Ask Ban Tacs Question
Hi Julia,
I am in the process of making an offer on a commercial property through a Self Managed Superannuation Fund, and the agent has advised me that I need to have the fund setup prior to making the offer. Can you please answer the following questions for me.
1. Should the fund be “Individual” or “Corporate”? And do I need and ABN?
2. What is the time that it takes to set up?
3. Do I need an accountant or can I do it myself?
Thanks and regards
Answer
My answer very much depends on whether you are going to borrow or not but rather than risk further delays I will give you the answer for both:
The SMSF fund is a trust not an individual or a company but as a trust is not a legal entity allowed to enter into contracts in its own right it needs a trustee to act on its behalf. That trustee can be a company (all the members must be directors) or individuals (all members must be trustee). If you only have one member then you must have a corporate trustee.
You will need an ABN but do not have to register for GST unless your turnover of GSTable supplies is more than $75,000. Residential rents are not subject to GST so don’t count towards the threshold but commercial rents are subject to GST so do count towards the threshold.
Here is a link to our SMSF booklet for more information but it is still far from being everything you need to know http://www.bantacs.com.au/booklets/SMSFs_Booklet.pdf
The absolute first step you need to take is to make sure your employer will pay your superannuation directly into your SMSF fund. It is not good enough to have them pay it into another fund then rolled into your fund. If the property is negatively geared you cannot afford to have the super contributions go into another fund first because it will be taxed in that fund so you will have nothing to offset the losses on the property against.
If you are borrowing:
Most lenders will require you to have a corporate trustee.
It would be madness to try to handle the loan arrangements yourself. Every time I go through this with a client there is always something new that comes up and causes problems. The banks have you completely at their mercy and they are tougher than normal because the loan needs to be limited recourse.
My recommendation to clients is always that they find a lender before they do anything, finding a property is further down the track. To borrow to invest through a SMSF a bare trust needs to be set up to hold the property for the benefit of the SMSF until the loan is fully paid off, then it is transferred to the SMSF. This bare trust will also need another corporate trustee. The banks are very fussy about the bare trust deed because that is where their security lies. They will probably require you to use their bare trust deed or at least require you to pay their legal team to review yours so you may as well just use theirs. Likewise they will want their legal team to check your SMSF trust deed ie to make sure it allows the SMSF to borrow money. Now if they are going to charge you for this too there may be an advantage in just using their solicitor’s SMSF deed. So it is definitely worth talking to your lender before you do anything and see what obstacles they are going to put in front of you. They may also require you to talk with their financial planning department too (probably to see if they can get you to invest in one of their funds instead).
Borrowing Tips – try for an 80% lend even if you have to pay a little more in interest and make sure the lender has an offset account facility. The problem with SMSFs is that you cannot use the increased equity in a property to finance the next one. You need to save up that 20% deposit which is why you need to be able to borrow as much as possible and use an offset account to save the next deposit rather than a redraw facility. I believe St George is currently the only lender offering both these. Once the property goes up in value you can refinance it with a 70% lender that offers a lower interest rate. You can’t borrow any more but now that loan will only represent 70% of the value of the property.
Hopefully the above has shown you not just a need for advice but that you can benefit financially from the advice of someone that knows the finer points.
If you are not borrowing:
Then you could save yourself the cost of a corporate trustee and the ongoing ASIC fees by having individual trustees but you will need to have more than one member. A SMSF can be set up by simply downloading the documents off the net and signing them then getting an ABN and TFN from abr.gov.au and going to the bank and opening a bank account. The problem is that there are lots of rules to adhered to while running the fund, each year the SMSF will be audited and if you have broken any of these rules the auditor must report it to the ATO who in the worst case scenario can take nearly half the funds assets in tax because the fund is non-compliant. Our SMSF booklet will give you some idea but is not intended to cover everything. The ATO web site also has a booklet for SMSF trustees. In short technically you can do it yourself but do not!!!!!!
Please do not end up with one of the big organisations that do SMSF tax returns and audits all automatically. You want to have an Accountant you can talk to, who will help you understand the traps and tricks particular to your circumstances. A one size fits all approach may reduce costs (I doubt as their charge out rates are very high) but if you are going for that sort of set and forget arrangement you may be better just investing in a public funds anyway. The idea of property investing and SMSFs is to increase your wealth by a hands on approach, this is best achieved with an accountant who offers personalised service.
