The Biggest Thing To Happen To The Australian Investment Property Market Since Negative Gearing

Sydney, Australia (PressExposure) July 10, 2008 -- You can now use your superannuation savings as a deposit to buy property in Australia. With recent uncertainty in the Australian and Global financial markets many people want to diversify their risk, and increase their yield on investment through property investment. In September 2007, the Federal Government made amendments and legislated through the Superannuation Industry (Supervision) ACT 1993 (SIS Act) section 67 (4A) to permit Self Managed Super Funds (SMSF) to borrow to purchase an asset (e.g. real estate). For more information on the new legislation visit the Australian Taxation Office website [].

The SMSF segment presently represents about $286 billion in assets as at June 2007, around about 25% of the total Superannuation Assets. Presently there is approximately 375,000 SMSF in place with a projection of that doubling by 2012 due to these changes in the SIS Act.

The old rules meant you had to buy the property outright in your fund, whereas now you can borrow anywhere from 60% to 75% of the value of the property you are looking at purchasing. Please also note that up to 4 individuals, not 5, can group their super funds together to make a property purchase.

Questions and Answers:

Q1. How does my SMSF purchase a property?

The self managed super fund obtains a loan approval from our partnered alliance SMSF Loans. They have access to all the SMSF loans presently on the market, and will endeavour to choose the best lender for your circumstance. They can also arrange to set up the whole SMSF structure that is needed to purchase the property for approximately $2,500.00. (This does not include annual compliance and audit by your accountant). Please note: You are most welcome to use your own accountant to set up the structure, but be very careful that your accountant is being reasonable in what they are charging, and that they are setting up a structure that conforms with the lenders for the purchase of the property.

Once the loan structure is set up PK Property will help search, locate and negotiate the best property for your fund.

Q2. What are the tax advantages?

- Contributions made to the SMSF are taxed at 15% leaving 85 cents in every dollar to contribute to the property compared to as little as 55 cents with your traditional negative gearing. - When using PK Property buyers agents services you are paying our fees out of money that is already sitting in the fund taxed at 15%, not your top marginal tax rate should you be hiring our services outside the fund. - Maximum 10% capital gains tax on sale of property if held for at least 12 months and potentially nil if sold in pension phase. - Maximum of 15% tax on rental income. - You may effectively receive a tax deduction (via salary sacrifice) for loan repayments of the principal (which you cannot normally do). - The interest costs are tax deductible and can potentially reduce the 15% contributions tax to nil. - And for small business owners, additional tax concessions and asset protection from creditors may be achieved. - Unlike other property investments, as a business owner you can 'sell' the business premises you own into your SMSF - and rent it back to your business.

Q3. What are the features of the SMSF structure?

- Choose any kind of property including residential, commercial, retail, and holiday units.
- A super fund can purchase real estate let for business purposes from a member or a related entity (i.e. this does not breach the "in house asset" rule under the SIS Act). Investments in property other than "business real property" are permitted provided the purchase is from an arms-length vendor.
- The legal owner of the real estate will be the Property Trustee. - The beneficial owner of the real estate will be the SMSF. - The lender has no recourse to the other assets of the SMSF, providing the SMSF with absolute protection for its other assets. - The loans are personally guaranteed by the member/s of the SMSF (subject to credit approval). SMSFs can deal with the property however and whenever they like, in the same way as investors can deal with "normal" investment properties (e.g. lease, renovate, repair, or sell), (subject to the terms of the relevant loan and mortgage). - All rents are paid direct to the SMSF; Loan repayments are made in the ordinary way from the SMSF. - The SMSF can pay out or reduce the mortgage at any time (subject to the terms of the relevant loan). - When the mortgage is paid out in full, title to the property can be transferred to the SMSF or the Property Trustee can continue as registered proprietor.

Q4. Can I occupy the property?

No. If a member of the SMSF occupies the property the "in-house asset rule" would be breached. However, the SMSF can buy a property that the investor intends to live in after retirement. This is possible if you transfer the property from your super fund to yourself after you retire. You are permitted to buy a business premises in your SMSF and rent it back to yourself.

Q5. I thought super funds could not borrow or charge their assets. Is this correct?

- That was correct, until amendments to the Superannuation Industry (Supervision) Act 1993 (SIS Act) made in September 2007. - Under the new section 67 (4A) of the SIS Act, SMSFs can borrow providing the following conditions are satisfied. - The borrowed funds are used to purchase an asset (e.g. real estate).
- The asset is held on trust for the SMSF by another entity (i.e. the Property Trustee). - The SMSF must have the right to acquire legal ownership of the asset by making payment. - The lender's recourse against the SMSF must be limited to the underlying asset (i.e. the purchased property). The lender must not have a right of recourse against other assets of the fund.

Q6. What other restrictions apply?

- SMSFs must comply with all regulations applying to superannuation funds. - SMSFs may acquire up to 100% of the fund's total assets in the form of real property. SMSFs must ensure that the level of investment in real property is in line with the fund's investment strategy, including diversification of assets, liquidity, and maximization of member returns in the fund. - Where a fund invests 100% of its assets in real property, trustees must ensure that the fund continues to meet these requirements, for instance they must ensure the fund has sufficient liquidity to meet its liabilities (such as pension payments). - The government has also made it clear that super funds investing in these types of investments must have appropriate risk management measures in place and must understand the risks of investment.

Q7. Who pays what and when?

As the beneficial owner of the property and the borrower of the loan, the SMSF is responsible to pay all the usual amounts that you would expect to if you had bought an investment property and borrowed money on it in your own name rather than your super fund. For example, your SMSF will be required to pay: council rates, water rates, and land tax (if any); interest and other loan repayments; lender's fees; repairs; property management costs; and any insurance premiums management fees imposed by the Property Trustee.

Q8. What about land tax?

As the SMSF is the beneficial owner of the property, land tax is payable by the SMSF. The SMSF will only have to pay land tax if the total land values exceed the prescribed amount.

Q9. What happens when the loan is fully repaid? Can legal title be transferred to the SMSF? Would any stamp duty or GST be payable with respect to the transfer?

When the loan is fully repaid, the SMSF is entitled to have the legal title transferred to it. Depending on how the trust structure is set up and administered, this transfer should be possible without incurring tax, GST, or stamp duty liabilities (other than nominal) as the SMSF will already be the beneficial owner. Of course, this position may change because of future changes in the laws.

Q10. How can I transfer the property?

The SMSF can direct the Property Trustee to sell to any third party (subject to paying out the mortgage loan and any other amounts which might be outstanding).

Q11. Who can be the Property Trustee?

The Property Trustee should be an arms length trustee from the SMSF Trustee and the members of the SMSF. This is to ensure that the transaction is not a sham, and the related party and in house asset rules are complied with.

Q12. Is there an ATO product ruling for this loan?

No, there never will be because each individual's circumstances are different. Each borrower and/or adviser should seek their own expert tax opinion, based on their individual circumstances.

Property Market update:

Super ratings the super information agency says that superannuation funds are set to record this financial year their biggest ever loss since records began 10 years ago. On the other hand BIS Shrapnel Australia's most trusted source of information for the property industry is forecasting capital growth for property over the next three years to be around 18%, with Sydney's median house price to go from $584,000 to $650,000. Property analysts are also predicting that rents will rise 50% in the next 4 years, with vacancy rates in NSW at a record 30 year low being just .8%.

BIS Shrapnel's report also says that Australia's population is expected to grow by 1.5% through 2008/2009 its highest level since the 1980s. BIS says we are experiencing record net overseas migration which is underpinning what is already strong underlying demand for housing but our main problem is that we are not building enough houses for upcoming demand.

At PK Property we are presently experiencing a real resurgence in the property investment market in the price ranges of $350,000 to $1.5 Million. With great purchasing prices and strong rental returns some properties are returning 5 % yields. I personally have not seen yields like that since I started my business 11 years ago.

So if you are looking at upgrading or wanting to buy an investment property either in your self managed super fund or out of your fund, I do believe there is a window of opportunity for great purchasing up until Christmas.

Please email today should you want to make an appointment with our team to talk further on how you can benefit from these new superannuation changes, or just for a general chat on your property requirements.

Disclaimer: This information is provided as a general guide only and is not advice or a recommendation to enter into any transaction, and is subject to the final documentation. This information has been obtained from sources that PK Property Search & Negotiators believed to be reliable and PK Property Search & Negotiators makes no representations as to, and accepts no responsibility or liability for, the accuracy or completeness of the information. PK Property Search & Negotiators and its affiliates do not purport to be legal, tax, accounting, financial or regulatory advisors in any jurisdiction. PK Property Search & Negotiators acts neither as an adviser to, nor owes any fiduciary duty to any recipient of this information. Prior to entering into any proposed transaction, the recipient should independently evaluate the risks of such a transaction and the recipient's ability to assume such risks from their adviser.PK Property Search and Negotiators strongly suggests before you enter into any property purchase through your SMSF that you consult your accountant beforehand.

About PK Property

Contact PK Property Search & Negotiators Pty Ltd:

North Shore & Northern Beaches Office:
Cremorne Town Centre, Suite 13, Level 1, 287 Military Rd, Cremorne NSW 2090 Australia
Phone +61 (0)2 9904 3444, Fax +61 (0)2 9904 3555.

City - Eastern Suburbs - Inner West Office:
Australia Square, Level 5, 95 Pitt St, Sydney NSW 2000 Australia
Phone: +61 (0)2 8249 8180, Fax +61 (0)2 9904 3555

PO Box 112 Cremorne NSW 2090
Phone +61 (0)2 9904 3444
Fax +61 (0)2 9904 3555
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Press Release Submitted On: July 08, 2008 at 8:52 pm
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