Sounds like you have enough in super to use a SMSF and a limited recourse loan to purchase a property in your SMSF, however your SMSF will not be able to acquire a residential property that you currently own.

If you are forced to sell your IP there is nothing stopping you purchasing a different property with a SMSF to keep your property portfolio heading in the right direction.  With $170k you should be able to find something that will be neutrally or positively geared.

Hi R F I

I have responded to your post over on Invested: http://www.invested.com.au/4/best-way-start-out-trusts-38274/

Terry is on the right track.

You can distribute up to $3,333 to minors under 18 (including your children or even nieces / nephews etc)

If you are in VIC you can probably transfer the property into a trust with only nominal stamp duty (i.e. virtually no stamp duty – just legal fees) – but you need to plan for any capital gains on the transfer.

Hope this helps!

p.s. Congrats on having such a head start – you are in a great position at such a young age.  Quietly jealous over here.

Hi ASB,

To enable your SMSF to purchase a property from a member, it must be considered 'business real property' – meaning it has to satisfy the business use test which is: "used wholly and exclusively in one or more businesses"

SMSF Ruling 2009/1 deals with the definition of 'business real property' in more detail.

The following example (#13 of 37 examples) would be relevant to your situation:

Example 13: Letting holiday flats – no business

• Ms Hend owns 2 holiday flats, which she lets for short-term accommodation at a popular holiday destination. Ms Hend and her partner manage and maintain the flats, which includes cleaning and repairing the flats, and financial tasks such as banking.
• Ms Hend and her partner set up the Hend SMSF and both become members of the fund. They propose that the Hend SMSF acquire the flats from Ms Hend.
• The elements of repetition and continuity of acts and transactions indicate the possibility of there being a rental property investment business being carried on. However, the scale of the operation is such that it is not considered to be a business. As there is no business conducted in respect of the premises, the property is not business real property . Any sale of the flats to the Hend SMSF would contravene the related party asset acquisition rule in section 66.

Based on the above, your unit in the snowfields would not be considered business real property.

The only other example I could find from Ruling SMSF 2009/1 is the following (#19):

Example 19: Strata titled hotel complex

• Mr Chou owns a studio apartment in a strata titled hotel complex. The contract for purchase includes a requirement that the unit is leased for fifteen years to Xin Pty Ltd, hotel business, with rent paid to Mr Chou based on occupancy of the complex. The contract specifies that the freehold owner has no right to reside in the unit during the time it is leased to Xin Pty Ltd.
• Mr Chou wishes to sell the unit to his SMSF.
• The real property is used wholly and exclusively in Xin Pty Ltd's hotel business and is business real property of Mr Chou for the purposes of acquisition. However, if Mr Chou or a related party of the SMSF intended to stay in the unit at any time, there may be in-house asset implications.

You haven't provided enough information to enable me to be able to determine whether example 19 could apply to your situation.

It really comes down to whether there is a business involved – i.e. if there was one company that rents a large number of units in the same area an then handles all the bookings etc (similar to example 19 above) then it may be considered business real property as it is used wholly and exclusively in that business.

There is no work-around solution if the property cannot be considered business real property to enable you to acquire that particular unit.

There is nothing stopping you selling your unit to a third party and buying another completely different unit (can't be the same unit) in the name of the SMSF from an unrelated party – however you would obviously incur additional selling costs which is not ideal.

The other bigger picture issue is diversification – you haven't mentioned what other investments your SMSF has apart from the other unit it already owns – so maybe two very similar units at the same location are not ideal in terms of the risk aspects?  I know the yield seems good – so you will have to balance that against any potential risk.

I hope that the above is helpful and provides some clarification.  If you have any other questions please let me know.

Kris

Hi guys,

Just a quick update on this issue.

In September the ATO discussed this issue (and numerous other SMSF borrowing issues) with superannuation industry representatives at their NTLG superannuation technical sub-group meeting.

I have posted an article about this issue in more detail on my blog:

http://www.evolvemysuper.com.au/strategies/borrowing/can-you-renovate-a-property-purchased-under-a-smsf-limited-recourse-loan/

Hopefully we will have a resolution on this issue early next year.

Hi Mike,

If you have read anything from Robert Kiyosaki you should have learned the following:

– buy assets
– that produce income
– focus on cash flow
– structure your investments correctly to reduce tax and protect your assets

The reason 'astute' property investors probably don't pay much tax is because a lot of them are so astute that they have geared themselves so negatively that their biggest expense is tax deductible interest.  Add to that tax deductible depreciation and viola – you are paying bugger all tax.

I am not saying negative gearing is the root of all evil – in the short term it is not too bad and in times of strong capital growth it is an appropriate strategy.  If possible try to find a way to be cash flow positive or neutral but still have your future investment properties generating a tax loss (thanks to depreciation).

You also should find a good accountant that earns their keep through the tax saving advice they can give which is appropriate for your situation.

Also ensure that your decisions are based on the quality of the investment rather than primarily on the taxation implications of the investment.

I am sure many other people on the forum can provide some general tips and direction – so keep reading and educating yourself and don't rush in to any investments – there are always bargains to be found.

Good to know you are grateful Grateful!

I have read the Explanatory Memorandum that came out with the 07/07/10 changes and my interpretation is Yes – it can be done provided any improvement / renovations are NOT so significant that a replacement asset is created.

The key issue as I read it is:

Circumstances not permitting a replacement asset include:
– the replacement by way of improvement of real property

So I guess the big question is – how much improvement to a property will create a 'replacement asset' ?

I have put forward the above interpretation to some other SPAA Specialists and they have agreed with my interpretation.

I know this issue is something that SPAA has questioned the ATO about recently – so hopefully we will see an ATO interpretative decision on this issue in the coming months to give some certainty to SMSF trustees.  Until this happens each SMSF trustee must take their own advice and make their own decision.

In the interim a private ruling may be applied for if you want specific advice on your situation.

All the best!

Hi Emmy,

I have recently started using Depreciator for my clients and I have been impressed by the service and how easy it is to organise.

I have also had good feedback from my clients.

Prices are $500 to $800

That is great news Number 8

Good luck with everything – I hope everything runs smoothly with the bank.

Due to the typically higher yields, commercial properties work really well when purchased by a SMSF using a limited recourse loan.  The banks typically will only lend up to 65% on a commercial property when purchased by a super fund, and based on this LVR and a gross yield of 9% to 10% a lot of the time the property will be cash flow positive (or maybe only slightly negative).

Cash flow positive property is perfect within a SMSF as you can quickly build up surplus cash via the excess rent and contributions (including salary sacrifice) – which in turn can be used to purchased more property or diversify into other types of investments.

It is good to see the costs coming down in regards to the set up / structure and advice surrounding a SMSF purchase using borrowings.

One cost that hasn't come down however is the bank legal costs – $2,000 plus is such a blatant rip-off – I mean how long does it take to review a SMSF trust deed and the associated docs such as the contract and the bare trust docs – a couple of hours max? 

I encourage anyone involved in assisting people purchasing property using SMSF loans to put pressure on the banks to make them put pressure on their lawyers regarding these costs – if the banks want the business they will need to move.  I know it is unlikely that it will make an immediate difference – the banks have too much power – but I am feeling unreasonable, and as George Bernard Shaw said:

"The reasonable man adapts himself to the world: the unreasonable one persists in trying to adapt the world to himself. Therefore all progress depends on the unreasonable man."

And I want some progress!

It is always good advice to shop around when looking for a loan provider – and SMSF limited recourse loans are no exception.  I have a comparison of current SMSF loan providers here.

I would be interested to hear Number 8's feedback through the process and whether he comes up against any hurdles / issues.  Feel free to share mate!

On a related topic, there is a company up in Brisbane which have a total upfront cost of $1500 inc GST to set up and process a SMSF limited recourse loan.  The amount includes all bank legal fees, but doesn't include any advice by an accountant / SMSF specialist (including SMSF set up) or the banks loan establishment / application fees. 

They use St George and have managed to negotiate a better deal for their clients.  They have a couple of noticeable differences to a typical SMSF limited recourse loan (instalment warrant) structure however:

• They have their own special purposes trustee – which holds the title as trustee of your custodian trust for the benefit of your SMSF
• They inter-twine their trustee into the loan / title – meaning if you want to refinance down the track you will basically need to set the whole thing up from scratch – which will be challenging even if possible
• They charge an ongoing % fee on the value of the underlying property
• They handle some of the administration as their trustee company is on the title and also look after any changes if required to ensure the structure stays compliant with any future change to the SIS provisions surrounding limited recourse borrowings

Overall this type of structure has some good points, but it also has some drawbacks – it is up to each individual investor and their advisers to determine whether it is right for them.

I was reading some old posts of mine on another forum – and I was predicting that purchasing property using your SMSF with borrowings would become more commonplace, and that once mortgage brokers, real estate agents and anyone else with a vested interest in property and loans got their heads around how it works we would see it become more mainstream. 

I think I can safely say I was right!

Once again if anyone else has any questions about buying property with your super please throw them out there!

Hey Tim,

Yes – that is correct – bare trust, property trust, debt trust, custodian trust all names for the same thing when talking about SMSF borrowing / limited recourse loans.

You need another company (with it's own ACN – not ABN) in addition to the trustee company of the SMSF for most lenders.

The following table is a quick reference to what the lenders currently require in regards to trustee companies for SMSFs and custodian trusts with limited recourse loans:

One of the reasons, I believe, that at least one of the trustees must be a company is that legally individuals can't transact with each other when they are acting as trustees – but a company as trustee and individuals as trustees can.

Looking at the above table, it is prudent that you have trustees companies for both your SMSF and your custodian trust.

There are a couple of articles on my blog (see link in signature) about using trustee companies if you want to learn more.

Any other questions let me know.

Try the August issue – pages 44 to 48

Worth a read. 

You will see a pattern with all the guys featured – I will give you a clue – starts with 'cash' and ends with 'flow'

This is the first time I have actually bought API magazine – it seemed a good read – I just had to ignore the gaping holes in the article about buying (geared) property with your super on pages 78-79.  I guess editorial considerations need to be taken into account!

Sorry – off topic!