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How to use your superannuation to purchase property

Superannuation is your investment for your retirement and can be a great way to invest money.  Did you know that you can take control of your own superannuation and use it as an effective tax saving and wealth creation tool?A self-managed super fund (SMSF) is just what it says – a super fund that is managed by the people who invest in it. Like other super funds, the assets and money in a self-managed super fund are solely for retirement benefits. It cannot be used to run a business, renovate a house or benefit you before retirement.

Self-managed super funds provide the same function as other super funds – they invest contributions and make them available to its members on retirement. However unlike other super funds, the members of self-managed super funds are also the trustees, and they decide what the contributions are invested in and how benefits are paid. Perhaps the biggest benefit of a self-managed super fund is that you control what you invest in.

This information sheet provides a simple guide on setting up a self-managed super fund and then using it to invest in property.

For more general information on what a self-managed super fund is, read the information sheet Self-managed superannuation funds.

Who can set up a self-managed super fund?
Anyone can set up a self-managed super fund – it is not just for people over the age of 40, or those approaching retirement.

The maximum number of people who can be in a self-managed super fund is four. They do not need to be related however it is useful if they have similar investment goals and styles.

What does it cost?
Setting up a SMSF costs around $2000 if set up with individual trustees or around $2200 if it is set up with a corporate trustees (the additional cost is due to higher government fees and charges). There are also annual costs of around $2000, depending on how many different investments your SMSF has.

Apart from the dollar costs, you also need the time and skills to manage your own super fund, both of which can be burdensome.

What is the difference between a corporate trustee and individual trustees?
A corporate trustee is when a company is the trustee. Each director of the company is a member of fund, and each member of the fund must also be a director of the company.

When a fund has individual trustees, each member of the fund is a trustee.

The main difference is that it is easier – and cheaper – for fund members to change (ie new members join, other members leave) if the trustee is a company. For example a new member may join if the fund is established by mum and dad and their child wants to join once they start making superannuation contributions.

Regardless of which method is chosen, all members of the fund are required to be trustees, which ensures each member is fully involved and has the opportunity to participate in the decision making process of the fund.

How do I set up my own self-managed super fund?
There are a few steps involved in setting up your own self-managed super fund.

Action that needs to be undertaken

1. Check with your employer that you can change your super fund – some employers, such as the Queensland Government, have a requirement that a specific fund is used. Who does this – SMSF members
2. Complete an application form requesting Morris Accounting setup the fund. This can be downloaded fromwww.morrisaccounting.com or by calling 07 3105 5926. Who does this – SMSF members
3. Decide whether you want to set up the fund with a corporate trustee or with individual trustees. Who does this – SMSF members
4. Return the completed form and relevant the fee to Morris Accounting. Who does this -  SMSF members
5. The fund documentation is prepared – called the Trust Deed. Who does this -  Morris Accounting
6. Apply to the Australian Tax Office (ATO) for the fund to be regulated, and to obtain an ABN and tax file number.
This process can take around two weeks. Who does this -  Morris Accounting
7. Once the ABN and TFN has been obtained, the paperwork needs to be reviewed and signed by each of the SMSF members. It is recommended that each member of the SMSF keep a copy of this paperwork for their records. Who does this -  Morris Accounting
8. Contact your existing super funds to arrange for any monies to be rolled over into the new SMSF. This process can take up to 6 weeks. Who does this -  Morris Accounting
(please note that in some instances Morris Accounting will not be able to do this on your behalf, however you will be notified if this is the case)
9. Prepare an investment strategy. This needs to consider the risk, return, diversification, cash flow, asset allocation and the ability to discharge existing and prospective liabilities. Who does this -  SMSF members – can be done in consultation with Morris Accounting
10. Establish a bank account for your super fund. This can be set up at a financial institution of your choices with your own choice of bank. The account name needs to be the same as the name of your super fund. Who does this -  SMSF members
11. Advise your employers of the details of your SMSF so super can be paid directly into the new fund. Who does this -  SMSF members
12. Monies are transferred into your super fund bank account and it is ready to commence receiving your own super contributions and make investments!

What can the super fund invest in?
Strict rules govern what the super fund can invest in.  The main rule is that the fund cannot invest in or purchase from any members of the fund.  This is called the In house Asset test.  Here is a short list of what your fund can and cannot  invest in.

Allowed
Cash/Bank Accounts/Bonds
Public Company Shares (ie listed on Stock Exchange)
Commercial Property
Residential Property (let out to 3rd party tenants)
Loans to 3rd Party companies, business,

Not Allowed
Residential Property (members home or holiday)
Loans to members or non-arms length parties
Private Company Shares

Also remember that the general rule is that Superannuation funds are not allowed to borrow.  So that all investments are normally made in cash.  This means that previously property was generally not an investment option as most property is purchased using finance.

How can I use my super fund to invest in property?
Following legislative changes in 2007, SMSFs can now borrow for residential and commercial property investments providing strict rules are met.
SMSF loans are fairly straightforward to arrange, and need to adhere to the following rules:
▪ The loan is non-recourse – meaning it can only be used to borrow against the secured property asset, not other assets of the super fund (ie if the loan is to purchase property A, it cannot then be used to pay for shares)
▪ The SMSF is the beneficial owner of the property until the loan is paid out
▪ The trustees of the SMSF have effective operational control of the property – ie the trustees determine the rent, select the tenants, pay for maintenance etc
▪ SMSF loans can only be used to fund the purchase of income producing property – it cannot be used to buy a vacant block of land that will not generate an income.

The basic steps involved are:
Action that needs to be undertaken
▪ Select a property to purchase.  Who does this - SMSF members
▪ Create a bare trust and loan document within the SMSF. Who does this - Morris Accounting
▪ Select the loan product (ie the lender, whether it is interest only or principle and interest, fixed or variable rates etc) Who does this -SMSF members
▪ The financial institution lends money to the bare trust, which legally owns the property on the loan. Who does this -Financial institution
▪ The SMSF provides the deposit and the monies to meet the loan repayments. Who does this -SMSF
▪ All income generated from the property is also paid into the SMSF.

Morris Accounting strongly recommends that a financial or mortgage broker is engaged to select the loan product – Nathan can provide referrals if necessary.

Note that finance broker and accountant setting this up need to communicate to ensure that the correct documentation drawn up to meet the requirements of the financiers.  This is crucial especially as each financier have their own internal policies and rules for this borrowing.

Experience has shown that it is better for one person to undertake all the legal documentation – ie Morris Accounting.   Legally we are not allowed and do not prepare the documentation ourselves, this is outsourced to the relevant legal practice to prepare.  We manage this process for our clients using our experience and QA checklists to ensure that all matters are being taken care of.

So whilst there are a lot of rules in relation to the superannuation environment, Morris Accounting manage those for our clients so that they can get on with the easy party of managing their own superannuation money and getting far greater results for their long term wealth creation strategy.  Contact Morris Accounting today to take control of your own super!

A guide to using a self-managed super fund to invest in property. (Downloadable version)

  1. hannah Reply
    Hi can we use what is in our super as a deposit for a loan to purchase an investment property?
    • admin Reply
      Hi Hannah, yes you are able providing certain conditions are met.

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