Ways to hold Property
in your Super Fund
There’s more than one way to get a property into your self managed superannuation fund depending on the funds you have available to you – and the below applies to both residential and commercial property depending on your preference.
If you have enough cash available in your super fund you can purchase a property outright in the super fund.
Not all of us have that amount of super available – and as you may have heard it is possible to borrow money from the bank to finance this. To do this you will need to use a special type of borrowing arrangement called a Limited Recourse Borrowing Arrangement (LRBA) which gets around the fact that a super fund is not allowed to borrow money in its own name by using a special trust – called a Bare Trust – which holds the loan and the property until the loan is paid out. To take advantage of this you will need a sizeable deposit – somewhere between 20 – 40% depending on the bank.
If the larger deposit is too hefty for your fund or you would like to share the opportunity for capital growth around there are other options.
Your super fund – along with some other investors who might include yourself as an individual, a trust your might own or a friend with their own super fund – the list goes on (or even a combination of any of the above) – may like to form a partnership through which you purchase a property. Because your super fund would be involved the partnership itself cannot take out a loan to finance this. Nor can any of the other investors take out a loan using the property as security.
The super funds investment would be limited to the amount of cash it has available. Other investors will need to either have the cash available or take out a loan using the equity in their home or another property.
You will need to keep in mind that rental properties often have other expenses including rates, land tax, repairs & maintenance, agency fees, leasing fees etc.
To pay these amounts – all partners will need pay their share of the expenses in proportion to the amount it owns.
If you put all of the money available in the super fund towards the purchase of the property and leave nothing left to cover these other expenses you may find yourself in a situation where you are making super contributions to your super fund and are not able to claim a tax deduction for these additional contributions.
The other potential problem is if you are over 55 and have started a TRIS pension (Transition to Retirement Income Stream) and do not have enough cash available to take out your minimum pension amount that you may lose the tax advantages that come with starting a TRIS.
A very flexible approach to holding a portion of a property in your super fund is through a unit trust. This is very similar to a partnership – but is much more flexible because when a party wants to sell their share.
Say the property you wish to purchase using the unit trust is $500,000 including stamps and legals. There are 100 units in the unit trust. Each unit would be worth $5,000. If you had $50,000 available in your super fund, your super fund could purchase 10 units. Going forward this would entitle your super fund to 10% of the revenue (after expenses of course) and 10% of the capital gain.
You could buy the 90 units – or they could be purchased by a combination of other people and their super funds.
Each year the property would be valued and this would be reflected in a new unit price.
As life never goes as planned, if someone needed to sell their units they could sell to an existing party for the market value of the units at that time – or to someone new. This gives everybody involved flexibility and control over their investments – including your super fund.
The same principle would also work with a company and shares – however the setup cost is more and so are the annual compliance costs. The other issue is if the company sells the property you cannot access any capital gains concessions which are available using any of the other options.
What to consider;
- Ask your like minded friends and family to see if there are opportunities for a group of you to invest in a property
- Ask your accountant for a quote for the set up costs of one of these arrangements – and an idea of what they would charge for the annual accounts
- Consider using a cloud software package so all parties can log on and see the income & expenses of the unit trust
- Ask your bank how much equity you have access to against your home if you would like to invest your super money in property, but don’t have enough to make it happen using only the super fund.
Buying Shares in Your SMSF
Shares in your self managed super fund? Of course you can!
You are able to use a buy and hold strategy for shares in your SMSF or you can use a more aggressive share trading strategy where you are buying and selling shares in much smaller timeframes (intra day or short term trading).
Keep in mind that the more transactions you have going through your superannuation fund the higher your accounting and audit expense will be. Your accountant needs to look at every single transaction you make.
If you want to use an online share trading account, the account must be in the name of your super fund. You cannot use an existing account you have in your own name and move money from your superannuation fund into it to buy shares – even if the profits you make are put back into the super fund.
The ATO will treat that as you taking money out to spend personally and you will breach the superannuation fund rules.
All shares must be purchased in the name of the superannuation fund.
To open a share trading account you will need to provide the following with your application form:
- the Superannuation Fund’s Tax File Number
- the ACN (company number) if your superannuation fund has a corporate trustee
- a copy of the signed trust deed
- your email address
- a certified copy of your proof of ID
- your current contact details
You are not only limited to listed company shares found on the ASX like Telstra and BHP.
This opens up different investment opportunities including investing in start up companies or existing small businesses through your superannuation fund.
There a few things you need to be aware of if you are going to invest in private, or unlisted, companies.
There must be a real value to any unlisted shares you purchase through your superannuation fund. To have a real value there must be other people who would want to buy these shares. Could you sell them to someone else? Would someone else buy them? If not, then these shares should not be purchased in your superannuation fund.
The superannuation fund cannot buy shares in a private or unlisted company from someone who is a member of the superannuation fund or one of their relatives.
Basically, this is to make sure you don’t pump up the value of your private company to get money out of your superannuation fund.
If you invest in a private company with your superannuation fund the value of the investment in private companies cannot exceed 5% of the money in the fund. This is called the in-house asset rule. The 5% will include the value of the shares in question plus any other share the superannuation fund owns in private companies.
The total superannuation fund investment from your fund in the private company should not be more than 49% of the total number of shares.
Shares – both listed and unlisted – need to be shown at their market value at 30th June each year in the superannuation funds financial accounts. Your accountant will revalue the listed shares based on the share price on the ASX, however for unlisted shares they will require a copy of the company’s financial statements.
What to consider:
- If you would like to invest in shares found on the ASX, search online for a broker you feel comfortable using, at a price you are comfortable paying.
- If you are a professional looking to buy into a firm – there are some special opportunities for you to purchase a part of the business using your superannuation fund which can be fantastic short term to help fund you buying in to the business, and long term to increase your retirement savings.
Keep an eye on the value of any private company shares you own in your super fund. If these shares increase in value, you will need to make sure this does not push you over the 5% in-house asset limit. It is not the cost price that is relevant for this limit, but the current value of the shares.
Using Your Super Fund
When Buying into a Business
When a business opportunity comes up, your super fund is often the last thing on your mind – but from a strategic wealth creation perspective it should be top of mind!
The tax effective environment of a superannuation fund means that any business profits your superannuation fund makes are taxed at 15%. There can be a big difference between this 15% tax rate and your individual tax rate – which can be up to 49%.
The other big winner of bringing your super find in on a business opportunity is that it has available cash – which you may not!
Cole has been working at his firm for a number of years and the directors have invited him to buy into the business as an associate.
The firm operates through a company structure, and they have offered him 40 shares at $10k each – which is 10% of the business.
40 shares x $10k = $400k
Cole has $50k that he can scrape together from cash and selling shares in his own name.
He will need to finance the remaining $350k.
Cole looks at finance at 6% p.a. interest and he expects to make a 10% return on his investment. Any additional income he makes on top of his salary and other investment earnings will be taxed at 46.5%.
If Cole purchases the shares in his own name, the first year will look like this:
Cole has $100k available in his super fund. If Cole were to use this to buy 10 of the 40 shares in his superannuation fund the investment split would be:
The first year would look like this:
By using superannuation to his advantage, Cole foregoes $2,140 of cash now ($10,165 – $8,025) but ends up $6,360 ahead ($16,525 – $10,165).
Using a superannuation fund can help you strategically grow your wealth.
As with any investment you make in your superannuation fund, you need to make sure that the investment you make is with the goal of providing for yourself when you retire.
This is important if you are looking at investing your superannuation savings in a start up company. You need to think realistically about the chances of that business making you money. If it is extremely risky – and the ATO asked you why you invested in that particular business – you need to be able to convince them that you believed that business was going to be successful.
This is particularly important if you happen to receive some form of payment personally from the start up business, like wages or director’s fees. You need to make sure that everything is above board. That the money you were paid would also have been paid to someone else for doing the same job.
If you want to use your superannuation fund to help you buy into a business you cannot own more than 49% as the total of your holding. This total includes the amount you hold in your superannuation fund, in your own name or through a company or trust structure.
If this percentage is more than 49% you will be subject to the in house asset rules – which means that your investment can only be a maximum of 5% of the value of your Superannuation Fund.
Things to watch out for when the in house asset rules may apply to you is a sudden increase in the value of the business. The business may only have been worth a small amount – and worth less than 5% of the value of all of the assets in your super fund. If this business all of a sudden hit the big time, and became worth a fortune – your share may become worth a lot more than 5% of your superannuation assets.
If Cole had purchased 50% of the firm and invested the $100k that he had in superannuation he would breach the in house asset rules because instead of being below 5%, the current investment held by the super fund would be 100%.
The business investment must be revalued each year at 30 June.
This value is then used by the superannuation fund to show what the value of the superannuation fund’s investment is. The value someone else would pay to own the superannuation fund’s share of the business.
Always check with your accountant before investing your superannuation savings into a business. Superannuation law is constantly changing and this article should not be relied upon in the place of you’re the advice of your trusted advisor. This article is meant to provide you with ideas and guidance only.