So You Want to Buy a Property in Your SMSF

Buying a property through your Self Managed Super Fund (SMSF) is quite straight forward if you have the money in your fund to purchase it outright, ideally with other diversified assets and some cash left over.  It becomes  a bit more complicated when you want to borrow money to make the purchase.

There are three (3) things SMSF trustees should know before making a decision.  Firstly, not all banks lend to SMSFs.  Secondly, those that do have some strict lending criteria and thirdly, there are some superannuation laws that must be strictly obeyed.  So here are some of the key issues you should be aware of, including basic loan qualification criteria:

  • The borrower must be trustee of your SMSF and it must be a corporate trustee, not the individual members
  • Your SMSF trust deed must allow borrowing for investment
  • You must enter into a strictly controlled Limited Recourse Borrowing Arrangement (LRBA) specifically designed for SMSF borrowing.
  • As part of the LRBA, you must arrange a custodial trust to become the legal owner of the investment property as well as an associated deeds and agreements to satisfy LRBA criteria
  • Be aware that there are strict regulations surrounding the use of borrowed funds under a LRBA arrangement to renovate and improve an investment property
  • For commercial (rental) property, participating banks will only lend up to 70% of the lender’s valuation of the property; and less for rural properties
  • There must be a registered mortgage over the property; the lender has no recourse to assets other than the subject investment property so will generally ask for personal guarantees
  • Your loan serviceability is based (only) on rental income produced by the property and your superannuation contributions over the past 2 years, which are subject to legislated limits
  • You must have other investments in your SMSF besides the real estate, as diversification is one of the key legislative requirements for SMSFs
  • You must have sufficient liquidity (i.e. cash or investment that can be easily converted to cash) in your SMSF to meet fund expenses and support the property if rental income or contributions are interrupted or interest rates rise.
  • Your lender will normally ask your financial adviser to sign off on the fact that you are aware of what you are doing and aware of your responsibilities as a Trustee therefore it is necessary to conduct a full fact finding interview and prepare a step-by-step plan with appropriate recommendations.

One of the biggest risks you face in a SMSF that has a borrowing arrangement in place is where a member dies or becomes permanently incapacitated.  Both events are likely to require the payment of a lump sum benefit to the member concerned or to the member’s nominated beneficiary(s).  In the absence of personal risk insurance owned by the fund trustee and held for the benefit of members, the surviving trustee(s) may be forced to sell fund assets in order to make such a payment.  Loan default can also arise as the result of the fund no longer having sufficient cash flow to be able to continue loan repayments in the case where the loan was approved taking into account the deceased or disabled member’s contributions.  Both circumstances could result in an asset fire sale sell off because there is a strict limit on time taken to pay benefits.  Such a short notice sale will crystallise investment profits / losses and could very well result in unplanned CGT consequences.

Divorce is also another major risk to a SMSF with a borrowing arrangement in place but I will deal with that in another post.

Getting back to the insurance issue, it is almost impossible for SMSF trustees to ignore personal risk insurance (like most people do outside super).  SMSF trustees have a legislative obligation to consider insurance in their annual investment strategies.  It is hard to argue that insurance is unnecessary when the risks added by property gearing are so obvious.  Any auditor worth their salt would note it and report it to the ATO.

If you want to discuss any of this further please contact me.





Retirement – Making the Most of the Last Lap

Retirement is generally regarded as quitting full time work somewhere in our 60’s, and starting a new phase of life without having to trudge off to a daily shift at the salt mine.

Although retirement can last 20 or 30 years, it is the last lap because there is only one outcome at the end of it.   We don’t get any younger; the body starts to fail and at some point we die.

So broadly speaking, retirement has two (2) phases which are often blurred and overlap.

  • The early part is enjoying a new-found freedom and having fun.
  • The later part is the drawing near to life’s end

The early fun part often requires part time work and some budgeting so that money doesn’t run out.  The later end of life part always needs some serious planning to make sure that (a) any time spent in failing health or aged care runs as smoothly as possible; and (b) we don’t leave a mess behind after death for our kids to clean up.

In my case, I am 66 and for me retirement is pretty good at the moment.  I survived a serious heart problem last year and now I run my business part time from home.  I am healthy and relaxed. I spend time with family and friends; and I work at my own pace.  That would be at enjoyable pace rather than high speed, high stress pace of the past.  I see fewer clients than I used do and they have to be a little more patient sometimes because they find me away on a holiday occasionally, whereas two years ago that would never happen.  Work is now fun and it keeps my brain active.  I feel I could do this for at least another decade; and I will if I can because I love what I do.  I am very good at it and I know I can make life so much easier for others.

So here I am at the start of my retirement, and I am very mindful of the deterioration of health and end of life that is somewhere ahead.  So here is my top ten (10) checklist to make sure that my own affairs are in order:

  1. Get debt free, my number one priority as it is a lot less expensive to live debt free in retirement.
  2. Boost super as much as is affordable.  The government constantly screws with it but it is still the best tax concession saving we have.
  3. Live as tax free as possible.  Superannuation pensions and the Age pension (Centrelink) help this cause, while income producing assets outside super (e.g. shares and rental properties) tend to work against this cause but if you are happy to pay tax then it’s fine.  Every situation is different so it is a matter of structuring for the best result.
  4. Review personal insurances.  Is all of it still needed?  Typically, it gets hellishly expensive as we get older.
  5. Check insurances in your super fund.  You are paying for it even if you think you aren’t, and they are also age-based premiums.
  6. Review your Self Managed Super Fund.  Is it still appropriate in old age?  Do you have a plan for it?  So many SMSFs perform poorly and there is no mercy from the ATO for ageing trustees.  Additionally, there are some real benefits for older people to transfer back to retail super (depends on your situation though).
  7. What to do with your business?  Business owners need to make decisions about what to do with theirbusiness and the company or trust that owns it.  Will it be a family succession or will it be an external sale?  While succession continues your legacy and helps the family, proceeds from a sale can attract a big capital gains tax concession if you transfer it to super.
  8. Plan for mental health deterioration.  We all need to have someone we trust beside us to make decisions and sign on our behalf (i.e. Enduring Powers of Attorney and Medical Directives).
  9. Plan for aged care.  Nobody wants to go there but in the event that it becomes necessary, have a plan and tell the kids well in advance so that the decisions are yours, not theirs.
  10. Organise your Estate.  This is an area that two thirds of Australian adults ignore which is silly because your family then has to deal with the Public Trustee, which can be an excruciatingly long, frustrating and expensive process.  For most of us estate planning is so much more than a will because a will only covers assets in your own name (only).  Separate arrangements must be made for super, companies and trusts.  The idea is to make your instructions clear through your will, your super nominations and other post death instruction documents.  Also be aware that you can put extra protections in place for a disabled beneficiary; and extra protections in place for yourself against a problem beneficiary (e.g. a child with a marital, gambling, drug or spendthrift problem).

So there it is.  My message to you is get this stuff done, find a purpose in life, and have an enjoyable retirement with a lot less to worry about.  Call me anytime to discuss because nothing I have outlined here is straight forward.