early query re property in SMSF

Discussion in 'Superannuation, SMSF & Personal Insurance' started by AusGuy, 9th Mar, 2020.

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  1. AusGuy

    AusGuy New Member

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    hi all.
    i'm guessing this has been asked alot, however i'm VERY new so bare with me please.
    i'm trying to gather some info before i see my fin planner..

    super balance;
    $185k

    Looking at purchasing a property for $225k, with current rental income of $1500 per month
    i'm self empl. so current not contributing alot to the super fund.

    how would lending for this work if we use an lvr of 40%?
    do i need to have a running balance in cash for the SMSF?

    thanks all.
     
  2. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Custodian trustee would borrow using the property as security, members would give a personal guarantee. Serviceability based on the fund and guarantor income.
     
  3. Scott No Mates

    Scott No Mates Well-Known Member

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    How would you pay for monthly bills or repairs if there was $0 in the kitty?
     
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  4. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The assumed yield is confusing as it's unusual. SMSF and personal licensed advice first is suggested.

    The fund would need cash for establishment and bare trust costs plus a liquidity buffer and duties and... .
     
  5. Lindsay_W

    Lindsay_W Well-Known Member

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    Wonder what you think about this idea @PandS :D
     
  6. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    Whaaaat?
     
  7. JohnPropChat

    JohnPropChat Well-Known Member

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    Sounds like you don't have an SMSF setup already. You need specialist advice.

    Servicing is based on shaded rental income and regular contributions, if this includes salary sacrificing then Banks may want you to meet servicing outside super as well.

    8% yield though sounds interesting, how much is the strata? Rental vacancies?

    @[email protected] knows his stuff, maybe give him a call.
     
  8. Richard Taylor

    Richard Taylor Well-Known Member

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    True unless you use a Nodoc loan thru a SMSF Rent to Buy style product where no servcicing is required.

    Other than in Victoria, South Australia (where they are not permitted) they are proving very popular where servicing is an issue due to lack of past contributions or you have another property and just dont meet the Banks criteria.
     
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  9. JohnPropChat

    JohnPropChat Well-Known Member

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    Interesting. What LVR? Resi? Term? Rate? Still need a personal guarantee?
     
  10. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    The ATO base terms apply. Some of these apparent brokers are basically a broker who parties up a related party loan (really strict terms) without giving financial advice or inroduce some third party which is dodgy brothers. Very dubious. I question if its complying credit advice issue.

    Assume a loan cost of 7% or higher. And a need for 40% equity at least plus.

    I dont get involved in establishment for such deals. It never makes sense. Its much like buying a fireplace to throw $50 notes in to keep warm.
     
  11. Richard Taylor

    Richard Taylor Well-Known Member

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    Maximum 85% lvr in metro but prefer 70% -75% / Resdiential - Yes / Current rate - 5.75% / Yes PG required.

    No Bare Trust required.

    We are getting 3-4 applications a week at the moment mainly from brokers who havec SMSF loans declined from traditional lenders after 6-8 weeks or assessment.
     
  12. JohnPropChat

    JohnPropChat Well-Known Member

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    How would it work without a bare trust? What is the structure?
     
  13. Richard Taylor

    Richard Taylor Well-Known Member

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    John, a compliant Rent to Buy agreement from the SMSF direct.

    No Bare Trust required.
     
    Last edited: 29th Mar, 2020
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  14. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    A bare trust would only be required where the SMSF is borrowing.
     
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  15. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    A` rent to buy contract for the smsf to acquire ?
     
  16. JohnPropChat

    JohnPropChat Well-Known Member

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    Would this buy in a Non geared unit trust or something similar so SMSF acquires the units slowly with additional payments on top of the "rent" payments?
     
  17. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    As far as using a ungeared UT - I would have same concerns since that trust would be controlled by unrelated parties or by other related parties in the absence of control by the smsf and also not comply with reg 13.22 and recourse is dubious. Unless the trustee was closely related and the value of each subsequent purchase could be reliably determined and the trust compliance maintained this could be a major risk.

    If it gets to these sorts of issues its a sign that it shouldnt be done. Buy to rent to acquire in a smsf ? No way. More holes than the titanic
     
  18. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    This a lease which the SMSF enters into and then it can buy the property down the track. It must have an option to purchase at a specific amount. Signed by by specialist lawyers as complying.
     
  19. Paul@PAS

    [email protected] Tax, Accounting + SMSF + All things Property Tax Business Plus Member

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    I dont dispute it can be initiated legally in respect of the option etc. If its a predominant asset for a SMSF it will face tough issues getting audit sign off and the investment strategy and risk Management Statement too. Counterparty and settlement risks and complying issues galore. The ATO InvStrat focus has really escalated and a big push onto smsf auditors is rolling out. Costly too. A true buy to rent through time - could be a audit with a qualified opinion. Just because something is legal doesnt mean it meets with the investment strategy being acceptable. The risRMS that must accompany the investment strategy alone will be costly, deed amendments and much more. And at the end of the day the apparent investment is potentially unsecured. And the buck wil stop with the auditor who wont likley accept the legal advice and qualify the audit report and report to the ATO.

    s55 of SISA is a big stick the ATO are waiving at auditors (and other advisers) for liability. My big issue with L2B is that the lease is with a smsf and the purpose behind a smsf entering into a lease isnt not itself an investment. Nor are the costs incurred associated with an investment. The costs incurred upfront vs the initial asset seem like a negative net asset at some point. This is one of the holes these arrangements skip. In a few cases I have seen the benefits appear to benefit the related party and concerns were that the use of the smsf as a temporary funding and tax limiting vehicle was a concern. ie Legal substence over form.

    If its messy and complex it may be worth thinking carefully about it.
     
  20. Terry_w

    Terry_w Lawyer, Tax Adviser and Mortgage broker in Sydney Business Member

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    Each trustee will or should need to get legal advice before entering into anything like this.
     
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