Did you know you can use your superannuation to invest in property?
This is a very complex area of borrowing but one that Trusted Finance Solutions specializes in. With all transactions of this nature, it is vital that you take the appropriate financial advice from a qualified financial planner who can guide you in the right direction and outline the pros and cons of this strategy as it is not for everyone. In fact, not only do we recommend this, it is also a requirement of all of the banks before the loan settles.
In summary, for some time, the Superannuation Industry Supervision (SIS) Act has enabled Self-Managed Super Funds (SMSF’s) the ability to borrow to purchase commercial or residential investment property (single asset) via a Limited Recourse Borrowing Arrangement (LRBA). The SMSF trustees receive the beneficial interest in the purchased asset but the legal ownership of the asset is held on trust (the holding trust) until the loan is paid out in the future.
A hypothetical example of the process to set up a SMSF and holding / bare trust and purchase an investment property is as follows:
- A Self-Managed Super Fund (SMSF) is established by a financial planner or accountant in the name of Smith Family P/L as trustee for (ATF) Smith Family Super Fund.
- Some or all managed funds and shares held in industry super funds are sold down and held in cash.
- Those funds are then rolled over from the industry funds and sit in a cash management style account in the name of Smith Family P/L ATF Smith Family Super Fund.
- Tim Smith and his wife Kelly Smith receive their respective 9.50% superannuation payments from their employers credited into this super account.
- A new entity named Smith Family Holdings P/L ATF Smith Family Holdings Trust is also set up. This is known as a bare trust or holding trust. This entity will be used to hold the property during the life of the loan to adhere to the strict superannuation rules.
- The funds from the cash management account are then used to pay a deposit for an investment property purchase. All additional set up costs for the loan are paid from the SMSF such as bank fees, legal fees and stamp duty.
- The maximum LVR for a residential investment property purchase is 80%. For a commercial property it is 65%-70%, depending on the financier.
Strategy – Purchase an investment property inside a newly established SMSF. The aim is for the rental income and employer contributions to the SMSF to pay the loan off in due course and have an unencumbered investment property, generating positive cash flow in retirement. Under the current rules, this income would be tax free post pension phase in retirement. Your accountant and financial adviser can give you further information on this.
Borrower – Smith Family P/L ATF Smith Family Super Fund
Security Property – 1 Jones St Melbourne, purchase price $650,000
Owner of Property – Smith Family Holdings P/L ATF Smith Family Holdings Trust
Loan amount – 80% of $650,000 = $520,000
Principal and Interest payments over a 25 year term (5.65% interest) estimated at $3,250 per month
Income in the SMSF –
$2,200 per month – Rental income estimated from the investment property
$1,030 per month – Tim’s salary is $130,000. He receives $1,030 per month SG from employer
$ 515 per month – Kelly’s salary is $65,000. She receives $515 SG per month from her employer.
$3,745 per month – Total income in the fund
The income in the fund of $3,745 per month is greater than the monthly repayments for the loan of $3,250. Therefore, the SMSF investment property loan is being paid each week by the tenant and the respective employers of Tim and Kelly with no impact on the Kelly’s cash flow outside of the SMSF.
If this strategy is something that interests you, please speak to your accountant and financial planner to determine whether this fits with your loan term goals and we can then work together to develop the plan.
