Since employer contributions to employees' superannuation funds became compulsory in 1986, Australians have channeled uncounted millions worth of funds into the scheme.
Self-managed superannuation funds (SMSFs) have become a popular choice for individuals wanting to take control of their retirement savings. At the same time, Australians have continued their love affair with property. It has great appeal for investors with a view to bringing self-funded, early retirement closer, by either making use of the negative gearing legislation or simply by making a profit through rental income.
Combining your superannuation with property investment seemed like a great idea... right?
There was one hitch, though. Prior to September 2007, investors' SMSFs couldn't borrow or charge their assets, so previously borrowing for property investment using your super wasn't an option. However, late last year changes to the legislation made by the previous government altered this to open a new avenue of superannuation investment diversification away from the traditional "managed funds" approach to help mitigate the risk to an individual's investment portfolio by making property investment possible.
While this investment avenue has now opened up, it isn't as clear-cut as it may seem. Consultation with the experts will determine whether or not this option is viable in your situation.
What the fine print reveals
The conditions surrounding SMSFs borrowing to invest are set out in the Superannuation Industry (Supervision) Act 1993 (SIS Act) under Section 67.
The SIS Act states that the borrower's funds are to be used to purchase an asset, in this case real estate, and that the asset is to be held in trust for the self-managed fund by another entity; which would be the property trustee.
Additionally, the SMSF must have the right to acquire legal ownership of the asset by making payment and any recourse by the lender of the funds used to purchase the asset against the SMSF must be limited to the asset (or property) in question. Essentially this last statement means that if any default on the loan occurs, the lender can only take possession of the actual property on which the default occurred; the other funds and assets held by the SMSF are protected.
Under the new structure, a superannuation fund will be the beneficial owner of the property and is able to purchase any kind of real estate, be it residential, commercial or even holiday units, provided you purchase it as an investment; not for you to occupy. You can, however, transfer the property from the fund to your own name after you retire and at that time move in and make it your primary residence.
The purchase of the real estate investment takes place in the usual way; the investor selects the desired property and then their SMSF must satisfy the loan requirements as specified by the super-leveraged loan provider.
These conditions differ a little from what the regular lenders will offer for a standard property investment mortgage.
The maximum loan-to-value ratio available is generally lower; some lenders offering up to 85 per cent on residential property for full documentation and 83 per cent for low documentation loans. This excludes the capitalisation of fees and is slightly lower again for commercial securitisation. A maximum loan term of 30 years is applicable for residential property and 25 years for commercial. There may also be restrictions on the postcodes in which the property can be located.
For the exact details applicable to an individual situation, check with the lender.
The deposit, balance of purchase price, associated legal costs and stamp duty are all paid by the SMSF, as they would be in a normal investment property purchase. Similarly, the lawyer or conveyancer is chosen and appointed by the SMSF and they complete all necessary legal work as usual.
All costs associated with the property are paid by the SMSF. This includes council rates, land tax (if it applies), loan fees and repayments, maintenance and repairs conducted on the property and the property management costs.
Because the property is "beneficially owned" by the SMSF, outside of the legal ownership of the property trustee, it also receives all proceeds of rent or other income and can improve or renovate the property as any other investor may.
At any time, the SMSF is able to pay extra into the mortgage or pay it out entirely, subject to the lender's terms and/or fees associated. Once the mortgage has been repaid in its entirety, the title to the property can then be transferred to the SMSF or the property trustee can continue as registered proprietor.
At this stage, if your mind is brimming with newfound property investment ideas using your SMSF, you would be well advised to proceed with caution. This is a complicated issue that takes into account the correct setting up of the trust, how the loan is structured, compliance with guidelines of the trust and tax implications of each individual situation.
Before setting off on an SMSF-funded real estate buying spree, consult a certified financial planner, your accountant or the taxation office for a summary of the new legislation, as it applies to you.
Lauren Newlands is a financial analyst with financial services research group CANNEX.