WATCH: Should You Use Your SMSF to Buy Property? | NAPP. Podcast Ep.4

[00:10] Okay.

[00:11] Welcome back everybody.

[00:12] In this episode, we're delving into the self-managed

[00:14] super fund space, and we're asking the question,

[00:16] should you use your self-managed super fund to buy a property?

[00:19] Before we get into any specifics, this content in this podcast

[00:23] is only general in nature.

[00:24] It does not constitute financial, legal or tax advice,

[00:27] and it's strongly recommended that you seek professional advice

[00:31] regarding your personal situation.

[00:33] That being said, I'm surrounded by our property power team here.

[00:37] Mike O'Malley, mortgage manager from Rate Money Sydney CBD Andrew Chan,

[00:41] strategic financial planner from Phoenix Private Wealth Management George Koletti,

[00:45] principal accountant from Access Professional Services Daniella Muzitano

[00:49] founder and executive director from Titlespace Conveyancing and myself.

[00:54] Gianni Musumeci, investment property advisor from Leveraged Property Advisers.

[00:57] So, look, I'm gonna kick off with you, Andrew is a worthwhile endeavor

[01:01] looking to purchase property through your self-managed super fund.

[01:05] It's a good question, Gianni, I like I have been I'm

[01:08] just going to win back the conversation because in financial planning, it's.

[01:11] Should you even set up a self-managed super fund i really the question,

[01:15] that people need to answer.

[01:16] And it's a different answer for your your circumstances.

[01:19] Each person's circumstances are unique.

[01:23] So, probably the best step,

[01:27] financial advisors, the place to go to

[01:30] when you're getting advice for a self-managed super funding.

[01:33] And it's important that anyone seeking to set up a SMSF seeks advice.

[01:38] And one of the requirements when you're setting up a self-managed super fund

[01:41] is that as, as a member, you're also a director, which means

[01:45] that you're responsible to adhere to your obligations as a trustee,

[01:49] to make sure that those benefits, any decisions you make

[01:53] for buying investments in your safe, self-managed super fund,

[01:57] is there to solely benefit that member for retirement.

[02:02] And so it's to you.

[02:03] Clients are to seek financial advice from professionals

[02:08] in your decision making.

[02:09] Having an investment strategy of

[02:10] you know what, what you're investing in why.

[02:15] And and that's why it's so important to seek that advice.

[02:17] And not only that is that it's you're

[02:20] you're making a change to your circumstance.

[02:22] So when we give me advice around setting up self-managed with funds

[02:26] where we need to look at, you know, what investments

[02:29] and what assets, what cash flow will fund that self-managed super fund.

[02:32] Right.

[02:32] So, you know, you have insurances that you have,

[02:37] you might have bought property for your principal place of residence

[02:40] and you're relying on those those, those risk management,

[02:44] policies inside your current superannuation fund.

[02:48] If you just blindly roll those over to your self management

[02:51] super fund, you can lose those insurance policies.

[02:53] So it's one of the things that we do

[02:54] and we review and we provide that advice to make sure that nothing's

[02:57] lost in that transition and that it's appropriate.

[03:00] Now buying a property in SMSF,

[03:06] to be fair,

[03:07] any entity that you create has a cost, like, you know,

[03:12] you could count accountant to once you've received advice to set that up

[03:15] and there'll be the accounting cost, they'll be the auditor cost.

[03:18] They possibly, depending on your life stage,

[03:20] actuarial costs and so in running the compliance of the fund,

[03:25] there are your responsibilities that you are responsible for.

[03:28] What is the downside is if you don't adhere to those responsibilities

[03:35] all those tax free benefits, that you might received that tax effectively,

[03:39] if there's a taxable component in that fund and you have not, executed

[03:43] your responsibilities adequately means that the funds are not complying,

[03:47] which means that if you lose half the fund and this is what people forget.

[03:52] But SMSF

[03:54] and property as a tool for the right

[03:57] circumstances, the right situations can be very effective.

[04:00] So when we talk about buying property, I myself and feel free

[04:05] for anyone to chime in, I feel property is best bought personally.

[04:09] And the reason for that is because

[04:13] you have high marginal tax rates.

[04:15] And so, for example, if I was to go and borrow

[04:18] money, an example, I'll get more money back from the

[04:21] from the ATO because I earn and I pay more tax.

[04:25] The superannuation environment is a very concessionaly taxed environment.

[04:29] You're taxed at 15%, so it's not as effective.

[04:32] Now if you have strategies outside

[04:34] and inside and you have plenty, then there's no reason why you shouldn't.

[04:38] There's also some some myths that I'll probably help Australians.

[04:43] We all have this idea to to buy that home in Noosa or Hawke's Nest,

[04:48] or wherever it might be at Port Douglas, as a holiday home.

[04:52] And you know what it is every time we go out for our family

[04:54] holiday, it keeps getting more and more expensive.

[04:56] Why don't we set up a self-managed super fund?

[04:58] And what don’t we just buy

[05:00] a property from the Gold Coast, and whack it there?

[05:02] And, and the reality is, is that people don't notice that you cannot

[05:07] you can't use it. Right?

[05:08] It needs to be an arm's length,

[05:11] you can't be what we call an in-house asset, in-house assets.

[05:14] And so many of them are limited to 5%.

[05:17] Good luck buying a single property in a self-managed super fund.

[05:19] So there's a whole host of I'm a self managed super fund specialist.

[05:23] That's with the self-managed super fund association.

[05:26] That's the highest designation, along with the self-managed super fund auditor

[05:30] that you can have to give advice on this.

[05:31] 102 00:05:32,433 --> 00:05:35,800 when you're getting advice, make make sure you get advice from not only,

[05:36] professional, a professional

[05:37] that's adequately qualified

[05:38] because there's a whole host of different rules and regulations around self-managed

[05:41] super fund.

[05:42] But, that advisor can help guide you so you don't make those mistakes.

[05:47] And you're not necessarily an expert yourself,

[05:49] but where the golden nugget where self-managed

[05:52] super fund on property really makes sense is when you're a business owner

[05:57] and and really it's what we call business real property.

[06:00] So you're a business owner and you have a place that you operate from.

[06:04] And that's what we call your business premises.

[06:06] It might be a warehouse,

[06:07] it might be a factory, it might be a unit in the city, a suite.

[06:11] Then you can put it in your property.

[06:12] And so you go from a situation where you, you might be paying a $100,000 rent

[06:17] at Barangaroo and you're saying, whoa, you know, why am I,

[06:20] why am I doing that when I could, I could just buy a property in my SMSF

[06:25] and I would have that paid off in ten, ten years or less.

[06:28] And so then there's questions around, do I, can I do that outright

[06:33] or if I can't do that outright, do I use borrowing.

[06:36] And then the strategies get become more complex?

[06:39] Because I think in that example, you,

[06:40] you have the benefits of being both owner and tenant in some respect.

[06:44] So from, from a tax perspective, how does that typically work

[06:48] when you're setting up a self-managed to a fund?

[06:49] With that in mind, being a business real property owner.

[06:53] It's actually a pretty good strategy to have.

[06:55] But, you know, I usually have these discussions with Andrew anyway, because

[07:00] one thing

[07:00] that's super important when you're making that consideration

[07:04] and I tell this to my clients all the time, is

[07:08] that purchase standalone still a good investment?

[07:11] Like if you weren't able to lease it because you either outgrew

[07:14] your business, outgrew, we decided to close down or do something else.

[07:18] Would that investment still stand as a good investment on its own?

[07:22] And if the answer's yes, then I get an insight.

[07:25] Have a look at this.

[07:26] What do you think?

[07:27] As an alternative for them to use as an investment?

[07:30] Because I think it's a great strategy moving forward in

[07:34] as far as superannuation works,

[07:37] if they're holding that asset long term and again,

[07:40] depends on the stage of their life,

[07:41] what their business makeup is, what their family makeup is.

[07:44] How much money they're earning in their business, can they support it?

[07:47] Or if all of these tip boxes and so forth, they’re ticked

[07:51] and they're holding that property until they reach Preservation Age

[07:55] and then click it over into pension mode.

[07:56] If they decide to retire, then they sell the property subject

[08:00] to obviously the new limits and, you know, the revaluations and everything that.

[08:03] Yeah, unfortunately Andrew and I have been yet

[08:06] spoke with and discussing all the time at the moment.

[08:09] They can basically have no capital gains and live on the earnings of that.

[08:15] Because they're going to realize that property.

[08:17] Yeah. I think that's important to know.

[08:18] There was a couple of things there as well is coming from a business, real property

[08:21] perspective is, yes, businesses up to upsize in.

[08:25] They might move on. Or they might shut down the business.

[08:28] And you need to consider

[08:29] that asset as a standalone asset rather than something that you use.

[08:32] And from a investment perspective, commercial and industrial property,

[08:36] typically they have longer vacancy periods as well.

[08:39] So there'll be a cash flow deficit that you'll need to fund.

[08:41] And you've got to consider that.

[08:42] Yeah, for sure 100%.

[08:44] And winding back a little bit more, Mike, to the lending perspectives around

[08:49] purchasing property, whether it be residential, commercial or otherwise,

[08:53] how does that stack up or how does that differ inside a self-managed to a fund?

[08:57] Yeah, it's interesting.

[08:57] And I think, George,and Andrew sort

[08:59] of adequately covered a lot of the aspects of it.

[09:01] I mean, to state the most obvious point, the, borrower is your SMSF.

[09:06] It's not you personally, and it's what's called limited recourse borrowing.

[09:10] So you've got a level of protection, when you buy, you know, in a super fund,

[09:14] more generally, there are less lenders operating in the space,

[09:18] so your borrowing options are a bit more restricted.

[09:22] And the interest rates will generally be a little bit higher.

[09:24] When someone comes to an SMSF loan, you need quite,

[09:29] you know, you need a very thick structure behind you.

[09:32] You've got to have the SMSF set up properly by, you know, the likes of George

[09:36] or the advisor and the structure in place with, with these two, you,

[09:43] you have to have a very clear strategy

[09:46] behind the super funds investment plans.

[09:49] And the borrowing must fit that strategy.

[09:51] So there are few restrictions around it.

[09:53] I mean, you can't just go and improve a super a property inside an SMSF.

[09:58] You know,

[09:58] there are rules around what you can do to the property or with the property.

[10:02] So they're slightly more restrictive. Yeah.

[10:05] But for the reasons outlined by Andrew, they also make quite a good deal of sense.

[10:09] Yeah. That's right.

[10:10] Maybe coming back to the financial planning

[10:12] or the or the, tax legitimacy of it as well.

[10:15] There's, there's a lot of restrictions around purchasing property

[10:18] and what you do with that property inside SMSF.

[10:20] If so, you can't change the material characteristics of the property,

[10:23] can't change it from a 3 to 4 bedder, or put a pool in or knock it down

[10:27] so it becomes quite restrictive from a legal perspective,

[10:31] what are some of the differences

[10:33] between buying in your own name versus buying in a self-managed super fund?

[10:36] Daniella, that people should be aware of?

[10:40] Well, the conveyancing, it's the same.

[10:43] So that doesn't change.

[10:45] I guess what it's important when a client comes to us to say I'm

[10:50] borrowing or sorry, I'm buying with my self managed super fund the first thing,

[10:54] it's give us a copy of the Trust deed, because what we see

[10:59] more and more often, especially if the contract is not, if the exchange

[11:03] is not done by the solicitors, is the wrong name on that front page.

[11:08] And, George and I talk about it all the time.

[11:12] Actually, George, we had a client that a,

[11:15] client of George that, you know, came to us,

[11:18] when he purchased, the conveyancer

[11:22] the agent, and, I don't know, we were not involved in that transaction.

[11:25] Had the wrong name on a contract.

[11:27] So the title was incorrectly registered.

[11:29] So then when he was doing the tax return, they realized that, and they had to come.

[11:34] They came to us to say, we now need to change the title

[11:38] from this entity to these entities.

[11:40] So you run through all the process.

[11:42] like having revenue

[11:44] will need to approve it.

[11:45] Make sure that you don't have to pay stamp duty twice.

[11:49] So there's a lot of,

[11:50] legal implications if that first step is not done correctly.

[11:54] And that's what we have to make sure of.

[11:57] And of course cooperate if you need to make a change to the contract date.

[12:00] I mean they can be but they don't have to be. Correct.

[12:03] Like once that contract is signed and then we realize,

[12:07] oh, there's been an error, or maybe the agent

[12:10] put the wrong name in the front page

[12:11] and the contract comes to us and was already exchanged.

[12:14] Not always the other side.

[12:16] Will agree to have that change made.

[12:18] I mean, so that was a new client because we always look at that

[12:22] and send them to Daniella straight away.

[12:23] Yeah, they're always getting it right.

[12:26] Yeah.

[12:26] So it's probably easy to get wrong or something that might be overlooked.

[12:31] But the has big legal implications down the track.

[12:33] Absolutely. Yeah.

[12:34] So I think that just goes to show like you need your conveyancer

[12:37] as the last line of defense in your property transaction.

[12:39] Oh especially with a SMSF. Yeah.

[12:41] One thing that you know, Daniella does for us with quite a few clients is,

[12:45] particularly with the limited recourse borrowings, which, you know,

[12:48] Michael organizes for them.

[12:50] Is it once the debt is paid, and there's stamp duty concessions,

[12:55] which Daniella is fully aware of and uses to her advantage, and we transfer

[13:00] that property from the bare trust back into the super fund’s name.

[13:03] And Daniella takes care of all.

[13:05] That's how it's seamless and tax free. Yeah. Awesome.

[13:08] That always gives you a good deal of comfort to know

[13:10] that you review the contract before they sign the trust.

[13:13] Yeah, we always ask for a copy of the charge

[13:15] to make sure that that name is the correct name, that it's going on the contract.

[13:19] Yeah, yeah.

[13:20] And you've got differences between states, you know.

[13:23] Saying that. Yeah. It's many times now.

[13:25] NSW, by the way.

[13:26] What it goes in the contract in New South Wales.

[13:29] What then reflects on the title search is different from Queensland.

[13:32] And yeah.

[13:34] I'm sure there's a few horror stories like that.

[13:35] You could probably share it. Yes. Yeah.

[13:39] I mean nothing.

[13:39] Ever goes wrong.

[13:40] Now, I've actually had clients that have, sold a property inside their SMSF

[13:45] because after three years of ownership, they realized that it was a cash

[13:49] flow burden on them.

[13:50] And so there's all sorts of costs there

[13:52] because they were negative gearing inside a self-managed super fund.

[13:56] And George is shaking his head and, you know, as a result,

[14:00] they've had to put more money into superannuation

[14:03] and then the opportunity cost associated with that as well,

[14:05] where they could have invested in something else that was,

[14:08] you know, cashflow neutral or something

[14:10] that grew in value more, right, at a lower price point or whatever.

[14:13] From all of our points that particular example is.

[14:16] So, important.

[14:18] And what we highlight here is get the right advice in the first place,

[14:21] structure it correctly, understand the cashflow,

[14:23] get the right lending, and then pick the right property.

[14:27] Yeah. Which is primarily the most important thing.

[14:29] Get the right asset.

[14:31] 100%.

[14:32] I am seeing now actually people, exactly as you say, transferring back

[14:36] into the individual names from the self-managed super fund.

[14:41] I probably would add to that there's a big smoking gun

[14:44] in the industry at the moment where there's a lot of property

[14:47] Spruikers

[14:49] hiring a junior accountant

[14:52] who doesn't really understand what's going on to just sell the products.

[14:55] Right. So what's driving the setup of these

[14:57] self-managed super funds is a property developer wanting to sell their goods.

[15:01] Right.

[15:02] And it's that's not putting the client's interest first, because whenever

[15:06] you pick up a strategy you need to know that, as I've said

[15:10] before, you've got to hold on to it to see the benefit.

[15:12] And if you're selling after three years, it's very unlikely that you're selling it

[15:15] because you've made money, you're selling it because you can't afford it.

[15:17] And in a world where, you know, if employment suddenly,

[15:22] is taking a turn for the worse, and you're not only confident

[15:26] of holding your strategy of properties or geared assets outside it impacts,

[15:32] but what in the beginning, when you first buy the asset,

[15:35] it might be neutrally agreed, hopefully not negatively geared.

[15:38] So you know in SMSF what we call LRBAs limited recourse borrowing arrangements.

[15:43] You know, the banks are really lending between 60 to 70%,

[15:47] you know, usually around that 65%.

[15:49] So if it's an okay property it will be slightly negative to positive.

[15:55] Right.

[15:56] But if you're

[15:56] negative already from the outset then you, you have to it relies heavily upon your

[16:02] SG, your super guarantee contributions to allow for that.

[16:05] And that means that you need to contribute

[16:08] consistently and you need to be stable in your job, in your business.

[16:11] And that's cash flow. Yeah.

[16:14] If you wind it back one more, it's to say what amount

[16:18] is the correct amount to set up a self-managed super fund.

[16:21] And so, you know, there is a minimum of what we say

[16:26] 200. ASIC says, the regulator, the Australian Securities and Investment

[16:31] Commission say 200,000 to 250

[16:33] means that the accountancy fees make sense as a proportion of that fund.

[16:38] And what we really in our industry, financial planning

[16:41] we don't like to see is funds being set up with $50,000.

[16:46] Right.

[16:46] Because then if, for example, you have the accountancy cost is like such

[16:51] a high proportion of what that set up value is and you'd have to borrow so much.

[16:55] Not that.

[16:55] And so,

[16:56] you know, if, if you're in that situation that's not the right situation.

[17:00] You don't want to put you know you know the situation.

[17:03] Nothing wrong with the strategy.

[17:04] But if it's executed poorly can destroy wealth.

[17:07] And so, what I would say is to make sure that you've got adequate money there.

[17:12] But also as part of what we do is we listen to regulators

[17:15] and we're listening to what they're looking for.

[17:18] And the ATO

[17:20] and ASIC do not want to

[17:21] see single funds with only one asset in there.

[17:25] Yeah.

[17:25] So it's not only a matter of that.

[17:27] I can afford the standard.

[17:29] I can afford, the property that I can afford the loan.

[17:33] You also need to have a really, and Mike correct me,

[17:35] you have to have a large buffer there to allow for it.

[17:39] And so the ATO is looking for diversification within the fund.

[17:43] They don't want to see a SMSF set up with just one property sitting inside,

[17:47] because that is not diversification.

[17:49] It's interesting just off the back of that, a couple of things.

[17:51] I mean, the lenders have been trying to be more flexible.

[17:55] And so we've seen LBRs increases.

[17:56] It's not borrowed 80% in an SMSF now.

[17:59] So you can but you need to think about is that the right thing to do.

[18:03] So this is why for me the advice part is very, very important.

[18:07] A lot of the

[18:07] lenders have reduced their minimum net, fund asset requirements as well.

[18:12] So you don't necessarily always have quite that cushion there that you alluded to.

[18:16] And people do need to think

[18:17] about the ongoing costs of operating in an SMSF,

[18:21] because there are quite onerous annual compliance and reporting requirements,

[18:26] and they need to be funded.

[18:27] So, yeah, there's a there's a bit to think about.

[18:29] Touching on that point there and going back to the conveyancing

[18:34] with the type of lenders that will lend to the self-managed

[18:37] super fund, they're now requiring independent, independent advice,

[18:42] which often like we can’t do in the same transaction.

[18:45] So we refer out somebody else to do it.

[18:48] So that's another cost associated in the conveyancing.

[18:52] You require another $1,000 there to get the

[18:55] Independent advice,

[18:56] From our perspective what I've seen and probably the biggest takeaway

[19:00] for all the viewers would be that don't put the cart before the horse.

[19:04] So if you've got financial planners or you know, spruikers

[19:09] that are saying out there, come and buy a property from us,

[19:13] we can do it all through your SMSF and they will basically set you up

[19:17] and set you up with a property that is number one, overpriced

[19:21] because they've already loaded up all of the commissions and so forth into it.

[19:25] And the biggest issue is I've had new clients come on board

[19:29] that have got these structures

[19:30] already in place, which really they weren't appropriate.

[19:33] And I've gone through them with and said, no,

[19:35] they should never have had it in the first place

[19:37] because they didn't have enough.

[19:38] And then they're looking at how do I unwind it now?

[19:41] Because I've just got this property which we've now look at the valuation.

[19:45] It's actually 50 grand less than what we actually bought it for.

[19:48] So don't do it the other way round.

[19:50] If you're looking at, you know, overall,

[19:53] am I going to buy a property in that superannuation fund?

[19:55] The short answer is there is some great advantages.

[19:58] If it's the right purpose, go to the property buyer's agent first

[20:03] to find the right property,

[20:05] and then get the lender and the planner to actually incorporate

[20:08] as part of your structure.

[20:09] Yeah, I'm seeing that a lot lately.

[20:10] Like people advertising

[20:12] specifically house and land packages through your self-managed super fund.

[20:15] And to your point, they're all in house.

[20:17] Junior broker, advisor, accountant, whatever.

[20:20] They'll set up the structure and then, yeah, they'll buy a house and land package

[20:23] up in the sticks in a developing area with no infrastructure.

[20:27] And then, you know, 2 or 3 years later, they’re the 50 grand short.

[20:30] So, look, there's there's plenty of horror stories out there, I'm sure, but.

[20:34] So look, thank you guys for your time. Really appreciate that.

[20:35] There's a lot to unpack here in this episode.

[20:38] And we could probably talk about self-managed

[20:39] super fund on the perils all day. But really appreciate your time.

[20:42] Thank you. Thanks, Gianni.