How to get More Power out of Your Super Fund

I’ve come across the article “How to get More Power out of Your Super Fund” that shows how investment into property may be accelerated by utilising Super and Unit Trust.

Some aspects of the article are not completely clear to me, and I was wondering whether someone would understand it better and clarify (maybe from previous experience):

Questions:
- Why/How the “…money can be directed into the unit trust…”?
- How the money may be “…then returned, tax-free, as a capital return…”?
- Does this strategy really allow to “…use money taxed at just 15%, not up to 48.5% to pay off the property debt…”?

All the comments are very welcomed.

 

Does anyone have a legal opinion about this, sounds too good to be true.

NickM, Nigel?

andy

 

Sounds like something you'd have plenty of time to monitor from your jail cell to me. Hope someone with the required skills can comment - its interesting to say the least

 

I saw a talk on this at recent property and investment expo in Sydney, same one that Yardley, Whitaker, Lomas and others spoke at. The company called it "super gearing" and it all seemed quite legit. It was mainly a method of using a unit trust to help borrow to buy property along with a SMSF with salary sacrifice to get money into the trust via the super fund. The unit trust allowed money to go back to the indivdual over time by repaying money that was lent to it at the start. Their web site has some more info under link "super gearing"

 

I can remember reading something similar to this in either API or Smart Investor magazine.

I would think the arms length relationship would be important to discuss with your advisers before proceeding.

OSS

 

I agree with some of the other comments that this could be rather dangerous; or maybe there are some key points that make it work but we don't have in the article. My best take on your questions Maverick:

1. A Super fund can't take out loans so you would invest into another entity that could, eg a unit trust, or an internally geared share fund if you wanted to invest in the stockmarket with gearing. The approach seems to have John and Mary also taking a loan and giving the money to the unit trust (their loan is for investing into the trust from which a negative return is claimable). Importantly, the trust owns the IP and the Super fund and individuals own units in the trust..

2. "Money being returned, tax free as a capital return". I'm speculating here but the only way I can see this working is if units in the trust are being transferred (sold?) by the individuals to their Super fund. That is, as more money becomes available to the Super fund (by 9% SGC or up to 15% via salary sacrifice) it buys a number of units off John and Mary at the original unit price. Thus the capital of their investment is "returned" and they'd use this to pay down their loan. If the unit price went up then perhaps that would include capital plus some level of capital gain that John and Mary would need to declare?

3. Effectively, the point above would mean that you are buying a IP with only the 15% (plus any surgcharge) tax and getting CGT benefits afforded to Superannuation - but more and more units will be owned by the Super fund and you must apply all of the normal access restrictions to those funds - eg age limits, etc.

This article seems a little different from the Super Gearing article, but as I suggested earlier, I think there are a few factors missing from the published story. If I was to try something like this I think I'd be spending a lot of money on accountancy services before going anywhere.

Dave

 

I think the key here is that you don't use the property as security for the loan, you use a LOC to
buy the property.

I heard of a scheme like this about 10 years ago that a smart accountant was going to put my old
man into to buy a property for me while I was at uni but I was much too stupid to take up the offer
(I wanted to live with my gf at the time.)

andy

 

Using super is as an investment vehicle is a great idea

but do we really want to push the envelope with strategies that could jeopardise your fund' assets ?

I dont mind taking some calculated risks with investing but in my humble view i like to keep the super fund assets separate from property investing.

A super fund achieves great benefits by investing in shares and managed funds. Franked dividends help to reduce the overall tax position of the fund.

I generally support and assist my clients to use their super fund to buy business premesis. They then rent back the premesis from their company.

Some of these strategies are fine, but why run risks with super ?

A non complying super fund pays 47% tax on the fund assets !

Cheers
NickM

 

I think one issue that business people often ignore is this:

Just because you CAN buy your business premises with your super money doesn't mean you SHOULD.

Just because the overly restrictive and indecipherable super laws provide this concession doesn't necessarily make the office or industrial property your business occupies a good investment. I think you should ask yourself whether, assuming you could source funds outside of super, you would still buy the premises or use those funds for another purpose. I suspect at least half the time the answer would suggest buying through your super fund is not the right approach.

My 2.2cents worth.

N

 

Great advice Nick and Nigel

I look on our Super Fund as a kind of parallel safe investment to our personal investment, and its Investment Strategy is weighted toward shares because our own preference is already grossly over-weighted toward property So either way, in the unlikely event I make it to retirement, there is guaranteed to be something in the fund at the end in a different asset class to whatever else we have

On Nigel's point, the only thing that would lean me toward buying office premises through the Super Fund for our company, is protection for the company from lessor's unreasonable rent rises, eviction, refusal to renovate etc. at renewal time if such things had the potential to affect our income substantially. On the flipside, being tied to premises might of course also limit our potential to relocate to a better position or gain other incentives,. Probably depends how necessary it is to be known in the same premises for the long term.

Unfortunately our super fund only has enough to buy a bedsit-sized office in a fairly unsavoury suburb, so it hasn't been an issue yet

Happy Anzac Day to all
Cheers
Carl

 

This is a really really old post - but for nostalgic reasons (and a little boredom) I have decided to reply.

Since 11 August 1999 an investment in a related unit trust will be an in-house asset. SMSFs can only invest up to 5% of the value of their net assets into in-house assets.

The exception is that when the unit trust solely owns business real property (i.e. commercial premises - NOT any old residential property). This type of investment will not be considered an in-house asset.

In regards to the return of capital tax free back to the members, I agree with D&K that this can only happen via the SMSF using the cash built up via super contributions to gradually purchase units from them personally.

The strategy doesn't mention that each transfer of units will be a dutiable transaction meaning you need to pay stamp duty in most states (not Victoria). The units, and hence the underlying property would also need to be regularly re-valued to keep everything at market value - meaning there could be a small amount of CGT on the sale of the units from the members to the SMSF.

The strategy is quite well written through in terms of getting people excited - it highlights all the benefits without eluding to the costs and drawbacks.

As I have stated before, I believe with the new(ish) super borrowing rules it is better in most situations to purchase via an instalment warrant arrangement rather than a unit trust.

 

Well Written Superman, however duty will not be payable if the units are redeemed by the original unit holder then new units issued to the smsf. (subject to land rich provisions - $3mill + in NSW)
CGT is payable on redemption of units, with careful planning & timing this can be minimised.

Given the choice of using a unit trust vs warrant trust i would lean toward the unit trust scenario.
Obviously you would need to be in a stronger financial position to use a u/t strategy.
The banks (& their lawyers) are being very difficult in relation to warrant loans and taking 3-4 months to finalise what would normally be a straightforward deal.
Nickm

 

Thanks for the information regarding the application of stamp - it obviously varies state to state and I am not an expert in dutiable transactions!

Really? What bank is that. I know NAB is a pain in the butt, however Westpac + St George (who both use Gadens Lawyers I believe) are actually quite good and have their heads around the technicalities of the structure.

3-4 weeks turnaround seems to be the norm for the application to be approved and lawyers to sign off on the deals I have seen.

Maybe it depends on the particular person at the bank you are dealing with?

Once again thanks for the input.

SM