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Property Bubble? What property bubble?

Thursday, October 04, 2012

Just about every time an American property guru arrives in our lucky country they start talking about our “Property Bubble”…… And we start fielding questions from clients about when “the bubble is going to pop?”.

The short answer is that we can only speculate about the future direction of Australian property prices. We are not even sure there is a bubble.

However, in relation to the existence of a bubble, there is one statistic that seems to surprise just about everyone.

The median Sydney property price has only risen by 21% since the end of 2004. Yes, that is an average of 2.6% per year for the last 8 years. This is almost exactly the same as Australia’s inflation rate for the same period.

This doesn’t look like a property bubble to us.

In fact, with the combined forces of;

1. strong population growth,
2. low unemployment,
3. sub 2% rental vacancy rates,
4. median rental yields at 15 year highs and
5. interest rates at 10 year lows,

one could easily argue that upward pressure on Sydney house prices is a more likely outcome.

Think of this simplified investment scenario.

A median house in the Sydney suburb of Hassall Grove will set you back $356,000.
Let’s assume that a 10% deposit was paid and there is a 90% LVR loan of $320,400.
The median rental yield for this suburb should provide you with a weekly rent amount of $390 per week.
The interest bill on the lowest 3 year fixed rate of 5.39% would be $332 per week.

Note, this calculation has not taken into account the potential tax benefits or the potential ongoing costs of the property but it does demonstrate how this market has developed some cash flow value. Something you rarely see in the middle of an asset bubble. source: smartlineblog

Property Investors prefer to Invest in Houses than Units

Thursday, October 04, 2012

Units more affordable, but buyers still attracted to detatched houses

By Cameron Kusher
Wednesday, 03 October 2012

With buyers looking for affordable housing alternatives, it would be expected that the number of transactions for units would be increasing. However, that hasn’t been the case in recent times.

Even with a current national median house price of $415,000 nationally and $390,000 for units, it is clear many buyers will have some difficulty entering into home ownership.

Although today’s RP Data analysis shows that at a national level the median unit price is just $25,000 cheaper than the median house price, across the combined capital cities units are $53,000 more affordable.

Across individual capital city markets, the difference in the selling price for houses and units range from $48,000 in Melbourne to $110,000 in Sydney and Canberra. Given the significant difference in the prices of houses and units in Sydney and Canberra, it is no surprise these cities have recorded the greatest proportion of unit sales over the past year of all capital cities at 42.5% and 42.8% respectively.

The analysis also highlights the difference between median house and unit selling prices at a capital city and national level over time. The data confirms that median unit prices were consistently higher than median house prices from mid-1996 to early 2003 at a capital city level, and up until mid-2004 at a national level.

Click to enlarge

This result is partly a function of the cost of housing being significantly lower at this time but is also because units were more abundant in inner city areas and attracted premiums because of this convenience.

Click to enlarge

Over recent years, the gap between house and unit prices has increased significantly, with the difference reaching as much as $76,000 across the combined capital cities and $35,000 across the nation.

Positive signs for WA Property Investment

Thursday, October 04, 2012

No property market recovery in 2013, but some early positive signs in WA: Peet

By Larry Schlesinger
Tuesday, 02 October 2012

Residential property developer Peet expects “conditions” in the residential property market to remain “volatile and challenging" into 2013 with business and consumer confidence remaining low despite the series of rate cuts in the previous financial year.

However, Peet managing director and CEO Brendan Gore did note in the company’s annual report that “positive signs” have emerged in the Western Australian property market in the first months of the year.

And he said there are also plans to accelerate development of Peet's Vantage master-planned residential community in Gladstone, the mining hotspot 550 kilometres north of Brisbane.

However, the overall tone of the annual report was one of a challenging year ahead for Peet and others operating in the residential development sector.

“The 2012 financial year delivered some of the most challenging conditions experienced in almost 20 years and there is little expectation that markets will improve significantly in the 2013 financial year,” said Gore.

“The series of interest rate cuts in 2012 has not had the desired effect to date and consumer and business confidence remains low."

He did add that the long-term fundamentals of the Australian property market – including population growth, an under-supply of housing and a tight rental market – “remain conducive to an improving market.

“However, the catalyst for household confidence, which will underpin improved demand in the residential property market activity, is yet to be found.”

Gore says Peet would be well prepared to "respond quickly and effectively to any improvement in consumer sentiment and the residential market".

“However, given the ongoing uncertainty in Australia, and until the timing and strength of the expected recovery is confirmed, the directors are unable to provide guidance on 2013 operating earnings with any degree of certainty."

Peet recorded a net operating profit after tax of $20.3 million for the year to June 30 and statutory net profit after tax for the full year of $5.4 million, representing a decrease of 76% compared to the previous corresponding period.

Shareholders did not receive dividend payment.

Peet chairman Tony Lennon said he appreciated this would be disappointing for investors, but said he trusted investors “have confidence in our ongoing dividend payment policy and the validity of the reasoning behind the decision taken”

Lennon said the year ahead would be a period of consolidation for Peet.

“We are operating in exceptional times where, despite the relative wealth of our own nation, we are heavily impacted by the global economy and consumer and business confidence has been low over a sustained period of time.

“This time last year, it was the crisis befalling some European economies and concern about the United States’ debt ceiling issue. This year, the slowing of the Chinese economy and falling commodity prices are also having significant flow-on effects in Australia and consumer and business sentiment remains cautious.

But he said the company was well positioned with “quality assets in good locations around Australia”.

“We have managed through a number of cycles and will continue to maintain the rigour required during the current market conditions, while positioning the company to capitalise on any upturn in consumer sentiment.”

Peet’s biggest residential project is Flagstone City, 45 minutes south-west of Brisbane in Jimboomba, which has a gross development value of $1.87 billion and is due to begin in 2013. It features 1,500 lots and is proceeding as scheduled.

In total Peet has a lot pipeline of 34,600 worth $6.2 billion.

Property Investment and the Mining Boom

Thursday, October 04, 2012

Decrying the end to the mining boom hysteria: Simon Pressley

By Simon Pressley
Friday, 03 August 2012

Widespread media reporting earlier this week suggested that Australia’s mining boom was near its end. Radio broadcasts, tabloids, even Channel 10’s The Project – they all lead with headlines claiming that our mining boom would end in two years.

Had the reporting stemmed from an article written by some random journo I would have given it the usual through-to-the-keeper treatment. To hear that credible economics advisory firm, Deloitte Access Economics, was the apparent source of these statements almost made me choke on my morning coffee. The copious amount of reports and articles that I’ve read over the last few years must be written in a language that I don’t understand.

I’ve been on record describing this not as a “mining boom” but a “resources revolution”. Suddenly, I’m hearing that the large volumes of natural resources which are responsible for powering up so many electricity sockets around the world, not to mention Australia’s own economy, is about to come to a grinding halt. Is someone going to turn the lights off?

From dirt to dollars

A number of the locations which we’ve been buying investment properties in over the last couple of years have benefitted from the economic stimulus from the mining sector. That said, they have all been strategically selected locations with a stable population base, a diverse mix of industries that contribute to the local economy, an abundance of employment opportunities, and demand for accommodation which is not matched by comparable supply.

Suggestions that the mining boom will end in 2014-2015 is misleading. But hey, it makes a good headline so the media will always milk that for what they can.

What is true is that the timeline for completing construction of much of the $240 billion in fully approved major projects is around 2014-2015. What is also true is that there are a number of factors which are deterring large resource companies (especially foreign companies) from investing in additional major projects. I also think policymakers need to be more proactive in developing other buoyant industries.

What has been overlooked by the doomsayers however is what happens when construction of these projects is finished – they are built for a purpose not for practice!

It’s not until key infrastructure such as processing plants, ports, pipelines and railways are constructed that those valuable resources below the dirt can be converted to dollars. That’s when commodities such as coal, gas and iron-ore are processed and exported to the likes of China, India, Japan, South Korea and France. That’s when our governments start to receive billions of dollars in extra revenue each year in the form of royalties. That’s when some of Australia’s biggest companies expect to return bigger profits, which will affect retail superannuation holdings. That’s when consumers will start seeing some of the fortunes promised by Treasurer Wayne Swan – tax cuts, increased superannuation contributions and infrastructure projects. Supply contracts which underwrite these royalties are on terms of up to 20 years.

Suddenly, now that (alleged) end to the mining boom has quite a wag in its tail. Mining doesn’t stop when construction finishes – it starts! The proponents need to get a return on their investment.

To suggest that the mining boom is near an end is admission of shortsightedness. Disregard the doomsayers for a minute and think about this logically. In Australia and around the world, are we likely to continue to breed, thereby resulting in continued population growth? In Australia and around the world, are we likely to continue to manufacture, produce, process and construct? If the answer to both these questions is “yes” then in Australia and around the world we will need more fuel for electricity and steel. If the answer is “no” then we all better stock up on candles.

Australia has some of the biggest reserves in the world of thermal coal and gas (both used in power generation) and iron-ore and coking coal (both used to produce steel). With the world’s pledge to reduce pollution the demand for gas-powered electricity will continue to skyrocket.

A majority of Australia’s natural resources are contained in Western Australia and Queensland. Consequently, the economic fundamentals of these states are the best in the country. And, many of the best property investment opportunities are also in these states.

It’s called the Asian “century” for a reason

Over this last decade the world has become acutely aware of the abundance of natural resources contained within Australian soils. Over the same decade most of Asia (home to 60% of the world’s population) has entered an era of mass urbanisation; an era which is expected to last so long that it is referred to it as “The Asian century” by people, including our very own Prime Minister.

Asia’s demand for natural resources is propelled by its enormous population, its ambition to transverse from an undeveloped to a developed region, and considerable financial capacity to support this.

Forecasts are for Asia’s middle class to explode from approximately 0.5 billion people to 1.7 billion over the next decade. Australia’s total population is only 22 million.

These changes in Asia are structural, they are real, and they will be long lasting. These changes have already altered the landscape for Australian property markets. To explain these changes we have produced a short educational video.

To suggest that the mining boom is near an end is an omission of the important role which Australia will play in “the Asian century”.

There will always be demand for Australia’s resources. In addition to the $240 billion in approved projects there is a similar value in proposed projects. Future project volumes will ebb and flow depending upon the economic and political climate at the time.

The biggest challenges stopping Australia from realising greater potential from additional resource projects include heavy taxes imposed on the mining industry and the lack of confidence/certainty that foreign investors have in our government. The inability of governments to contribute their own funding to some of the infrastructure required (ports, roads, rail lines), the cost and availability of skilled labour, and lost productivity due to industrial relations unrest are also inhibitors.

The opportunities to Australia from “the Asian century” extend well beyond the mining sector. As featured in our video, there are opportunities for agriculture, education, health and tourism.

Glass half full

As a nation, we need to stop moaning and start embracing the opportunities. It’s been four years since the onset of the GFC. Australia’s economy has been strong throughout, yet we persist with paranoia about Europe. Asia continues to boom, yet we continue to worry how long it will last. And the opportunities for our mining sector are enormous, yet we’re trying to predict how long it will last.

Those of us who naturally have aspirations for success look at problems and see solutions. Those of us who are naturally positive people don’t sit idle because of perceived risks; we look to mitigate and maximise opportunities. And those of us looking for confirmation don’t look towards governments or the media; we look at industry leaders and achievers.

For reassurance we should listen to people like Reserve Bank Governor Glenn Stevens who recently said: “Most Australians I encounter who return from overseas remark how good it is to be living and working here. We are indeed ‘lucky’ in so many ways, relative economic stability being only one of them.”

For direction we should follow the doers not the doubters. People like James Packer (entertainment and tourism), Gerry Harvey (retail) and Andrew Forrest (mining).

Leadership from government and business is integral to Australia cashing in on the Asian century. Regrettably, we shouldn’t hold our breath while waiting for this to occur.

Some friendly advice for those of us who are serious about goals and aspirations – focus on the opportunities, tell those around you to stop arguing about how to fix the problems, and remind the doomsayers to stock up on those candles before the lights go out.

Simon Pressley

Economic indicators for Property Investment are strong

Thursday, October 04, 2012

According to RP Data, with the exception of economic conditions, most ‘Spring selling season’ indicators for the residential market are stronger compared to this time last year.

Cameron Kusher, RP Data research analyst, says the lead-up to the residential Spring selling season is looking more positive, when compared to the same time last year.

However, Kusher says, the question is whether or not momentum will continue throughout the traditional selling season.

“In Spring we begin to see uplift in listings activity with more properties available for sale and subsequently an increase in auction activity. Spring also sees an improvement in the number of property sales, especially following winter, which is usually a slow period for the housing market,” Kusher says.

“Spring 2011 delivered somewhat of a disappointing selling season with sales volumes across the combined capital cities down by 3 percent, lower than they were in the Spring of 2010 and with no noticeable improvement from volumes in Autumn. The amount of stock available for sale during this period was continually increasing throughout the period to historic high levels and home values were falling across each capital city market,” he says.

According to RP Data, with the exception of economic conditions, most indicators are stronger compared with this time last year.

“Overall, we’ve seen some positive movements for home values with new stock being added to the market lower and each of the vendor metrics (selling time, vendor discounting and auction clearance rates) all showing an improvement,” Kusher says.

Despite a more positive trend for many indicators, when compared with those of 2011 , a comparison with the longer-term trend shows many of these indicators are moving off a low base.

“Overall, the data indicates that generally the housing market is now in a stronger position than it was 12 months ago. Considering this, the Spring selling season should be stronger this year than it was last year. However, in comparison to recent years we would not expect the housing market to power along through Spring in the manner that it has previously,” Kusher says.

Why Australia's resources boom – and property investment opportunities in resources areas – are nowhere near over

Thursday, October 04, 2012

Why Australia's resources boom – and property investment opportunities in resources areas – are nowhere near over: Terry Ryder


By Terry Ryder 
Wednesday, 08 August 2012

Three things are fundamentally wrong with the idea that the resources boom will end soon. 

One is the notion that the party stops when the construction of a mine or processing facility is completed – when, in reality, that’s when it begins. 

Another is the false premise that few new projects will be constructed beyond 2014, a claim that suggests people haven’t done their homework before indulging their addiction to media profile. 

And a third is a misunderstanding of the processes under way in China, India and other nations undergoing industrialisation and urbanisation. 

That misunderstanding has lead many to describe what’s happening in the resources sector as a “boom”. That’s a misnomer because a boom is a short sharp rise followed by rapid decline. 

The demand for Australian resources results from significant structural change in the world economy, inspired in part by the emergence of new economic power nations which are seeking to lift the living standards of very large populations. 

This is not a process to be measured in years. It will extend over decades. Property analyst Simon Pressley, recently named Australia’s Buyers’ Agent of the Year, calls it the “resources revolution”. 

High ongoing demand for our resources will continue beyond my lifetime, notwithstanding the likelihood of a few jitters along the way. Australia is going to play a primary role in servicing global demand for ore, coal and gas. 

The belief that the “boom” ends when construction of new mines and processing plants is completed is just bizarre. As Pressley pointed out in one of his Propertyology reports recently, this in fact is when it begins. 

Australia currently has massive new projects under construction, with iron ore projects, coal mines and gas processing hubs, along with associated infrastructure like export facilities and rail links. But the nation doesn’t earn any export dollars until these projects are completed. 

It’s only when they start shipping ore and coal and liquefied natural gas (LNG) that the dollars start to flow. And all the mega projects have proceeded with all or most of their future production under forward sales contracts. 

The third fault line running through the “the boom is ending” argument is the erroneous notion that nothing will happen in Australia once the current crop of projects is completed. The proponents of this idea need to catch up on their reading – or get out of their offices and visit a few coalfaces. 

Most of the big resources projects around Australia are yet to start construction or are just starting to crank up building work. There is so much more to come. 

There have been dozens of major announcements over the past month or so, coinciding with those silly predictions that it’s all grinding to a halt. Here are just some of those relating to Queensland alone: 

Queensland coal production is expected to more than double in the next eight years. In the same period Australia is expected to become the world's largest gas exporter. A report from the Bureau of Resources and Energy Economics says Australia's LNG exports could grow to 106 million tonnes by 2020. The report's long-term projections also suggest big increases in exports of thermal coal and metallurgical coal. 

The $23 billion Australia Pacific LNG project based in Gladstone is to be expanded. Origin Energy, ConocoPhillips and Sinopec have decided to add a second stage, having secured a 20-year supply contract with Japanese power company Kansai. 

A coal seam gas (CSG) project in central Queensland is a step closer towards production, with the state government issuing terms of reference for an environmental impact statement. Arrow Energy's Bowen Gas Project is one of two CSG developments that will form part of the company's LNG project. Arrow will develop up to 7,000 gas wells over the next 40 years, each with a lifespan of 15 to 20 years. CSG will be transported from the Surat and Bowen basins to be liquefied at an LNG plant at Gladstone.

The $1.1 billion Fisherman's Landing LNG project in central Queensland is going ahead, after Melbourne-based Molopo sold its Queensland CSG assets to PetroChina. The Chinese group will now begin talks with LNG Limited, which is behind an LNG plant at Gladstone, over a tolling agreement for gas from the Molopo acreage to be processed to be in the plant. Fisherman's Landing is the smallest of the five LNG plants under construction or planned for development around Gladstone.

Yarwun 2, the $2.4 billion expansion of Rio Tinto Alcan's Yarwun Alumina refinery, passed a major landmark recently when the first bauxite was fed into the new facility and Yarwun 2 began producing alumina. Eventually the plant will produce 3.4 million tonnes each year, compared with the current capacity of 1.4 million.

Xstrata has agreed to a $110 million pre-commitment for an expansion of the $2.5 billion Wiggins Island Coal Export Terminal at Gladstone, boosting the chances that the expanded port and the associated $1 billion Surat Basin rail project will begin exporting by 2016.

Stanmore Coal will bring 750 jobs to the Toowoomba and Surat Basin regions when it develops a Wandoan mine worth $380 million. Construction will begin in early 2014. The environmental impact statement for the mine says it could be operating and exporting before the end of 2015. 

Mt Isa City Council has started the process to freeing up land for developers to build a new suburb of about 400 homes. The council feels the expansion of the resources sector in the area makes existing housing supply insufficient to meet coming demand. 

We’ve also had major announcement of developments in Western Australia, South Australia, Victoria, New South Wales and the Northern Territory. Space doesn’t allow me to list them all.

2012 Tax Changes - Superannuation

Saturday, July 28, 2012

Superannuation changes

There will be plenty of changes made to superannuation this July.

The Government has deferred the start date of maintaining a cap at $50,000 for individauls aged over 50 years with balances below $500,000. So that means for everyone, the concessional contribution cap will drop to $25,000. 

The government will also provide a low income superannuation contribution for individuals earning up to $37,000, so they’ll effectively be refunded the 15% contributions tax.

It will also reduce the super co-contribution by 50%, to just 50c per $1 contribution, effectively reducing the top benefit from $1,000 to $500.

There will also be some changes for high-wealth individuals. People with income greater than $300,000 will have contributions reduced from 30% to 15%

SMSF super funds investing in property need to beware

Friday, July 27, 2012

The volatility in the sharemarket may tempt self-managed super funds (also known as DIY funds) to look elsewhere to invest and the recent rule changes to allow those funds to invest in property might look tempting.

Broadly, while super funds are generally not permitted to borrow money in their own right, there is an exception whereby a DIY fund is permitted to borrow money provided that the borrowing is made pursuant to what is known as a limited recourse borrowing arrangement, for example, an instalment warrant.

Such an arrangement entered into from July 7, 2010 can only be referable to a single "acquirable asset" held in a holding trust which the DIY fund is not otherwise prohibited from acquiring directly. In addition, a borrowing applied to the original acquirable asset can only be replaced with a "replacement asset" according to the relevant provisions of the law.

A major ruling has now been released by the Tax Office which gives the Commissioner's views on the limited recourse borrowing arrangement provisions. The ruling explains the key concepts of:

  • What is an "acquirable asset" and a "single acquirable asset".
  • "Maintaining" or "repairing" the acquirable asset (which is allowed with borrowed money) as distinguished from "improving" it (which is not allowed).
  • When a single acquirable asset is changed to such an extent that it is a different (replacement) asset.

The ruling outlines where money borrowed can be applied in maintaining or repairing (but not improving) a single acquirable asset. While such borrowings cannot be used to improve an acquirable asset, the Tax Office says money from other sources (e.g. accumulated funds held by the DIY fund) could be used to improve (or repair or maintain) that asset. However, any improvements must not result in the acquirable asset becoming a different asset.

The ruling notes that an "acquirable asset" is any form of property (other than money) that the DIY fund trustee is not otherwise prohibited from acquiring under the superannuation law. Although "property" can include proprietary rights or the physical objects of proprietary rights (e.g. land or machinery), the Tax Office says it is necessary to consider the meaning of property in both senses to determine whether money borrowed under a limited recourse borrowing arrangement has been applied for the acquisition of a single acquirable asset.

While the money borrowed can only be applied for the acquisition of a single acquirable asset (or a collection of identical assets with the same market value), the Commissioner considers that a single object of property may be acquired notwithstanding that it is comprised of separate bundles of proprietary rights (e.g. if there are two or more blocks of land). However, this will only be so where it is reasonable to conclude that, notwithstanding the separate bundles of proprietary rights, what is being acquired is distinctly identifiable as a single asset.

Money borrowed under a limited recourse borrowing arrangement may be applied in "maintaining" or "repairing" (but not "improving") the asset. To determine if an asset has been repaired or maintained (or whether it has been improved), the Tax Office says reference is made to the qualities and characteristics of the asset at the time the asset is acquired under the borrowing arrangement. To this end, the Tax Office says an asset is improved if the state or function of the asset is significantly altered for the better, through substantial alterations, or the addition of further substantial features or rights, to the asset.

To some extent, this repair vs improvement issue harks back to the age-old income tax treatment of repairs versus improvements. "Maintaining" the asset, which is allowed under the rules, means work done to prevent defects, damage or deterioration of an asset, or in anticipation of future defects, damage or deterioration provided that the work merely ensures the continued functioning of the asset in its present state. "Repairing" means remedying or making good defects in, damage to, or deterioration of, an asset and contemplates the continued existence of the asset.

In contrast to a repair, the Tax Office considers that an asset is improved if the state or function of the asset is significantly altered for the better, through substantial alterations, or the addition of further substantial features or rights, to the asset.

The Tax Office has given examples contrasting repairs (or maintenance) with improvements:


Repairs/maintenance (permitted)

Improvements (not permitted with borrowed money)

  • Fire damages part of a kitchen (cooktop, benches, walls and ceiling).
  • Restoration (replacement) of damaged part of kitchen with modern equivalent materials or appliances would constitute repair or restoration.
  • If superior materials or appliances are used it is a question of degree as to whether changes significantly improve the state or function of the asset as a whole.
  • Addition of a dishwasher would not amount to an improvement (even if dishwasher not previously part of kitchen), as minor or trifling improvement.
  • If house extended to increase size of kitchen this would be an improvement.
  • If as well as restoring the damaged part of the internal kitchen (a repair) a new external kitchen was added to the entertainment area of the house, external kitchen would be an improvement.
  • Guttering on a house replaced with modern equivalent and the house repainted. In replacing guttering a leaf guard can be fitted as minor or trifling addition to asset as a whole.
  • Fence is replaced using modern equivalent materials. Can add a gate to new fence as minor or trifling improvement.
  • Fire alarm installed to comply with new requirements of local council. Not an improvement as minor or trifling.


  • Pergola built to create outdoor entertaining area.
  • Addition of swimming pool or garage.


  • Integrated home automation system installed including electronically controlled lighting, multi-room audiovisual distribution and security system.
  • House extension to add further bathroom.
  • Cyclone damages roof of house. Replacement of roof in its entirety with modern equivalent is a repair.
  • If superior materials are used it is a question of degree as to whether changes significantly improve state or function of asset as a whole.
  • Addition of second storey to house at time of also replacing roof would be an improvement.
  • If fire destroys a three bedroom residential house. Rebuilding broadly comparable house is not an improvement as it restores asset.
  • If superior materials, fittings or appliances are used it is a question of degree as to whether significantly improve state or function of asset.
  • Rebuilding a residential house that is not broadly comparable to that destroyed is an improvement. If the funds to rebuild are from an insurance company and not from borrowings this does not affect the LRBA.
  • Residential house acquired under an LRBA and rented out for a number of years. The area is now a "real estate hot spot".
  • Decision to renew kitchen which, although functional, is significantly out of date and showing wear and tear. The design of kitchen is improved and modern equivalent, rather than superior, materials and appliances are used. Changes do not significantly improve state or function of asset as a whole.
  • Residential house is acquired under an LRBA and is rented out for a number of years. The area is now a real estate hot spot.
  • Decision to demolish house. Rebuilding a residential house that is not broadly comparable is an improvement. However, if the funds to rebuild are not from borrowings this does not affect the LRBA.

Farm (on single title) is the single acquirable asset under an LRBA. At the time of entering into the LRBA the farm includes one set of cattle yards, 4 bores including windmills, tanks and troughs and 3 km of fencing:

  • Replacing a section of cattle yards or existing fencing is a repair.
  • Ensuring bores, windmills, tanks and troughs continue working is repair or maintenance. This would include laying new pipes between the tank and trough to replace old pipes.

Each of the following further additions is an improvement:

  • A further set of cattle yards;
  • A further bore, tank;
  • A windmill and trough;
  • A further dam; further shed;
  • A further 2 km of fencing.
  • Machinery or equipment item of earth moving equipment acquired under an LRBA. Immediately after its acquisition money borrowed under LRBA is used to fund repairs to hydraulic system of the asset to return it to its full functionality. This would be a repair.
  • A major overhaul of the asset is carried out with all significant parts of the asset being replaced. This is likely to be an improvement as changes have significantly improved the state or function of the asset.

Note that the improvements listed above could be carried out provided that the DIY fund uses its own money (and not borrowed money). According to the Commissioner, these improvements would not fundamentally change the character of the asset to such an extent to result in a different asset.

There are many rules surrounding the investments that a DIY super fund is allowed to make, and many traps for the unwary. Anyone with a DIY fund who contemplates investing in property should seek professional advice.

Terry Hayes is the senior tax writer at Thomson Reuters, a leading Australian provider of tax, accounting and legal information solutions.

Five strategies for SMSFs investing in property

Friday, July 27, 2012

SME owners should now have more confidence about arranging for their self-managed super funds to borrow to acquire their business premises and other investment properties – provided the assets measure up as quality investments.

This follows the recent release of a self-managed super fund final ruling providing a detailed explanation of the ATO’s interpretation of the SMSF borrowing rules in relation to the purchase, maintenance and improvement of geared assets.

Undoubtedly, many SME owners have been reluctant to gear an SMSF to acquire their business premises because of uncertainty about how the ATO, as regulator of self-managed super, may interpret the borrowing provisions in superannuation law.

The uncertainty – which largely arose after the tightening of the SMSF borrowing laws several years ago – mostly related to repairs and improvements to geared property, as well as the gearing of properties involving more than one title.

Countless SME owners have long favoured holding their business premises in their family self-managed funds. But it is understood that doubt about the ATO’s interpretation of the SMSF borrowing laws has deterred some from proceeding with the strategy.

Business real estate – such as the premises of a family SME – is among the few types of assets that SMSFs are permitted to acquire from their members and other related parties. Further, business real estate is one of the few types of assets that funds can lease to related parties – including fund members and their businesses – without a limit on its value.

SMSF trustees in general are likely to feel more comfortable about borrowing to invest in residential and commercial property now that the ATO has issued this final ruling.

While the final ruling largely confirms the main points made in a draft ruling issued in September last year, there are some significant clarifications and additional examples.

Here are five strategies for SMSFs that are considering gearing to buy property:

1. Don’t waste time on an unnecessary clash with ATO

The final ruling provides wide perimeters for SMSFs wanting to buy, maintain and improve a geared property without breaching the borrowing laws or upsetting the regulator.

In short, this gives SMSFs a solid base to work within without having a costly and time-wasting dispute with the regulator.

Meg Heffron, co-principal of SMSF administration group Heffron, won’t go as far as saying that the final ruling provides a definite rule book for SMSFs with geared property – “but we are probably a lot closer to it than we have ever been”.

As Heffron says, circumstances will inevitably arise with geared SMSF properties that are not covered in the final ruling.

2. Borrow to invest with more confidence

This is because the final ruling confirms that the regulator will provide SMSFs with a fair degree of freedom within the borrowing laws when carrying out repairs and improvements to geared property.

Heffron is convinced that the ruling will give SMSFs more confidence about borrowing to invest in property.

This marks quite a turnaround for the prospects of holding geared property in SMSFs.

Almost two years ago, amendments to superannuation law toughened the laws about borrowing to invest through a SMSF. After July 7, 2010, an SMSF could:

  • Only acquire a single asset – not multiple assets – under a borrowing arrangement.
  • Could only drawdown on a loan (entered into after July 7, 2010) to make repairs, not improvements to a geared property.
  • Could not make a capital improvement to a geared asset that was extensive enough to have created a new or replacement asset.

Heffron says her “gut reaction” to the ATO’s initial views on these amendments were that it would be almost impossible for an SMSF to borrow to buy property. And she had regarded the ATO’s interpretation at the time as “a ban by stealth” on future gearing of property in an SMSF.

But the release of the final ruling together with its earlier draft has confirmed how ATO has taken a much more pragmatic and much less restrictive approach.

It is taking a more realistic attitude about what is a geared single asset, the difference between repairs and improvements, and about the extent of improvements will lead to a new asset being created.

3. Feel more assured about borrowing to invest in properties covering more than one title

This can be a key factor for SMSF property investors because many properties are on multiple titles.

Take the classic example of an apartment that has a car space on a separate title or a factory that happens to be built over several titles.

Following the 2010 amendments, ATO’s initial view was that a property with, say, two titles equated to two separate assets and could not be acquired under the one borrowing arrangement.

This meant that many properties were simply considered unsuitable for gearing through an SMSF.

But under the draft and final rulings, Heffron says the ATO takes a broad interpretation of what is a single asset. “The ATO takes the view that where the two cannot realistically be separated, they will be treated as a single asset for this purpose,” she explains.

In the ruling, the ATO gives the example of a factory that is built over three titles would be treated as single asset that could be acquired under a single borrowing arrangement.

And the ruling gives the example of an SMSF that wants to gear to buy an apartment and its car park, that are on separate titles on the same strata plan, yet state law specifies that the two cannot be registered separately.

Under the final ruling, the ATO regards the apartment and its car park as a single asset that can be acquired under the same borrowing arrangement.

4. Carry out quite extensive repairs to geared property

The final ruling clearly explains the ATO’s views in details about how far repairs can extend before reaching the point of becoming improvements. This is a vital distinction for gearing a property through an SMSF.

Martin Murden, a director of SMSF consulting for services provider to accountants Partners Group in Melbourne, suspects that uncertainty about the ATO’s initial interpretation of the difference between repairs and improvements had caused much concern among SMSFs.

“I believe people can now determine before proceeding [with repairs or improvements] whether their actions are going to result in a problem with super legislation and regulation,” he says.

Under the 2010 amendments, as discussed earlier, SMSFs could only drawdown on a loan to buy and maintain an asset – not to improve it.

This made the different between repairs and improvements even more crucial. And the question immediately arose: When does building work on a geared property reach the point of going beyond a repair to become an improvement?

“These issues will always be regarded as a matter of degree,” comments Heffron, “but the ATO clearly envisages quite a wide range of activities which might incidentally add to the value of the property falling into the ‘repairs’ category.”

“Replacing or rebuilding with ‘modern equivalent’ materials will generally be considered a repair or maintenance, but replacing or rebuilding with superior materials is potentially an improvement,” she explains.

Crucially, a fund can use its own money to improve a property – within limits discussed in Strategy Five.

5. Carry out improvements to a geared property with more confidence

The challenge for SMSFs is to know how much they can improve a property, such as the fund members’ business premises, without reaching the stage of creating a new asset.

If improvements to a geared asset lead to the creation of a new or replacement asset, the borrowing arrangement would have to be dissolved.

“The ATO originally took the view that improving a property will necessarily trigger the replacement of one asset [the unimproved property] with another asset [the improved property],” says Heffron.

“Like the draft ruling, the final ruling takes a far more liberal position and indicates that, in the ATO’s view, not all improvements will necessarily result in a replacement asset.

“Essentially, the ATO now draws a distinction between improvements that ‘fundamentally change the character of that asset’ and those that do not.”

The ruling gives examples of improvements that would not be regarded as replacing a geared asset. For instance, the addition of several bedrooms, granny flat, extra bathroom, a garage or a swimming pool would be regarded as improvements that do not lead to the creation of a new or replacement asset.

But the ATO ruling states a new asset would be created if, say, a residential house was converted into a restaurant with such changes as the inclusion of a “fully-functioning” commercial kitchen.

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Can I borrow and buy property inside a SMSF?

Friday, July 27, 2012

Can I borrow and buy property inside a SMSF?



by Peter Switzer

I am in my early 50s and we have paid off our house and we want to buy an investment property as we have surplus savings as we both work and pay a considerable amount of tax. I have been advised that we can borrow to buy and renovate a property inside a SMSF and that it could be tax-effective, especially if you wanted to live in the property after we retire. Is this right?

There are a number of issues here — some right but some wrong depending on how you interpret it.

First, I think it can be very tax-effective to buy a property inside your super fund for a couple of reasons. The best reason is that arguably if you held the property until retirement, you could withdraw the house as a lump sum payment. You would avoid capital gains tax, as a fully retired person who has met the right age for a release of super for a pension is in the no tax zone.

Be clear on this, you could not live in the house while it is in the SMSF but you could let it out to someone just like with an investment property outside of super. The SMSF can claim the tax deductions of interest and the costs of the services such as real estate agent fees.

You can borrow to buy the property but you might need a bigger deposit than with a loan outside of a SMSF but you can’t use borrowed funds to renovate the property — you must use money inside the fund.

Another tax advantage is that you can salary sacrifice into your SMSF and use this money to pay off the loan more quickly. If you try to pay off an investment loan for a property using post-tax dollars that could have been taxed at 46.5 per cent compared to the 15 per cent tax on salary sacrificed money in your SMSF, you can see that you would pay a loan off a lot quicker inside a SMSF. If you want to know more about this, have a look at, which has a resource centre that tackles these thorny super questions.

For advice you can trust book a complimentary first appointment with Switzer Financial Planning today.

Important information: This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

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