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The New Australian Dream

The Great Australian Dream was once to own your home - and you were set for life. This idea has now developed with society as people prepare for retirement through further investment and one avenue is The New Australian Dream – buying property through a self-managed superannuation fund (SMSF).

This year has seen Australia’s rental crisis deepen as the housing shortage grows, making this investment strategy one to consider. Real Estate Academy CEO Lee Woodward set up his own SMSF to buy the REA’s Central Coast premises, effectively becoming his own blue-chip tenant.

Property vs Shares

The law regarding buying property with superannuation changed in September 2007, opening up a host of new opportunities for investors wanting to diversify their portfolios, particularly in the wake of the 2009 share market losses. Mr Woodward spoke with Jason Plant from Westpac about how borrowing for this type of investment worked and who did it. “We’ve got everything from mum and dad borrowers who are looking to buy an investment property, up to quite complex company structures who are looking at either buying a property outright or doing some restructuring within their own group,” Mr Plant explained. “It’s back to the old adage ‘cash is king’. People who have money tied up in the share market are restricted in what they can do, unless they want to sell those shares for, potentially, a large loss. People who have cash in their SMSFs have a lot more flexibility and aren’t relying on those sell-downs or liquidations to fund any other investment strategies,” he added.

Be your Landlord

Company owners who buy their premises with their SMSF would receive proceeds to pay off personal debts, or make other investments. “It is all completely above board through a trust structure that effectively converted their non taxdeductible debt across to deductible debt in the super fund,” Mr Plant explained, saying the premises was then protected in events like bankruptcy. “They set up a formal lease between their business and the SMSF at market rates, the property moves across at market rates, but they maintain control of the property and become their own tenant so it takes away a lot of that tenancy risk.” There are some restrictions, however, based on the Superannuation Industry Supervision (SIS) Act. This act has a sole purpose test where assets bought for the superannuation fund must benefit the members in their retirement. Put simply, this means if you buy a residential property with a SMSF you cannot live in it. The LVR (Loan Valuation Ratio) is an important point the bank will consider when lending to an SMSF. An LVR is the amount of the loan divided by the amount of the property. All banks have differing ratios for different product classes, but Westpac’s are as follows: residential is 80 per cent, standard commercial is 65 per cent and specialised commercial or rural is 50 per cent or less, depending on the asset class and what it’s used for.

Get Financial Advice

The most important thing to remember when considering any investment strategy is to discuss it with your financial planner. Mr Woodward spoke with Certified Financial Planner and Adviser Scott Wakeham, who said property was a “good investment”. “Over the past few years, particularly in the area of superannuation, the laws have really become much more favourable to investors. A lot of the inflexibility and controls have been relaxed so that now superannuation is a very legitimate way to grow your assets in a tax-free environment,” Mr Wakeham said. For anyone considering using a SMSF to buy property, Mr Wakeham advises them to spend some time putting the process together first. “With this strategy you need to get the professionals together on the finance side, on the super side and on the tax side to make sure that you set up the right structure to facilitate this purchase,” he explained. “The banks are going to want to know LVR, personal guarantees, plus you have a responsibility to satisfy the sole purpose test that this asset is going to be for the sole purpose of providing retirement benefits for yourself.” There are some initial expenses involved in establishing a SMSF, including setting up the trust deed and engaging the right compliance and tax services. “It’s important to speak to a certified planner to assess the fees against what you’re paying at the moment, just to see whether the do–it-yourself model is going to be the best vehicle for your retirement savings. SMSFs are not for everyone and they may not be the appropriate vehicle for some people at this stage for their retirement savings,” Mr Wakeham said. He also advised investors to consider all the risks before taking the plunge with their super. “As financial planners, we’re trained to look at the big picture and to not only focus on the rewards of a particular investment, but also to look at the risk. Some of the things we would look at for clients looking to borrow money, or an SMSF borrowing arrangement, would be to protect that debt,” Mr Wakeham said, adding cash flow could be invested in life or loss of income insurance, which are tax deductible. This way, the property would still be paid off if something happened to you and the asset passed on to your family. “Every part of a particular financial situation has a domino effect on other parts,” he said.

Steps to buying property with SMSF

  1. See your financial planner for a needs analysis
  2. Get a Statement of Advice which details the investment strategy you are looking at
  3. Create your own SMSF with assistance from your accountant or an approved financial planner
  4. Meet with your bank to confirm the budget and the details, such as purchase price, your contribution, interest rates, rental yield and policy guidelines
  5. Form the trustee
  6. Locate the property
  7. Property is valued and bank approval process
  8. Exchange on the property
  9. Trust document and actions are prepared and signed
  10. Settlement

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New Australian Dream