Property has always been a popular form of investment amongst Australians. It has a perceived level of security as it is tangible and most investors have experience with property through home ownership.
With the current record low interest rates, investors have continued to increase their appetite for buying property. Housing finance has increased as have the number of building approvals. With the low interest environment, investors demand in property is likely to continue to drive some level of capital growth over the coming year.
Investments in property can be made either directly through the purchase of specific land or structures, or indirectly through either listed or unlisted property trusts. Trusts are an effective investment vehicle for Self Managed Super Fund (SMSF) trustees who want to create a diversified property portfolio, because direct property investments require significant funds, although structured borrowing arrangements can help.
Commercial (business real property)
- Real estate investment trusts (REITs)
- Unlisted property trusts
- Related party unit trust
- Unrelated private unit trust
SMSF Limited Recourse Borrowing Arrangements (LRBA)
There has been a great deal of discussion in recent months on borrowing by SMSFs since the Financial System Inquiry report release last December recommending to the Government to ban all borrowing by SMSFs.
The ATO has since released two interpretative decisions around how they apply the non-arm's length provisions to LRBAs involving loans from related entities to an SMSF. More recently the Government has announced that they did not agree with the Financial System Inquiry's recommendation to prohibit LRBAs by SMSFs. They do not consider the data sufficient to justify significant policy intervention. The ATO has been advised to monitor leverage and risk in the superannuation system and report back to the government after 3 years.
An SMSF is not prohibited from borrowing money if the arrangement entered into satisfies the conditions specified under the Superannuation Industry (Supervision) Act (SISA).
Section 67A(1) of SISA provides an exemption from the basic prohibition on SMSF borrowing where:
the borrowing is applied for the acquisition of a single acquirable asset;
the borrowing is to be used to purchase an asset that is held on trust for the SMSF;
the SMSF receives a beneficial interest and a right to acquire the legal ownership of the asset through the payment of instalments;
the loan is applied to an asset that the fund is permitted to acquire under the superannuation law; and
the lender's right to recoup against the loan is limited to recovery from the specific asset.
Borrowed monies cannot be used to improve an asset, therefore, you cannot borrow money to renovate an existing property or to develop land owned by the SMSF. However, trustees may make subsequent draw downs under an LRBA for the purposes of maintaining or repairing the asset subject to the LRBA. The asset can be replaced by another asset that the SMSF is allowed to acquire but only in very limited circumstances.
Single Acquirable Asset
When entering into an LRBA within your SMSF, it is important to ensure that all parties are aware of what is involved in terms of costs, documentation and compliance with SISA.
The trustees will need to review the fund's trust deed to ensure the borrowing is permitted and the fund's investment strategy should be reviewed to incorporate decisions about how the investment will be financed and through which lender. Some lenders prefer to deal with an SMSF that has a corporate trustee, therefore, a change of trustee may be required.
A security trust deed will need to be established (with a corporate trustee), this is the entity that will hold the asset acquired under an LRBA. The security trust deed is between the security trust and the SMSF. The security trust will be the legal owner of the asset and should therefore be listed on any contract documentation. The security trust is not seen as a separate entity for tax purposes and therefore no accounts or returns are maintained for the security trust.
When funding the purchase of the asset, the deposit must be paid from the SMSF and the SMSF should take out a cover note to insure the asset from the contract date. Payment on settlement will likely be made with the borrowed monies and the SMSF may wish to contribute additional funds.
All transactions in relation to the loan repayments, income from the asset and expenses incurred are made by or to the SMSF. Loan repayments need to be identified as principal and interest. Once the payment of the final instalment is made, the legal ownership of the asset must be passed to the SMSF.
An example of the LRBA structure is below:
Preservation Age Versus Age Pension
To gain access to your superannuation either as a lump sum payment or a pension payment you need to have met what is known as a 'condition of release'. Some of these include:
- Retirement after preservation age (refer below)
- Termination of employment after age 60
- Attaining age 65
- Permanent disability
- Terminal medical illness
- Upon death
In the 2015 budget announcement, the Federal government proposed changes to raise the pension age to 70 by 1 July 2035.This has created concern for Australia's middle age workers. However, the key concept that every Australian needs to be aware of is that 'preservation age' is different from 'age pension age'.
Your age pension age is the age that you first become eligible to claim the age pension. The current qualification age for the age pension is 65 years, increasing to 67 years by 1 July 2023.
Your preservation age is the age at which you can retire and access your preserved superannuation benefits which currently ranges from 55-60 years depending on your date of birth.
To access superannuation once you reach your preservation age you must also retire from the workforce. Those individuals who have reached preservation age, but have not yet retired, may still be able to assess their superannuation through establishing a Transition to Retirement (TTR) pension. Individuals turning 55 this year will need to wait until they are 56 now before being eligible to commence a TTR.
Currently the proposed legislation to increase the Age Pension age has not been passed through the Senate and appears unlikely to at this stage. Those in their 50's and 60's should take the opportunity of the generous tax rules and incentives around super and increase their retirement savings. Some strategies this age group should consider is looking into salary sacrificing into super while they are still working, review their insurance policy and needs as they may now be over insured as well as reviewing their asset allocations within their investment portfolio considering the extended date for retirement.
Managing Risk Of Trustee Incapacity
With an ageing population, the number of Australians living with dementia is a risk facing many families. Currently 3 in 10 people over the age of 85 and 1 in 10 people over the age of 65 live with dementia. According to Alzheimer's Australia, the number of cases of dementia in Australia is expected to increase to almost 900,000 by 2050. This can cause serious problems for SMSFs where a trustee loses capacity.
Under SISA, a person who holds an enduring power of attorney (EPOA) granted by a member may be a trustee, or a director of the corporate trustee, in place of that member without causing the SMSF to breach the legislation. However, on activation of the EPOA, the person holding the EPOA must formerly be appointed as a trustee, including consenting to be a trustee and signing the appropriate declarations and notification to the Australian Taxation Office.
A person's incapacity will give rise to important succession and estate planning opportunities and strategies. Taxation savings can result from the attorney cashing a superannuation benefit immediately prior to a member's death.
Where a person has lost capacity, their attorney will usually have full control over the person's financial affairs including their superannuation. In summary an attorney's powers allows:
- Cashing of superannuation benefits (if the member satisfies a condition of release)
- Moving the member's benefit from one superannuation fund to another. This action may also result in revoking a binding death benefit nomination (BDBN).
It is unclear whether an attorney is able to make a BDBN for the member. The favoured view is that this is not possible.
If you would like to print this information please click here for PDF format
The information provided in this information sheet does not constitute advice. The information is of a general nature only and does not take into account your individual financial situation. It should not be used, relied upon, or treated as a substitute for specific professional advice. We recommend that you contact Brentnalls SA before making any decision to discuss your particular requirements or circumstances.