Property Investing with Your Personal Super Fund: Townsends Business & Corporate Lawyers
It is trite to say that “Australians have a love affair with property”. But being trite doesn’t make it any less true. With traditionally some of the highest home ownership rates in the world and with so many people having the financial goal of having an ‘investment property’, Australians have a focus on property investment that much of the developed world does not share. It is not surprising then that this love of investment in property would extend to investment by their personal (self managed) super fund.
What we’re about to look at should not put you off. Your accountant, financial planner and super fund lawyer can help you navigate these waters.
Why would you want to invest in property using your personal super fund as opposed to outside super? Generally speaking the answer is one word: ‘tax’. Income earned by the property is taxed at a concessional rate (generally 15%) and the capital gain will also be taxed at a concessional rate (generally 10%) or even, if you have retired and your fund is in pension phase, nil.
You can even negatively gear inside your super fund and potentially use the tax loss to offset against the fund’s other income or carry it forward to use when the loan is paid down to the point where the property becomes positively geared and tax would otherwise be payable. Whether or not this is a viable strategy for any particular fund should be discussed with your adviser at the time.
Although tax is probably the main reason there is also the fact that the property may be protected from your creditors inside the super fund. Although creditors are entitled to access your super fund assets in certain strict conditions, a property inside the fund would not be available to those creditors if the purchase was in the ordinary course of your investment life and sufficient time had passed between the purchase and the insolvency. This might be a very useful benefit for those for whom the prospect of liability litigation is ever present, such as doctors, dentists, accountants and architects.
So once you’ve decided to buy property through a personal super fund there are a number of matters that need to be checked.
For a start it would be helpful if you had a personal super fund. Just because you haven’t set one up yet is no reason to not consider doing so in order to make that property investment. Your financial planner can discuss with you the do’s and don’ts that apply to super and how that would sit with your investment. The main issue will be of course that once the money and asset is inside super you can’t access it normally until you reach the relevant retirement age.
Once you’ve got your personal super fund you’ll tick off the following things.
Tick No. 1: you will need to ensure that your trust deed says that you can purchase property. Everything that a super fund wants to do must be permitted by its trust deed or governing rules. You should ensure that you not only have the power to buy property but also to lease it, maintain it, mortgage it and of course sell it.
Tick No.2: the fund has to have an investment strategy and that strategy must include the strategy of the fund to invest in direct property, perhaps even of a certain kind (e.g. residential, commercial, industrial etc).
Tick No. 3: you must ensure that no-one connected to the fund uses the property. Generally that includes a member of the fund, any relative of any member or any company or trust controlled by any member or any relative of a member. So don’t for a minute think that you can live in the property purchased by your super fund. That’s a breach of what is called the ‘sole purpose’ test and would make your fund non-compliant. If a fund is ‘non-compliant’ it loses its tax concessions and may be taxed at the highest marginal rate. Bad move.
The only exception is in respect of ‘business real property’ which may be used by a member or other related party. But be careful to ensure that the use fits within the strict definition of ‘business real property’ and the ATO guidelines.
Tick No. 4: you must ensure that you don’t purchase the property from anyone connected with the fund (same as before – a member, relative or company or trust controlled by a member or relative). Again the exception is in respect of ‘business real property’.
So if you own your business premises and would like to get the benefits of holding those premises inside your personal super fund you can transfer those business premises to the fund. Tax will be payable on any capital gain and in most States and most situations you will have to pay state duty as a result of the transfer. In NSW (and to a lesser extent WA and Victoria) state duty concessions apply so talk to your lawyer about those to see if you qualify.
Tick No. 5: if you are going to arrange for your personal super fund to buy property, make sure it is the trustee of the fund which is listed on the contract as the purchaser. In other words, you can’t buy it in your own name and then assume you will be able to treat it as a superannuation asset or that you can just transfer it to your super fund. That only leads to double state duty and tears before and after bedtime.
There is an exception to ‘tick rule number five’ which brings us to the issue of borrowing by a super fund to purchase property. There is an enormous amount to say on this topic so all we can do here is provide a summary of the main issues. Whatever you do, don’t even think of signing a contract to purchase property which involves a borrowing until you have spoken at length with your accountant and/or financial planner as well as a loan broker and/or bank and a good superannuation lawyer.
Why would your personal super fund borrow? Simple, it hasn’t got enough money to make the purchase otherwise. But additional to that is the strategy of leveraging your super assets. Assume your fund bought a property for $500,000 and that in 10 years it is worth $1M. If it used its own funds the super fund would see a return of 100% on its investment. But if the fund had borrowed $400,000 to buy the property and therefore used only $100,000 of its own money the return is 500%.
All the major (and some of the second tier) banks lend to super funds but their requirements are detailed and it takes longer than a normal housing loan so leave plenty of time to provide the bank with all the paper work they need. Generally they will lend around 70% of the value of the property but they may go higher in certain circumstances. If you don’t provide a personal guarantee the bank can only have security over the property you are purchasing. The super fund must not give security over any of its other assets.
So having decided after advice that borrowing by your personal super fund to purchase property is a good idea you then have a few major things to tick off on.
The property must be purchased not by you and not by your super fund but by a separate trustee that you appoint called a ‘holding trustee’ (“why” is a long story that I’ll tell you over a beer one night). That holding trustee must be the purchaser on the contract but all the purchase money must come from the fund.
You have to sign another trust deed (don’t panic, it’s only small) but exactly when you sign it depends on which State you’re in. This is because the different States have different rules about their state duty which will apply to this little deed. If you get it wrong your fund will be up for double State duty. In NSW, ACT and TAS the little deed must be signed after the contract to purchase the property is exchanged. In QLD, SA and NT it must be signed before the contract. In WA and VIC it can be either.
From then on although the holding trustee (which will likely be a new company you set up) is the owner all the costs and tax are paid by the super fund. Eventually when the loan is paid out the property can be either immediately sold on market or transferred to the super fund. If you’re advisers have set up the transaction properly only nominal duty is payable on that transfer.
Investment in property through a personal super fund has much to commend it, but there is a lot to consider and care is needed so always seek expert advice.
Peter Townsend is the Principal of Townsends Lawyers a law firm which focusses on legal advice and services for self managed superannuation funds.