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Buying a Property Through Super

In this episode of the Real Wealth Podcast, Tom Gleeson and Stefan Angelini talk about how you can buy a property in your superannuation. More so, how you can buy a property within a Self-Managed Superannuation Fund (SMSF). The different rules that need to be followed to make sure that your SMSF is compliant.


Tom Gleeson

Hi, everyone. Stefan and Tom here from Angel Advisory. Welcome to another installment of the Real Wealth podcast. So today's topic we're looking at is basically based on demand. We've had a lot of inquiries lately, people asking about owning, buying and owning property through Super. So we want to answer some of the main questions that we've been getting lately and to do that, Stefan Angelini, welcome.

Stefan Angelini

Hi. Hi.

Tom Gleeson

So this will be fun. I mean, I'm going to enjoy it. But you absolutely love property and you love Super, so you're going to kick off

Stefan Angelini

Yeah.

Tom Gleeson

Before we get into the good stuff.

Stefan Angelini

Such adore.

Tom Gleeson

Can you bang at the disclaimer and I'll start a timer. If you go over 10 seconds, I'm going to cut you.

Stefan Angelini

Hello everyone, lovely to see you. Stefan Angelini here. I just wanted to let you know that everything here today is just general information only. Please don't consider as personal advice. If you want any personal advice, please go, because consult your licensed financial advisor. Boom.

Tom Gleeson

That was pretty good. All right, cool. Now the fun stuff. So a lot of inquiries recently. I suppose we got to start fairly broad because there are restrictions around owning property through Super. And we want to introduce the concept of the SMSF, the Self-managed Super Fund.

Stefan Angelini

Yeah.

Tom Gleeson

So do you want to explain how it works with owning property through Super and how that ties in with SMSF?

Stefan Angelini

Cool. Well, let me take it right back. What is? What is Super? How can you hold your Super? So there's 3 main ways you can hold your Super. One is an industry fund, so basically one of these where you're pulling up a whole lot of money. Another way is a retail fund. So a retail fund is where you've got more control of your money. You can control your investments. There's a whole lot of different platforms, more made for people with higher balances in Super who want more control.

Tom Gleeson

Yeah.

Stefan Angelini

And then there's a Self-managed Super Fund where you've got ultimate control, ultimate discretion. But you are the trustee, so you are the person giving the information to the accountant lodging, the tax returns. You're the one that gets in trouble if something goes wrong. But it means that you can do a whole lot more trickier things like buy property through your Superfund.

Tom Gleeson

Yeah.

Stefan Angelini

And that's why that's a Self-managed Superfund. It's the most complex, it's the most expensive to run. Not really at the end of the day, because it's just like their accounting fees. Once you've got a high balance, it's very low because it's more of a fixed cost to run it. But a Self-managed Super Fund is great for people that want ultimate discretion over their Super savings yet.

Tom Gleeson

Yeah. So with the SMSF, there's a little bit more complexity to it, but the options that are available to you are much broader.

Stefan Angelini

Yeah.

Tom Gleeson

So we can put a line through owning direct property through retail and industry. It's only available through SMSF.

Stefan Angelini

Yeah, cool. It doesn't mean you can't own property in other ways, but it's got to be through a manager or a fund manager. So property fund, for example, where you own one of many, there's a professional manager that gets paid for this, but if you want to own that direct asset, 123 Smith Street, I don't know if that's actually an address, but it's got to be. But, yeah, you need to have it if you want your Super have it in a Self-managed Super Fund.

Tom Gleeson

Yeah. And if you live at 123 Smith Street, and you listen to this, we're not trying to buy a house, just an example, no.

Stefan Angelini

Property value just went up.

Tom Gleeson

So in terms of the use of property, we there's one box that needs to be ticked, which is the sole purpose test.

Stefan Angelini

Yeah. So basically, sole purpose test in Super means that is it for the ultimate purpose of earning an income for your retirement benefit. So he's got to make sure that he said basically what that means is it an investment, are you buying it for investment purposes?

Tom Gleeson

And what that means in reality is if you're going down the path of buying property through your SMSF, you're not planning on living in it and you're not planning on holidaying in it, because that doesn't meet the sole purpose test. We're aiming to build your Superannuation balance for retirement. We're not buying you a house.

Stefan Angelini

Yeah. That's right. Eventually, if you want to get tricky about it, you can eventually pull the property out of your Superfund.

Tom Gleeson

Yes. Down the track.

Stefan Angelini

If you want to use it for your own purposes.

Tom Gleeson

Yeah, you can. I don't think we have. Property in SMSF.

Stefan Angelini

I do. I do.

Tom Gleeson

So the next one is, and I think this has been happening, a question that we've been getting a lot, is can you use debt to buy property through the SMSF?

Stefan Angelini

Yeah. Yeah, you can. There's a certain structure of it that it's called Limited Recourse Borrowing Arrangement. So an LRBA, but basically there's a few banks out there. There used to be a whole lot that will allow you to borrow money to your Superfunds. Not to you, to your Superfund. For the purposes of purchasing a property, in terms of, like, LVR's loan to value ratios, you can borrow up to 80%. People don't think you can, but you can for resi for commercial. A lot of the times it is a bit lower and there's not many providers out there, which is why you're seeing interest rates that might be in the high 60s all the way up to 8 or 9% for a property in Superfund. For a property in a Superfund. So interest rates are quite expensive now just because they're a specialized product.

Tom Gleeson

So the answer to some of those questions can you it's yes.

Stefan Angelini

Yeap.

Tom Gleeson

How it's LRBA, Limited Recourse Borrowing Arrangement and what are the effects on cost? It's cost more.

Stefan Angelini

Cost more.

Tom Gleeson

Yeah.

Stefan Angelini

Yeah. You weigh up. All right, well, is it worth borrowing money to buy that property? Is there capital growth that I see that it's going to happen? What's the rental return looking like? Because obviously the rental return probably won't cover the interest cost. If you're borrowing 80%, if rent returns at 3% and you're borrowing at 9%. So there's a bit of a differential there. So can you afford it? And that's part of the assessment that we do. Can you afford to hold the property? And what if things go belly up?

Tom Gleeson

Yeah.

Stefan Angelini

What are you going to do?

Tom Gleeson

Yeah. So I suppose the next thing to touch on is the structure and any other restrictions that there are on the debt.

Stefan Angelini

So the structure is when it comes time for borrowing through your Super, you need to set up a Self-managed Super Fund and then you need to set up what's called a Corporate Trustee, so you can have individual trustees. But instead of this, you need a Corporate Trustee where the members are the directors, and you can have up to 6 members within a Superfund. So 6 people can hold money in a Superfund.

Tom Gleeson

Yeap.

Stefan Angelini

Now, including that this is called a Limited Recourse Borrowing Arrangement. So there's a limited recourse, which means the lender can't go back and get all your assets.

Tom Gleeson

Yeah.

Stefan Angelini

Which is why a lot of banks don't want to do it anymore. It's really not worth it for them. But you've got to set up a separate thing called Bare Trust, which sits within the SMSF, which is a separate structure that ends up borrowing the money that creates the extra protection for your Superfund. And that's, I guess, the complexity for the structure that there is. The Corporate Trustee and this Bare Trust needs to get set up to own this asset. And what was your other question?

Tom Gleeson

Are there any other restrictions on the debt?

Stefan Angelini

Yeah, so when you use debt for a property purchase, there's restrictions on what you can do to the property. So in terms of renovations, you can give it a little paint, you can do cosmetic things, but you can't go in there and change walls and do a development or put your own money into it to extend it. There's a lot of rules around what you can do to it. So it's just really important to make sure you get the right advice, talk to all the right people if you're going down this track before you start trying to develop or add too much value to the property. Because then you're in a game of almost like property development.

Tom Gleeson

Yeah.

Stefan Angelini

And that's sort of like a no no when you're borrowing money through Super.

Tom Gleeson

Yeah. So that covers a lot of people wanting to buy property through the SMSF. What we want to look at now is existing property something that's already owned? Can it be transferred from ownership perspective into the SMSF?

Stefan Angelini

Yes, but no. Clear as mud. I've been using that thing so much lately. Clear as mud.

Tom Gleeson

I hear it all the time.

Stefan Angelini

Yeah. Also, so anyway, can you transfer a property into your Superfund if you own it? Residential properties? No, you cannot. If it's a business, real property, basically a commercial property, is rented out for business purposes. Yes, you can. And when you do that, there is some implications around that. So if, let's say you bought the property for $500,000 and then it's now worth a million dollars, you need to transfer it in at market value to get a proper valuation.

Tom Gleeson

Yeap.

Stefan Angelini

Because you can't be trying to trick the system.

Tom Gleeson

Yeap.

Stefan Angelini

That's a no no. That means that you will have capital gains, because essentially a change of ownership, it's like you're selling it. So whatever structure you hold it in before you transfer it, that's a capital gain event.

Tom Gleeson

Yeap.

Stefan Angelini

So make sure you're figuring out, what am I going to do? Given I've got this gain, it's going to impact me. Is it still worth it after doing that? And the second thing is, the benefit is, within a lot of states, because it's like the same beneficial ownership they call it, you don't necessarily have to pay stamp duty. So if you think of stamp duty in Victoria, and think about it as being .55% of the sale price.

Tom Gleeson

Yeap.

Stefan Angelini

So it's million dollars, $55,000 would have to be the stamp duty cost.'

Tom Gleeson

Yeap.

Stefan Angelini

Because you are the person transferring it to your Superfund. You're sort of like, if you own it in a certain structure, then you won't have to pay stamp duty on it.

Tom Gleeson

That's because it's your personal name to your SMSF.

Stefan Angelini

Yeah. So it's got to make sure that it's in family trust can't really happen. I don't think anyway,

Tom Gleeson

Yeah.

Stefan Angelini

Go get some really good advice from someone smarter than me. But a lot of the time, if it's in your personal names, and yet it's possible, and you can get that stamp duty exemption as long as you tick a lot of the boxes under the regulators or the revenue departments.

Tom Gleeson

Yeah.

Stefan Angelini

Certain framework that they work in.

Tom Gleeson

Because in effect, it's not really transferred.

Stefan Angelini

Yeah.

Tom Gleeson

So it makes sense no stamp.

Stefan Angelini

That's right. But if you want to transfer it into the zen, then you got to get into the rules around Super. How much money can I get in so concessional contribution scenario and then non-concessional contributions, so about ticking these boxes. So what's a tax deductible contribution and then what's a not a tax deductible contribution? How much can I use? So if you got a property worth a million bucks and you're the only person in that Superfund, you can't get a million dollar property into a Superfund, just by transferring it.

Tom Gleeson

Yeap.

Stefan Angelini

So it needs to be another structure and then you play off debt and things like that. So it becomes quite complex when you want to start transferring properties into Super. But the reason people might want to do it is because eventually taxes in Super are quite low. So it can be quite tax beneficial to own property through a Superfund.

Tom Gleeson

Well that leads us into final, but most important, what happens when you sell. So we talked about the transfer of ownership in what happens when the time does come to sell that property from your SMSF.

Stefan Angelini

Also look at taxes, right? So you own in your personal name, you get a 50% capital gains tax discount if you've got it in your Superfund. Normally your Superfund in accumulation has a 15% tax rate.

Tom Gleeson

Yeap.

Stefan Angelini

But when you own an asset for longer than 12 months, you also get a discount in your Superfund name. So you pay 10% tax on the sale. So think about it again. If you make $500,000, pay 10% tax. So you sell it for a mil.

Tom Gleeson

Yeap.

Stefan Angelini

$500,000 gain.

Tom Gleeson

Yeap.

Stefan Angelini

Take off 50 grand for taxes, your net benefit is $950,000.

Tom Gleeson

Yeap.

Stefan Angelini

But certain rules in Super that if you meet a condition of release being you're over 60 years old, you have seized employment, you're retired or you're 65 or over, then your Superannuation can become account based pension under a certain level of assets and therefore the sale of that asset does not have any tax implications. So you sell it for a million dollars, you got a $500,000 gain, but the tax is zero. So you keep a million dollars. And that's the main driving force behind if you know, if you believe that property is always going to increase.

Tom Gleeson

Yeap.

Stefan Angelini

Then when sell it, if I do need to sell it. Because a lot of times when you retire, you might need access to that million dollars that's sitting there just to fund your retirement, because you're not earning an income anymore. And therefore, sell the asset, pay no tax on it, and you're in a really good position.

Tom Gleeson

If you can hang on to it for that after you've met that condition of the lease.

Stefan Angelini

Yeah. And that's why we love Super because keeps your taxes low. If you don't need access to the property or the income from the property, then hold it through a tax effective structure. But it's just rules and regulations around it because it is quite tricky.

Tom Gleeson

Yeap.

Stefan Angelini

We're seeing a lot of people come and buy just using cash in their Superfund, so using multiple parties, bringing them together, building up the cash balance and saying, well, property is just taking a big hit. I want to use this as an opportunity to get in.

Tom Gleeson

Yeah.

Stefan Angelini

Especially because equity markets have come back.

Tom Gleeson

Yeap.

Stefan Angelini

So much since the start of the year.

Tom Gleeson

Hopefully, that's answered a few of the sort of broader questions. There's always going to be more, though, there's going to be more complexity and more questions that need to be answered when it comes to setting up the SMSF, buying the property, selling the property, etc.,

Stefan Angelini

Yeap.

Tom Gleeson

Which we're on hand for but it's a good start. It's answered a lot of questions and obviously to go throw a bucket of cold water on Stefan.

Stefan Angelini

This space always changes. If you're got any questions about buying property through your Super, how to do it? How do I get up to 6 members in a Superfund to buy a property or own it. I've got a property that my business rents. I want to buy a property through my Superfund and have my business rent it from there. We do this kind of stuff all the time. So if you got those kinds of queries, reach out to [email protected] and we'll get one of our experts to have a chat. Thanks, Tommy.

Tom Gleeson

Excellent. Thank you very much.

Stefan Angelini

All right, thanks for listening.

Tom Gleeson

Cheers.

Stefan Angelini

See you guys soon.

Tom Gleeson

Bye.

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