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Wholistic Financial Solutions provides a lot of essential information and updates regarding the property investment industry. Check this page for the updates.

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.

Related Items :

Extracted From http://www.smartcompany.com.au/superannuation/050040-five-strategies-for-smsfs-investing-in-geared-property/2.html

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 www.switzersuperreport.com.au, 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.

Can I rent a property from my SMSF?

Friday, July 27, 2012

Can I rent a property from my SMSF?

You can not rent residential property from your own SMSF; however in some circumstances you will be able to rent a commercial property if it is for business purposes. The rent will have to be at a market rate and the premises will need to be for running your business.

Can I buy property for my SMSF that I already own personally?

Friday, July 27, 2012

Can I buy property for my SMSF that I already own personally?

In some instances yes, it will depend on whether the property is residential or commercial. You can buy a commercial property that you already own and even borrow against it as long as you meet the borrowing criteria i.e. a maximum LVR of 72% for residential property and 63% for Commercial Property.

If you want to buy a residential property then it must be at arms length and not currently owned by a related party, it must be purchased from and leased to an unrelated third party.

Buying Property through a SMSF

Friday, July 27, 2012

Buying Property through a SMSF

If you are looking to control your Super and are unhappy with your Industry Super Fund returning consistent poor or negative returns like many other Australians you now have more options in regards to a SMSF.

In 2007 the Australian Government made it possible for ordinary Australians to borrow money to buy property in their SMSF.

Before setting out on this journey you must ask yourself 3 simple questions as everyone's goals will differ and each of us is in a unique financial position.

  1. Do you have an Existing Industry or Platform Based Super Fund with a combined minimum balance of $80,000?
  2. Are you looking to control your Super Fund Investments?
  3. Are you looking for a low cost Self-Managed Superannuation Fund Solution?
  4. If so contact us at WFS Canberra for your free SMSF Consultation to see if buying a Property in an SMSF will work for you. www.wfscanberra.com.au

Year End Tax Tips for Property Investors

Friday, June 29, 2012

Year End Tax Tips for Property Investors

n  Documentation – when it doubt – keep the record anyway so your Accountant can claim it if possible.

n  Depreciation – Have you got a depreciation report for every property?  If not, get one.  It is free cash in your pocket.  We use a company that guarantees more cash to you than the report costs

n  Travel – ATO accepts 4 trips per year to the property and maybe more if justified.  Keep travel expenses and diaries.

n   Interest Expenses  - Learn how to maximise tax deductible debt and minimise non tax deductible debt

n  Pre-Pay Expenses – interest & other expenses can be pre-paid 12 months in advance

n   Manage Capital Gains & Losses – if you are selling a property speak to your Accountant first.  An Accountant experienced in CGT can save you hundreds of thousands of dollars by correctly planning Capital Gain

n   Manage Capital Losses – if you are selling an Asset for a Gain are these any Assets you can also sell for a loss to help you minimise the gain?

n   PAYG Variation – get it done now ready for next year. Extra cash in your pocket per fortnight.

Little known Tax Tip for Year End Planning for Business

Friday, June 29, 2012

Little known Tax Tip for Year End Planning for Business

 Increased Instant Asset Write-Off Threshold for business starting July.  Assets costing under $6,500 will be able to be claimed outright rather than depreciated.  This is up from the existing $1000 rule.  So you may want to delay any large purchases till next week. 

Year End Tax Tips for Property Investors

Friday, June 29, 2012

Year End Tax Tips for Property Investors

n  Documentation – when it doubt – keep the record anyway so your Accountant can claim it if possible.

n  Depreciation – Have you got a depreciation report for every property?  If not, get one.  It is free cash in your pocket.  We use a company that guarantees more cash to you than the report costs

n  Travel – ATO accepts 4 trips per year to the property and maybe more if justified.  Keep travel expenses and diaries.

n   Interest Expenses  - Learn how to maximise tax deductible debt and minimise non tax deductible debt

n  Pre-Pay Expenses – interest & other expenses can be pre-paid 12 months in advance

n   Manage Capital Gains & Losses – if you are selling a property speak to your Accountant first.  An Accountant experienced in CGT can save you hundreds of thousands of dollars by correctly planning Capital Gain

n   Manage Capital Losses – if you are selling an Asset for a Gain are these any Assets you can also sell for a loss to help you minimise the gain?

n   PAYG Variation – get it done now ready for next year. Extra cash in your pocket per fortnight.

SMSF and Property

Monday, June 18, 2012

Hello All,

First you tube video has been uploaded:

http://www.youtube.com/watch?v=222bPwA2LxQ

 

Topics include Loans in SMSF. Property in SMSF, CGT in SMSF advantages in SMSF and DIY super. 

Hope you enjoy it!

feel free to suggest topics you would like me to discuss.

 

Catherine

 

SMSF and Property

Friday, June 01, 2012

  A new battalion – property and superannuation join forces?

 

Since time immemorial it has been argued as to whether the benefits of gearing property investments outweighed the tax concessional environment offered by superannuation.  Now the battlefield has changed dramatically.  Why would you choose one over the other when you can have the best of both worlds.  New laws introduced in September 2007 allow Self Managed Superannuation Funds (SMSF’s) to, for the first time, buy geared property in a simple and uncomplicated manner.  SMSF’s can now select a property of their choice, be it residential or commercial, and borrow up to 80% of the value of the property. 

 

The most common investment strategy seen in the baby boomer era was to invest all surplus funds into accessible investments including property and shares and then cashing these in and contributing the funds into super just prior to retirement.  The only disadvantage of this strategy was a potentially very large Capital Gains Tax bill. 

 

However, this strategy has been dramatically hampered by the Governments new contribution rules which only allow $25,000 of concessional contributions per year.  

 

The effect of the new contributions rule is to significantly disadvantage generation X and Y.  It is fair to say that most young singles and young families have better things to do with their money and more pressing needs than to make the most of their $25,000 per year contribution limit.  Then when they are getting closer to retirement and have more surplus funds they will be prevented from, like their pre-decessors, making large contributions just prior to retirement.

 

Why would you buy property in a SMSF instead of personally?

 

For many reasons including;

 

  • you get the benefit of ‘leverage’,
  • a maximum of 15% tax on any rental income in excess of costs,
  • you receive a tax deduction for the loan repayments of principal (which is normally impossible) via salary sacrificing the amount required to cover the shortfall,
  • asset protection – the asset is protected from creditors in the event of a lawsuit or bankruptcy (some conditions apply),
  • the property can still be sold and the loan repaid at any stage,
  • any capital gains on the property when sold will be taxed at a maximum rate of 10% (if asset held for more than 12 months)
  • But the biggest incentive of all – if you keep the properties until age 60 and commence a pension from the fund,
  • any capital gain on the property will be TAX FREE,
  • any rent on the property will be TAX FREE,
  • any income paid out to you will also be TAX FREE.

 

The laws are only new and law complying products are now being introduced and marketed.  It is envisaged that these products will hit the market like a storm once investors realize the potential.  SMSF's are now the largest segment of the superannuation industry and it is likely that this figure will increase exponentially once knowledge of the loan products becomes widespread.  It is also interesting to note that this may be the first time in history that all advisors (financial planners, accountants, auditors, property advisors and mortgage brokers) have a common ground for advising clients.  All advisors have something to gain by assisting clients into these products. It’s not only a busy time ahead for advisors but a time to join forces and put a cease fire on the battle.

 

The team at Wholistic Financial Solutions can assist all trustee of SMSF’s consider this option in regards to borrowing to buy property within their super fund.   Come along to our free information seminar or request a free consultation to discuss your personal situation.  Call Catherine on 02 6162 4546


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