Hi Cath,

The previous comments are on the right track.

You can utilise the monies in your SMSF as the deposit on an investment property – and it is a superb strategy if you have support from people who know what they are doing in terms of the structure and getting the loan across the line.

What you really need to know is that in general, your SMSF cannot borrow. 

However, one of the exceptions to the rule is when a 'limited recourse loan' and an 'instalment warrant' structure is utilised.  As Ben mentioned you also need an intermediary trust (typically with a NEW company as trustee) which holds the title of the property.

You don't need to know in detail about all the technicalities around how it works – however as trustee (director of the corporate trustee of your SMSF) you do need to have a basic understanding about how all the pieces fit together. Unfortunately no written explanation of diagrams can easily explain it – but I have recorded a short video / animation which does give an overview of how it all work. 

You can find it here: http://www.evolvemysuper.com.au/strategies/borrowing/how-to-buy-property-with-your-super-video-overview/
It is also on Youtube here (you can make it higher resolution which makes it easier to read).

***Apologies is the video comes across as amateurish – I focussed on the quality of the content rather that flashy production values***

I have also posted a lot of notes that provide more information that was not included in the video underneath on my blog (the first link – above).

For more information I have also shared a really good podcast / audio interview from Lee Woodward from the Real Estate Academy here http://www.evolvemysuper.com.au/strategies/podcast-interview-purchasing-investment-property-in-your-smsf/

Both the video and the audio interview / podcast are in plain English and not too technical.

Obviously using your current superannuation as the deposit on an investment property (or two or three) is a great strategy for many investors – simply because you don't need to do the hard yards saving a deposit – you probably already have it! 

But this big advantage comes with a some small disadvantages you have to be aware of:

– it will cost you more – you already have a SMSF with a corporate trustee – which is good, but the set up of the trust and trustee to hold the title of the property will cost you, and as previously mentioned the loan rates normally have a small premium on them

– you can't re-borrow against increases in value/equity – you need to physically sell the property to realise the gains to re-invest to get the snowball effect happening

A couple of tips (I have been involved with a number of these loans):

– cash (flow) is always king – but more so with SMSF loans / instalment warrant arrangements – ideally you want any geared property within your SMSF to be cash flow positive to enable it to look after itself without having to be dependant on extra cash coming in from contributions etc

– you need to have insurances – not just on the property – but on yourself and other members of the super fund – so if you need to payout any disability or life insurances you are not forced to sell the property for whatever you can get for it in a fire sale.  It will also be looked at as part of the loan application for the SMSF – so it works in your favour having some insurance cover.

– don't borrow too much – this kinda relates to my first tip, but it is important so I thought I would repeat it!

– you can refinance in the future – and more lenders are starting to bring out these types of loans

– the strategy of using your super to buy investment property is not mutually exclusive with other property investment strategies – you can do property inside super and outside at the same time!

At the start, when looking at obtaining a loan for your SMSF it can seem overwhelming – but honestly, once you get your head around it and all the tax advantages that come with it (short term and long term) it is a fantastic wealth creation strategy.

If you (or anyone else) has any questions about SMSF loan / instalment warrants please post your questions – myself and other members of the forum would be happy to answer them.

Apologies for the blatant self-promotion of my blog – I just felt it was the easiest way to answer the questions!

Thanks and good luck
Evolve

(I am also in the process of writing an instructional / 'how to' ebook on this subject – to be informed when it is available for download please sign up for my email newsletter by clicking here).

Terry has it right.

If he is still an Aussie resident for tax purposes then he declares all worldwide income (i.e. including PNG income with a credit for PNG tax paid).

Negative gearing runs as normal.

Your accountant should be able to confirm all this and give specific estimates as they will know more detail about your personal tax situation.

Good luck with everything

Kuradji – can you give us an update – how has this purchase progressed?

Excellent response Terry,

If I can put a practical application on your suggestions:

– I would utilise a unit trust structure
– I would set up a company to be trustee of the unit trust with both yourself and your mate as the directors and shareholders
– Miike to drawdown on your equity as a separate loan and use the funds to purchase units in the unit trust ($1 per unit)
– Your mate to purchase the equivalent amount of units using his cash
– The combined capital introduced used as the deposit for the target property
– Additional units can be purchased by both parties in the future to provide an additional cash injection to fund renovations and expenses (you can stagger this and have an agreement that you can each contribute an even amount to keep it 50/50)
– The trustee of the unit trust will borrow in its own right to fund the rest of the purchase (i.e. borrow up to 80% even if you don't need to and keep the excess cash to fund renovations / loan repayments etc)
– Miike will get negative gearing benefits as the interest on the separate loan to purchase the units will be deductible

As per Terry, you will need a unit-holders agreement. It will cost you money in legal fees, but it will me money well spent.  The general processes and decisions can be worked out before hand between you and your mate, and then you can visit a lawyer to formalise it.

The above structure is not perfect – you will still run into problems if one of you wants to exit the arrangement and the units themselves as an asset could potentially be at risk if one of you either has a family law issue or faces personal bankruptcy.

You mention that in the future when appropriate you would want to utilise any built up equity to fund other projects (i.e. re-borrow and use $ for deposits).  With this structure it may be a good idea to keep a reserve of equity available to cover 50% to 60% of the net equity (property value less loan secured against the property) – this will enable the unit trust to be re-financed in the future to pay out either part if one decides to dispose of their interest.

A key issue I see is if one of you guys can't match 50/50 with the required cash – i.e. if any renovations run over budget and one of you has to put more cash into the venture than the other – I have seen this happen and it can rip friendships apart.

At the end of the day it will be easier to transfer any units than a portion of a property title – especially if you have a corporate trustee as both Terry and myself have suggested.

Although probably not relevant to you guys (based on age) I have seen in practice two unrelated parties invest into a unit trust with 50/50 interests utilising their superannuation via a SMSF to fund the purchase of the units and provide the seed capital for a similar venture and the unit trust borrowing. 

This can work as the super laws state it is allowable provided each party doesn't have more than 50% of the income and capital entitlements – exactly 50% each is OK.  A private ruling from the ATO and extensive professional advice obviously highly recommended though!

I hope the above information provides some direction – if you have further questions please ask.

I would also like to see other forum members contribute their expertise as 2 brains are always better than 1 …..

Yeah – this is a pretty common question.

Lets look at the options:

1. Buy in your personal name:

– if negatively geared then you will reduce you taxable income and save you 37 cents in the dollar (plus 1.5 cents medicare) for every dollar the property is costing you – this is good and could even make it cash flow positive once you take into account depreciation etc

– When you sell, if there is a capital gain then you will get smashed with capital gains tax because the net gain (after 50% general discount) simply gets dumped on top of your already high income and gets taxed at that rate – and based on your current income it wouldn't take too much to push you up into the 45% tax bracket ($180k plus) – this is bad

– if you have job where there is a possibility of someone trying to sue you, then having assets in your own name is not good as it puts them at risk

2. Buy in a companies name

– No CGT discount – this is very bad for a long term capital appreciating asset like property

– Doesn't help your personal tax situation

3. Buy in the name of a trust

– Great for positive or neutrally geared properties as you can distribute the surplus income to beneficiaries on a lower tax bracket (such as your wife or $3333/yr to your kid)

– CGT discount available (provided distributed to an individual)

– Not so good for negative gearing

Other options:

4. Hybrid trust / property trust

– If correctly structured with the right loan / lending set up you could get the best of both worlds – i.e. deductions on a loan in your personal name but ownership held in a legally separate (protected) entity with the ability to distribute future income and capital gains in a tax effective manner to lower taxed beneficiaries

– essential to be set up correctly

5. Self managed super fund

– best possible tax treatment (15% on income 10% on capital gains – or 0% for both if you are in retirement)

– negative gearing benefits available via salary sacrifice

– you likely already have amounts in super that can be used as a deposit

– flexibility to do a combination of bank finance (in SMSFs name) and member finance (you on lend to the SMSF also) which will enable you to re-coup some capital back into your own name via the SMSF repayment the member loan back to you

– excellent asset protection

– you can't re-borrow from any built up equity and use it for further property deposits – you need to sell and realise the gains/ profit to fund further investments to get the snowball effect happening

– higher initial upfront and ongoing costs

– ability to utilise other family members within the SMSF to gain access to profits before you retire* – so it is not locked away
*old person to be member of your SMSF sold separately

Summary

The above if a very basic overview based on the information you have provided.

You will need to seek paid professional advice to ensure you get the structure right – it will costs too much to change it down the track.

If you have any questions please throw them out for myself and other forum members to respond.

Evolve

Great info about the anti-detriment payments L.R.

Pity you have to die to access them!

But seriously, estate planning is important in a SMSF – especially with lumpy assets such as property.

The anti-detriement reserves are a superb gift to give to future generations. The tax deduction (and more importantly the tax loss it creates) can amount to hundreds of thousands of dollars.

Evolve

First of all – congrats on getting your business cranking and generating a nice juicy profit AND excess cash flow!

Generally, you should keep your business interests and your investment assets legally separate. 

This means buying any assets in a different name i.e. a different trust, super fund or a beneficiary / spouse who is not a director of the trustee company.

Whatever you do, you will be paying some tax.  Your goal is minimise that tax as much as legally possible and use it to build your wealth.

WARNING: Business advise rant:
Also, before rushing in and investing that money, ensure you have sufficient cash reserves in the business – if anything the last 2 years has taught us (and is still teaching) is that business that have a strong cash buffer will not only survive through the tight times / downturns – but they will rebound stronger.  I see too many small business owners ripping cash out of their businesses and sentencing them to a slow and cash-strapped death!

Reinvest back into your business wherever possible.

***Business advice rant over***

Back to your potential issue with a nice big profit (taxable income) in your trust:

– Firstly work with your accountant to do things to minimise the taxable (on paper) income / profit in your trust.  I have written something relating to 2009 tax planning here. Obviously a few things have changed (i.e. tax bonus on asset purchases expired) – but most is still relevant

– The great thing about the trust structure is the flexibility to distribute to beneficiaries in the most tax effective way – this could be yourself and your spouse / partner but also children, nieces/nephews under 18 – $3,333 each for the 2011 (current) tax year with $0 tax and they don't need to lodge a return

– 30% is the rate of tax if the income is between $37,000 and $80,000 – so your goal is to keep the taxable income for yourself personally (and your spouse if applicable) under the $80,000 mark.  This also helps (but not essential) with finance applications down the track – you want to show good income for finance serviceability purposes.

– You should max your super contributions – even if you are younger – tax deductible and can be used as a deposit for investment properties (only with a SMSF) – as far as I know this is the only way to get a tax deduction for a capital purchase such as a property (or at least only pay 15% tax on the money)

– You can distribute to a company and only pay 30% flat rate on the amount distributed, however be aware that you physically need to pay the cash to the company otherwise you will get into trouble with Div7A / UPE issues (sorry – accountant lingo) – what you need to know is that you need to pay the cash to the company if you distribute from the trust otherwise you will get slugged with a huge amount of tax.  

– You can lend the money that goes into the company receiving the trust distribution back to either the business or yourself, however the loan needs to be at commercial rates / conditions otherwise the nasty tax problem as above.  The way the law works with these loans however is that no interest or minimum repayments are required if at the end of the financial year the loan is repaid in full. This means so long as the money is back in the company account at 30 June, you have use of that cash for 364 days of the financial year – this can be useful for dropping it into a mortgage offset account or line of credit to reduce interest on a home loan etc – but ensure you repay it at the end of the year.  Anyway – this is a complex area so talk to your accountant

I could go on and on about this, however I believe you need to keep an eye on your priorities and any tax planning should be dependant on the following (in this order):

1. Keeping your business cranking with a good cash reserve / cash flow
2. Keeping it simple – sometimes paying a couple of thousand less in tax is often NOT worth the effort
3. Purchasing some other cash flow producing assets (such as property)
4. Protecting your non-business assets – i.e. asset protection

I hope this info helps

Please feel free to throw out any additional questions to myself and the other forum members, and even come back and keep us updated.

Just realised I probably didn't answer your question.

 OK – no you can't purchase property using pre-tax dollars with your trust.  Distribute the income to beneficiaries, pay tax and then purchase either in personal names (if will be negative geared) or in a separate / new trust (with corporate trustee) if positively geared and/or if asset protection is a concern.

Good luck with everything!

Evolve

I have seen way too much of this in my professional career thus far. 

Trying to prevent honest hard working people from getting ripped off is huge motivating factor for me – it is one of the few things that gets me fired up and want to do something about it!

Hopefully the regulators will get it right without making good quality financial advice too costly for the average punter.

SM

Wow – reading this thread has been a lot of fun.

I just want to point out that this is a property investing forum – so a lot of the post / comments are from people who are into doing it themselves via property.

Before I comment, I will disclose a few things about myself:
– I am a chartered accountant and SMSF specialist adviser (SPAA)
– I also have a Diploma of Financial Services (DFP) – however I don't consider myself a financial planner
– I have been working as an accountant since 2002

I would hazard to say that the comments relating to financial planners being worth zilch are based on the fact that people have not received value (or perceived value).  This is because as people have commented, all many financial planners do is sell people a product for a commission or fee – there is no actual planning!

I believe that people are willing to pay for a service they get value from – and quite frankly the a lot of financial planners have not provided value so don't deserve to get paid!  This goes for all services such as accountants, lawyers etc also.

I think that old mate (number8) from Birchcorp has an interesting business model – give free financial planning and make money from the insurance commissions.  This is a nice point of difference – good luck with it!

In regards to the comments about planners not being able to give advice on property, property development and business acquisitions – why would they?  In addition to ASIC regulations and their own AFSL licence holders preventing them, chances are they can't get their insurance to cover advice on such things either!  If you want that type of advice hunt down an expert in the area (such as an accountant or lawyer).

Mortgage brokers don't work for nothing – they earn commissions on the loans they write / broker – which is cool as they normally earn it and the majority of people would rather that commission go to their friendly neighbourhood broker rather than the big bad banks!

In a lot of cases it is extremely difficult for any person who provides a non-tangible service such as financial planning, accounting or legal advice to show the true value of the service they provide. 

I feel sorry for financial planners (especially the good ones – and I know a couple of superb ones*) – they simply can't win:  If they put a portfolio together for the client and it does well, the client complains because his/her mate is getting 0.5% more than they are (or they say they are), and they get flogged when their portfolio goes down – even though it might not be going down as much as the average punter!

In addition, people generally don't like to accept blame for their own mistakes – especially with money – which is why the cost of financial planning services has increased so much in the last decade – people have tried (sometimes successfully) to sue financial planners, so their PI (public indemnity) insurance goes up. Not to mention the ridiculous amount of red tape planners have to go through to do their job – this distracts from the actual advice!

*FYI the superb ones practice what they preach and are doing very well for themselves.

If you are crazy enough to enter the financial planning industry (v8ghia I am looking at you) then you need to have thick skin and hopefully the ability to provide (and more importantly SHOW) true value.  Possibly the worst job in the world.

Education is good to assist you make good wealth building decisions, however not everyone can be an expert at all things – hence why people seek advice from experts.

I am sorry if this comment seems like a rant – I hope it provides some value and a different perspective.

Evolve

I have only briefly skimmed the previous responses, however have you considered utilising a SMSF to purchase the investment property?

A SMSF has the following advantages:

– You can now borrow – same as if in a trust or in your own name
– Superb asset protection (better than a family / discretionary trust)
– You can get a tax deduction for your deposit!
– It doesn't necessarily lock up all the gains on the property until you retire

There are obviously some costs involved and it may not be suitable for everyone, however if structured correct can be a superb tax saving and wealth creating vehicle.

Any question let me know.

Cheers
Evolve