SMSF Inview - July 2010

1 Jul 2010

In this edition of the SMSF Inview:

• Investing in property via your SMSF;
• Invitation to attend our property panel discussion;  
• Government extends temporary relief on minimum account based pensions for 2010/11;  and
• Annual PAYG Instalment Notice

o investing in property via your SMSF

There are three ways in which a Self Managed Super Fund (SMSF) can typically invest in property. Below is a summary of how this can be achieved:

1.      Buy it outright

A SMSF has the ability to buy either residential or commercial property directly as part of their overall investment strategy. The purchase can be either outright by the SMSF itself or as tenants in common (with another party, i.e. individual, trust, SMSF).

Buying commercial property within an SMSF is an attractive strategy for business operators as your own business can operate from these premises, paying rent on commercial terms. 

The table below outlines some of the can do’s and can’t do’s with buying property within a SMSF:  

There are some important considerations when buying property inside a SMSF, including understanding the tax benefits of property being held inside versus outside of super, tax on future capital growth, and the type of trustee structure that should be in place.

2.      Buy property within an ungeared unit trust (that SMSF invests in)

A SMSF can acquire units within an ungeared unit trust to acquire residential or commercial property. This strategy is commonly used where a SMSF has insufficient capital to acquire the asset outright and will include other unit holders. This could include you personally, business partners, other family member, etc.

It is important to note that this strategy does not allow for the unit trust to borrow money to acquire the asset, not can it be used as security for the borrowing, as this would be a breach of superannuation law requirements.

The example below demonstrates how an SMSF co-invests with the members to acquire the property inside the ungeared unit trust.

This strategy is attractive for SMSFs trustees that are:

• looking to acquire land for development (including subdivision); or
• looking to acquire their business premises with a view to their SMSF ultimately owning the property

3.      Borrow within your SMSF to acquire property

Superannuation law allows for a SMSF to borrow money for the acquisition of an asset using a limited recourse borrowing arrangement (also know as an SMSF instalment warrant). This strategy allows for individuals to leverage inside super and use income and contributions to service the debt, plus obtain all the tax concessions ordinarily available within superannuation.

The diagram below outlines how this arrangement works:

Your SMSF borrows funds to acquire residential or commercial property. The legal ownership of the acquired property is held in a Bare Trust in custody for the SMSF. The Fund takes out the loan and contributes cash to pay the deposit and meet legal costs and stamp duty. The SMSF then manages the property in the same way as you would any other real estate investment.

The loan is limited recourse and the property is used as security. In the event of default, the lender only had recourse to the residential or commercial property. They cannot claim on any other assets of the SMSF. 

The property is leased from the SMSF on commercial terms. Rental payments, superannuation contributions (e.g. SGC & salary sacrifice) and other income enables the Fund to meet loan repayments and expenses associated with the property. All income and expenses are received and paid for by the SMSF (not the bare trust). For a commercial property, the tenant can be a related party such as your family business; or an unrelated party under lease. For residential property, the tenant must be an unrelated party (i.e. you or any member or your family).

When the loan is repaid, legal ownership of the property can be transferred from the bare trust to your SMSF.

• Who will benefit from the strategy?
• A Trustee of a SMSF
• Those wanting to invest in residential and/or commercial property within super;
• Those that own existing commercial property outside of super;
• Those with a long-term investment timeframe

Some of the benefits include: 

• Ability to accelerate wealth accumulation
• Diversification of superannuation into direct property
• Two sources of inflows to assist repaying the loan – rental income and super contributions
• Gearing benefits whereby the Fund can offset loan interest and expenses against rental income and contributions
• Gearing can increase your return on investment (but also e
• Have concessional tax rates apply on income after expenses
• No capital gains tax if asset is sold in retirement
• Limited recourse, meaning the lender only has recourse to the property and not any other assets of the Fund
• No additional ongoing cost as the bare trust holds the asset for the SMSF as beneficial owner until loan is repaid. No financials or tax return required as all income and expenses are attributable to the SMSF.

  o invitation to attend our property panel discussion

 The Australian property market continues to steam along with record sales, and clearance rates. However, like any investment decision, buying a property is not without risk. You need to consider all aspects before you buy. 

Join us as we pose questions to experts in the areas of Real Estate, Wealth Management, Self Managed Super Funds and Mortgages. Understand the do’s and don’ts, the overall financial impact and the role of property in your financial well-being.

Click here to register your interest to attend this session or contact us on 1300 883 122.

Tuesday, 20 July 2010

6.15pm for 6.30pm start

Heidelberg Golf Club

View Map

* Please note that this panel discussion will only be conducted in Melbourne at this time.

  Property Panel Discussion Flyer (3.34MB)

 o Government announces extension to temporary relief on Account-Based Pensions

The global financial crisis (GFC) has had a significant effect on the account balances of most super fund members in Australia. As a result, the government over the past two financial years (2008/09 and 2009/10) introduced temporary relief by halving the minimum pension that could be withdrawn from account based pensions, including transition to retirement income streams and market linked pensions. 

Whilst the Government was silent on any announcements with the 2010 Federal Budget in extending this temporary relief, they have announced on 30 June a further extension to the minimum drawdown requirements for the 2010/11 financial year.

The table below outlines temporary relief minimum percentages to be applied for the 2010/11 financial year:

Note: Amount calculated on 1 July each year, unless first year of account-based income stream, and then pro-rated from commencement day. The minimum amount is rounded to nearest $10.

Example

John (62) is currently draws the minimum from his account based pension. John’s account balance at 1 July is $800,000. For the 2010/11 financial year, John’s minimum factor is 2%, which means he must withdraw a minimum pension of $16,000. Without the temporary relief, John’s minimum would be 4% (or $32,000).

 o annual payg instalment notice

In July 2010, the Australian Taxation Office (ATO) has issued to SMSFs the Annual PAYG instalment notices. These are required to be paid by 21 October 2010.  We suggest that all Trustees who receive this notice take this opportunity to review whether the fund has had any significant changes between financial years that may justify varying this amount.  Examples include commencing a pension, reducing the levels taxable contributions (salary sacrifice), etc. 

If you believe that the PAYG instalments are higher than the Fund is required to be paid, you do have the ability to vary this amount.  However, please note that a Fund may be liable to pay a variation penalty where the varied instalment amount or rate is less than 85% of what should have been used. 

You may wish to take this opportunity to have your super fund compliance requirements prepared prior to the due date of this PAYG instalment to work out a more accurate tax liability to be applied for the 2010 financial year.  Please contact your SMSF Client Manager to discuss this further.

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