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There is a new wave of investor opening up the property market, wanting to take advantage of new regulations and borrow to buy in their Super.
You may have already seen many clients hoping to do this, or you may be unsure how to guide them through the maze of regulation necessary to enable them to do this.
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Either way, there are some things to seriously consider to best make this happen. Before your client signs the contract, you and they need to understand what is involved.
There are some limits, both practical and financial that your client needs to consider.
Long term, the structures are fairly inflexible. The transaction needs to be considered as a long term investment as it is not like a standard loan with flexibility. These structures are rigid and not always suitable. The limits include:
· The loan cannot be refinanced
· Your client can’t redraw the facility
· There are significant limits to making improvements to the property
· If the client’s circumstances change down the track – they may only have the option of selling the property – regardless of whether or not it is an opportune time in the market to do so.
In some cases it may actually be easier for the client to purchase the property in their own name or under a different entity. Some clients can effectively be set up as the bank – and be the lender to the Superannuation fund.
This all comes down to understanding what’s right for your client – but we need to think long term here on their behalf.
Property Maintenance
Often times the rent on the property may cover the mortgage, but consideration still needs to be seriously given to future repairs and maintenance. The fund generally cannot redraw the facility, so your client is going to need to provide the funding out of the other assets of the fund.
Recent contributions caps have meant that getting money into Superannuation is much harder, and with strict limits, it is not inconceivable that there will be a shortfall created within the fund, simply because there is work to be done.
Your client needs to understand, plan for and be prepared for this.
Understanding the tax benefits and pitfalls
Conceptually there are significant taxation benefits from holding assets inside of Superannuation, especially where the property won’t be sold until your client retires.
However, this benefit should be weighed against the general benefits of negative gearing of a property under the client’s own name. The benefits of negative gearing are significantly less under Superannuation.
In addition, your client cannot offset losses on the property under a SMSF against their own income. So it is important for them to understand which course is going to be most beneficial for them.
Stamp Duty on repayment of loan warning
Because these structures are so new there is very little appreciation of what happens after your client’s loan is repaid. One of the biggest concerns is that if the loan isn’t structured correctly, there may be double-stamp duty consequences, and this is an area which is yet untested in practice.
How to get the loan right
There are a myriad of scams in Australia involving SMSF – and this area of brokerage has come under the microscope from ASIC and other regulatory bodies. It’s important to encourage clients to tread carefully and never to jump in to this type of loan.
If you are concerned about getting the loan right for your client, refer them to a small business lawyer. They can clarify upfront what will work best for them under the SMSF, and to help them understand the risks of the transaction they are about to undertake.
That way the risks are clearly explained, their expectations are met, and they end up with the right structure for their retirement.
MaryAnn Armstrong, Armstrong-Doessel-Stevenson Lawyers
MaryAnn Armstrong is Principal Solicitor and Legal Practitioner Director of Armstrong-Doessel-Stevenson Lawyers.
ADS Lawyers offer a range of legal services from litigation to conveyancing, but their primary emphasis is on helping small businesses through tailored legal consultations and packages. This includes compliance, contracts, taxation, and debt recovery help.
MaryAnn has been described as a ‘breath of fresh air’ in law, with her focus on working within the law to lift people up to be the best they can be - in their businesses and in their lives.
