There are many advantages when a Super Fund acquires residential or commercial property. Just to name a few…
A maximum 10% capital gains tax on sale of property if held for at least 12 months;
Potentially nil capital gains tax on sale of property if sold in pension phase;
Maximum of 15% tax on rental income;
All rental income received assists in paying off the mortgage loan;
Any expenses such as interest, council rates, insurance and maintenance may be claimed as tax deductions by the super fund, which potentially reduces its tax liability;
The super fund pays the required deposit (+ costs) on the property being purchased;
If you are a self employed business owner and currently own commercial property, you can transfer this property into the super fund;
A great way to generate wealth for your retirement through tax effective super contributions;
Greater investment choices and control over your future;
The super fund can pay out or reduce the mortgage at any time (subject to the terms of the relevant loan);
Through gearing, the super fund can acquire real estate property for a greater value than that of the funds ‘net worth’;
Other than the property acquired, all other super fund assets are safe and cannot be touched by any lender due to the ‘limited recourse’ provisions in section 67 (4A) of the SIS (Superannuation Industry – Supervision) Act.
A Super Fund is now permitted to borrow money and charge assets provided the borrowing complies with the following:
The fund may select any property (residential, commercial, retail or holiday units). The purchase must usually be an arms length transaction (i.e. the property is purchased from a ‘stranger’). There is an exception for ‘business assets’ (i.e. property leased to a tenant who conducts a business in the property). In this case, the property may be purchased from a ‘related party’ of the superannuation fund;
The legal title to the property must be held on trust by an independent trustee (called the ‘Property Trustee’ in these notes);
The beneficial title to the property will be held by the Super Fund;
A Lender will generally lend to the Super Fund on a limited recourse basis (i.e. the Lender’s recourse will be limited to the property, thereby providing the Super Fund absolute protection for its other assets). The Fund will charge its beneficial interest in the property to the Lender. In addition, the Property Trustee will grant a mortgage over the legal estate to the Lender. Certain lenders will also require personal guarantee from all members of the Super Fund;
All rents will be paid directly to the Fund;
The Fund will make loan repayments to the Lender in the ordinary way;
Funds can deal with the property however and whenever they like, in the same way as you can deal with ‘normal’ investment properties (e.g. lease, renovate, repair, or sell);
The Fund can pay out or reduce the mortgage at any time (subject to the terms of the relevant loan);
When the mortgage is paid out in full, title to the property may be transferred to the Fund by the Property Trustee or the Property Trustee may continue as registered proprietor.
It is important that the legal structure clearly complies with all the above requirements. Failure to do so may result in the Fund becoming a ‘non-complying’ fund within the meaning of the SIS Act.