, especially if the asset being purchased is an interest in another asset-such as a tenants-in-common interest in a property.

Tips before Option

There are some tips you need to keep in mind before you decide to select this type of investment, for example:

Borrowing requirements for an SMSF is generally stricter than a normal property loan that you may take out as an individual. Also, there can be substantial fees and charges associated with the purchase, ownership, and subsequent sale of a property in an SMSF. Remember that loan repayments must be paid from your SMSF. So, you need to ensure the income in the super fund will cover these costs and allow for growth.

And you are responsible for Compliance. The ability to buy property in your SMSF with borrowings would be with some very strict rules and obligations that you may not be familiar with since they are not criteria that exist outside an SMSF.

Using SMSF to property investment is becoming more popular in Australia because it can be another investment choice to diversify your investment assets.

 If you want more suggestions and seek assistance about SMSF, call BOA & Co. accountants in Chatswood on 02 9904 7886 and our SMSF Specialist will be pleased to assist you.

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understanding the ess changes five things you need to know

Understanding the ESS changes. Five things you need to know.

 

There have been some recent changes to the tax rules when it comes to employee share schemes. There has been an attempt to make them more appealing for employer and employee participation.

 

The changes to the ESS were significant as of 1 July 2015. They allow for a more extended tax deferment. There are some new rules for startup companies.

 

There are five significant changes to take note of.

  1. Changes to the tax treatment of these employees go into effect as of 1 July 2015.

It will be applied to interest in shares, stapled securities, option to acquire shares, and rights when it comes to dealing with the stapled securities.

 

  1. There are additional concessions that can be used by startups.

Under the new rules, employees are allowed to have a 15 per cent discount when they are working with a startup company, and this amount is tax-exempt. When employees sell them for making a profit, they may be subject to being taxed.

To be considered a startup the company has to be in business for less than ten years, have no equity interest listed on the stock exchange, and cannot have a turnover of fewer than 50 million dollars.

For a concession to apply to a company, the ESS must meet the following:

    • When working with interested that is issued under the ESS, and the shares cannot have a discount that is greater than 15 per cent of the market values.
    • The rights under the ESS must have a strike price that is SS that is great then or more than the market value from the company.
    • The employee mist holds this stock and any interest that they make for at least three years.

 

  1. When going for a tax-deferred scheme, the taxing point can be deferred from the date of the exercise.

This change can delay the first taxing point. The taxing point will be deferred if

Employees can exercise their right to have no risk forfeiting if there are no restrictions on getting rid of the share.

All ESS investments with no risk of forfeiting the internet and restrictions on the sales are removed.

There are times when the employee can resign for the job.

Interest may be deferred up to 15 years after the ESS were obtained.

 

  1. Requirements for Significant Ownership and Voting Right Limits have stopped.

The limits on voting power went up from 5 per cent to 10 per cent. The only ownership had to have a significant investment in the company, but now all shares are looked at.

This will allow the employees to gain a larger share of the company, but it will also look at the shares that they already have.

 

  1. An Income Tax Refund in possible even if an employee does not exercise their rights.

If an employee decides not to exercise their right with ESS but had to pay the taxes up front, they will be given a refund for the money that they have paid on income tax. The refund will be granted if the ESS was able to protect the employee from risk in the market.

These changes have been long-awaited by the tax professionals, including accountants. The changes are welcome by employees.

 

New Standard

The Australian Tax Office has released its standards to make things easier for startup companies. There is information on the website, including how to take advantage of these new offerings.

Do you think you may qualify for these stamp duty concessions? Call BOA & Co. accountants in Chatswood on 02 9904 7886 and our SMSF specialist will be pleased to assist you.

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Do you know about Stamp Duty Concession on certain asset transfers in Self-Managed Super Fund?

Are you a property investor?

Are you a trustee of SMSF?

 

Then you should read this article carefully. 

Aside from the lower tax rates which apply within a self-managed superannuation fund, the trustees of SMSF can also take advantage of the valuable stamp duty concession provided by Revenue NSW.

 

Buying commercial real property under a self-managed superannuation fund (SMSF) is seen as a common strategy. But how about if you have already owned commercial properties? 

 

Not everyone knows that you can also take advantage of the valuable stamp duty concession provided by State Revenue, which could save thousands of dollars in duties and taxes along the way. 

 

This concession can be very significant.  If the SMSF purchases NSW land/property from a member with a market value of $900,000, the duty which would apply (but for the concession) is $35,835.0.  With the concession, the saving in duty is $35,335.0.

 

Here is the current breakdown on stamp duty for property investors or small business owners looking to move property they own personally in to their SMSF.

 

Stamp duty imposed by State and Territory governments should always be considered before transferring land to an SMSF. Concessions or exemptions from duty may be available depending on the State or Territory.

 

Reminder:  the land/property must be business real property owned in the personal name of the member of SMSF rather than a company. Certain trust is also eligible as a landowner but please check with our SMSF specialist at BOA & Co.  

 

The following tables set out the details of the stamp duty offices and relevant provisions of the relevant legislation in each State and Territory. This is up to date as at 27 February 2017.

 

NSW

Transfer to an SMSF
Duty payable $500 subject to conditions being met. Previously $50 but increased 01/07/2014. Depending on the documentation in place for the transaction you may be able to apply for a retrospective re-assessment and obtain a refund. An SMSF specialist lawyer would be able to advise you on this.
Relevant provisions 62A NSW Duties Act 1997
General description of legislation Nominal duty is charged on a transfer of dutiable property from a person to a trustee of an SMSF where the: transferor is the only member of the super fund or the property is to be held by the trustee solely for the benefit of the transferor (ie property or proceeds of the sale of the property cannot be pooled with property held for another member and no other member can obtain an interest in the property or proceeds of sale), and the property is to be used solely for the purpose of providing a retirement benefit to the transferor.
Documentation Evidence that it is a complying SMSF as at the date of the agreement/transfer, copy of minutes of meetings of the SMSF stating the intention to have the property transferred to it and confirm that the property was owned beneficially by the transferor member, copy of the SMSF trust deed or a variation to it, showing a non-revocable clause that the property is segregated for the transferor member’s benefit only (follows wording in section62A(2))
Legislation Duties Act 1997 (NSW)
Legislation website http://www.austlii.edu.au/au/legis/nsw/consol_act/da199793/
Office Office of State Revenue
Website http://www.osr.nsw.gov.au

 

VIC

Transfer to a super fund

Duty payable No duty subject to conditions being met
Relevant provisions Section 41 Vic Duties Act 2000
General description of legislation No duty is charged in respect of the transfer of dutiable property made without monetary consideration to a trustee of a super fund, where there is no change in beneficial ownership (again, the property must be held in the personal name of the member and not a company name). A transfer of property to a trustee of a super fund by a beneficiary of the fund does not, for the purposes of this section, effect a change in the beneficial ownership of the property.
Documentation Documents are required – refer to ‘Evidentiary Requirements for Dutiable and Exempt Transactions’ on SRO website
Legislation Duties Act 2000 (VIC)
Legislation website http://www.austlii.edu.au/au/legis/vic/consol_act/da200093/
Office State Revenue Office (SRO)
Website http://www.sro.vic.gov.au/land-transfer-duty

 

QLD

Transfer to a super fund

Duty payable Ad valorem duty applies
Relevant

provisions

No provision for exemption or concession from duty
General description

of legislation

A transfer of dutiable property is a dutiable transaction.
Documentation Duties office form and documents are required.
Legislation Duties Act 2001 (QLD)
Legislation

website

http://www.austlii.edu.au/au/legis/qld/consol_act/da200193/
Office Office of State Revenue
Website http://www.osr.qld.gov.au/duties/index.shtm

 

There are also other conditions which have to be satisfied. For example Revenue NSW requires evidentiary documentation before these concessions can be granted. 

Do you think you may qualify for these stamp duty concessions? Call BOA & Co. accountants in Chatswood on 02 9904 7886 and our SMSF specialist will be pleased to assist you.

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smsf property investment

5 Mistakes on Self-Manged Super (SMSF) Property Investment

Deciding on getting into property investment through the self-managed super fund or SMSF is something worth considering. If you take into consideration the volatility of the stock market, low-interest rates, and tax concessions, it makes a lot of sense. So what do you need to know?

 Here are 5 Common Mistakes when considering property investment through SMSF

  1. High leverage on SMSF property investments
    • Heavily rely on bank loans when investing property within SMSF might be problematic. High loan-to-value ratio (LVR) could be feasible when investing elsewhere but SMSF loan is more strict and less options in loan market. Most lenders require positive cash flow (i.e. no Negative Gearing allowed) considering acquisition of property in SMSF.
    • Having a combined balance of $200,000 for husband and wife investors could be a starting point of thinking property strategy in SMSF. 
    • The loan-to-value ratio is lower for an SMSF loan than for residential property from most of the lenders. You would need a 25-30% or more deposit when borrowing to buy a property.
    • Lenders view SMSF loans as riskier, and hence a high-interest rate because they consider it a commercial loan even if it purchases residential properties. 

     

  2.  Buying an inappropriate property
    • Not getting a good return on investment, invest in areas that overly supplied or show inconsistent capital growth.
    • Balancing with right rental yields and capital growth is critical. Thinking high capital growth without required rental income leads to insufficient cash. 
    • Investing in bad or volatile areas could make you lose your money quickly.
    • Consider supply vs. demand. You will get good rental returns if you get a good location with low supply

     

  3. Carefully buying off-plan in SMSF
    • Buying off-plan can be a risky move if you do not do your numbers correctly.
    • Undertake a cash flow analysis into your fund with a buffer because you might guess wrong after a few years when settlement, it might not be as what you thought initially. For example considering higher interest rates and lower rental income when doing the analysis.
    • Improper valuation and conservative quotes by banks can lead to problems in future. 
    • If you must buy off-plan, purchase somewhere with strong demand and solid rental return. You avoid the oversupply of apartments that are prevalent in some areas.
  4. Too late to start SMSF property investment
    • Aim to invest for long term (a minimum of 10 years), before the retirement age of 65.  Never too early to start SMSF just to do the maths right. 
    • If possible, start as early as 45 to realise the true potential of investing
    • Investing in property is typically for 10 to 20 years; banks are wary of short-term loans
    • If you are pooling funds from other members, you must also consider their ages, how close they are to retiring, risk tolerance and your ability to manage the funds to the advantage of all members

     

  5. All in property is risky
    • Property is good investment asset to be held in super, but still needs to diversify.
    • Right level of cash reserve mixed with other liquidiable investment is healthy strategy just because real estate is not liquidable asset with a higher transactional cost when selling.
    • Diversify your SMSF to have a well-rounded portfolio
    • Have a good buffer of assets and only invest in property when you have sufficient resources

Do you need professional assistance for your next investment? Call BOA & Co. accountants in Chatswood on 02 9904 7886 and our specialists will be pleased to assist you.

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BOA & Co. Policy changes

Policy Changes for SMSF Customers & Those Requesting Interest Only Lending

Policy and Process Changes for SMSF Customers & Customers Requesting Interest Only Home Lending.

Today, BOA & Co. is implementing policy and process changes for when we lend to Self-Managed Super Funds. These changes will apply to both Home Lending and Business Lending products.

On Saturday 1 July 2017 some additional changes will be implemented for Interest Only Home Loans to ensure Boa & Co. continue to apply responsible lending practices when assessing a customer’s ability to service existing and proposed debts.

These changes will help us protect the interests of our customers and ensure we continue to meet our regulatory requirements.

What’s changing?

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