Tax and legal advice

SMSFs: Two things you must consider

By Naomi Mitchell

naomi mitchell tnThere has been a great deal of talk of late about self-managed super funds (SMSFs) and associated regulatory changes that may come into effect in the near-to-medium term future.

Blogger: Naomi Mitchell, partner,Younis and Co.

The growing popularity of SMSFs has led some market commentators to call for increased regulation – regulation that if introduced, could significantly impact on the way that property investors can borrow in SMSFs. Nevertheless, for the time being, SMSFs remain a feasible investment vehicle for many Australians looking to break into the property market or expand their portfolio.

In last month’s blog, I outlined some key considerations relating to SMSF property investments including: the importance of establishing the correct SMSF structure before signing a sale contract; and the implications of understanding (or not understanding) the restrictions placed on SMSF property acquisitions.

In this particular blog, I will focus on two equally important, but perhaps less obvious, SMSF considerations – these are: the unique nature of SMSF borrowing; and the requirements around preparing an investment strategy.

1)    SMSFs lie in a unique borrowing world – forget what you’ve done in the past

The processes surrounding finance approval for SMSF loans are very different to those for mainstream mortgage products. If investors don’t recognise these differences from the outset, they risk incurring unnecessary expenses and losing properties altogether.

Most investors, particularly experiences ones, will have established relationships with mortgage brokers. Indeed, some investors may have used mortgage brokers for prior purchases and received strong Loan to Value (LRV) ratios before moving ahead with nice and easy settlements – straightforward processes with minimal fuss and complications.

The key difference in the SMSF borrowing process is that investors need to fulfill the strict limited recourse criteria – meaning that if the borrower defaults at any point, the lender’s recourse will be limited to the fund asset being financed and the income rights associated with that asset. Because of these criteria, it can take a lot longer for lenders to approve finance for SMSF property purchases.

The problem that commonly arises in practice is that investors don’t realise that the SMSF borrowing process is unique. Based on their previous property dealings, they’ll find a property, pay a deposit, and attempt to secure finance three or four weeks into the settlement process. If, for example, the associated settlement period is six weeks (as is commonly the case), the investor often won’t be able to prepare and submit the required documentation on time.

This is why it is so important to secure finance pre-approval well ahead of any intended SMSF property acquisition(s). By doing so, investors can place themselves in a position to act swiftly and decidedly should properties of interest arise – giving them not only a competitive advantage over buyers without pre-approval, but also a clear price guide and a level of certainty when searching the market.

2)    Prepare an investment strategy

All SMSF trustees are required under the Superannuation Industry (Supervision) Regulations 1994 (“the regulations”) to prepare, implement and regularly review a documented investment strategy for their fund.

The regulations stipulate a number of non-exhaustive factors that the investment strategy must take into account including:

•    The risk involved in making, holding and realising, and the likely return from, the fund’s investments, having regard to its objectives and its expected cash flow requirements;

•    The composition of the fund’s investments as a whole including the extent to which the investments are diverse or involve the fund in being exposed to risks from inadequate diversification;

•    The liquidity of the fund’s investments taking into account its expected cash flow requirements; and

•    The ability of the fund to discharge its existing and prospective liabilities.

There are no formal requirements associated with the document’s layout; your investment strategy could theoretically be anywhere from a hundred lines to a thousand pages. However, the more thorough you are, the more likely you’ll be to comply with the regulations and devise a strategy that works.

They key thing to remember when selecting a property (or properties) for your SMSF is that each investment must ultimately meet the objectives of the SMSF. This means that any prospective property investment must be aimed at benefiting members of your fund on retirement or fund members’ dependants (should a fund member pass away prior to retirement).


 About Naomi Mitchell

naomi mitchell

Naomi Mitchell has over 17 years’ tax and business advisory experience. She specialises in superannuation, overseeing over 120 self managed superannuation funds with assets over $40 million. Her clients cover a diverse range of industries including food manufacturing, construction and engineering, and hospitality.

For more information on SMSFs or the various services that Naomi and her team at Younis and Co offer, please visit http://www.younisco.com.au/.

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podcast

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In this episode of the Smart Property Investment Show, Dominique Grubisa joins host Phil Tarrant to share her personal story which saw her hit rock bottom with excessive debt during the GFC.

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Dominique unpacks how, by relying on her background in law, she was able to overcome that debt and in doing so develop a unique investment strategy which she believes many can utilise today.

Dominique discusses distressed properties, and how she goes about finding them in order to buy property well below market value. She shares the process of identifying distressed properties as well as the controversy surrounding this buying method.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

3 big property investment myths busted open
5 steps to take on low-risk property developments
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Tune in to the latest episode of Property Showcase, the podcast with the inside track on the products and businesses that will help turbocharge your portfolio, maximise returns and make your overall investment experience seamless and stress-free!

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To hear more about these services, make sure to tune into this episode of Property Showcase!

 Make sure you never miss an episode by subscribing to us now on iTunes!

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    In this episode of Property Showcase, Michael Beresford joins editor of Wealth James Mitchell to unpack why recent political changes are not reason for concern for Australian investors.<\/p>\r\n

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Many investors who would have been successfully approved for finance last year are struggling now to either begin or continue their property investment journey because of the current financial climate.

In this episode of the Smart Property Investment Show, broker John Manciamelli and Momentum Media director Alex Whitlock joins host Tim Neary to discuss how APRA changes and the royal commission have resulted in a tighter lending economy and what that means for Australian investors.

They discuss what traps investors should avoid if they are trying to obtain finance, the four key growth drivers in a property market and unpacking trust structures while revealing one type of trust that you should miss.

If you like this episode, show your support by rating us or leaving a review on iTunes (The Smart Property Investment Show) and by following Smart Property Investment on social media: FacebookTwitter and LinkedIn.

If you have any questions about what you heard today, any topics of interest you have in mind, or if you’d like to lend your voice to the show, email [email protected] for more insights!

RELATED AREAS OF INTEREST:

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AREAS MENTIONED:

Hobart
Bondi
Deception Bay

 

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Getting finance approved in this tightening lending environment

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