Heads up - perhaps super funds will be permitted to borrow?

Just wanted to give everyone advance notice that there's a bill in the Senate at the moment which might have the result that super funds will be permitted to borrow.

The bill is aimed at confirming the governments position that although most instalment warrants involve a borrowing they are permitted investments for super funds.

But from a preliminary perusal it seems to me that it might end up that super funds can borrow provided

1) the borrowing is used to acquire an asset that's held on trust so the super fund trustee gets beneficial ownership over time through paying instalments;
2) the lender has limited recourse to only the relevant asset acquired and not other assets of the super fund
3) the asset must otherwise be one the super fund can acquire (i.e. rules around acquiring in-house assets etc will still apply.

It's too early to say, but this could really open the floodgates for self-managed super funds to buy commercial and residential property in circumstances where the super account balance was insufficient to do so previously...

It could fuel another property boom and lead to lots of work and fees for the financial services industry in structuring such arrangements

Too early to judge but it looks like it could be much broader than merely instalment warrants on listed shares.

I'll post further once I've had a chance to look more closely at the proposals.

Cheers
N

 

interesting.. imagine all the tied up money in super money now available to borrow to buy property!

 

Hi Nigel,

Thanks for that info.

But with a tax rate of only 15% does it make much sense to borrow in a Superfund when the deductions will be much greater outside super when negatively geared against your salary etc which is likely to be at a much higher tax rate?

Cheers - Gordon

 

Good point Austini, and I would imagine borrowing would be quite conservative.. as who is going to pay the bank interest and property maintaince/costs? Rent would have to cover the loan repayment meaning a low LVR of 40%.

 

Number 2 would be a big stumbling block impeding the purchase of property until the lending institutions get their products in order.

Presently any property loan as a total liability associated with it which would mean that all asset of the SMSF are at risk to cover a bad property loan.

Possibly the banks will come up with a +ve geared property loan product?

Cheers

 

This is interesting. I wonder if it's the first step in allowing first home buyers to use their superannuation as a deposit on a home. Stranger things have happened.

 

If this goes through, it will send property prices into the stratosphere. I believe - and have believed for a long time now - that FHB's should be allowed to use their super money as a deposit on a home AND use their SGC to pay back the loan, with conditions of course.

Those being:
- the money can only be used to service the original loan to purchase the home (cannot use SGC money for reno's, upgrade etc)
- equity lending is prohibited unless it is for investment purposes and if investments are sold, any profits must be used to pay down the home loan
- the SGC portion is used to pay down principal only ON TOP OF regular payments - cannot use the SGC as part of regular payments
- once the loan has been paid back, the money used to pay the loan must be replaced inside super with additional super payments made from employee's salary

It might happen... Yeah and I just saw a pig fly past my office window.

Mark

 

Mark, setting up schemes like using your super to buy a house, what do you think that will do to prices? Are we going to forfit our super now aswell to buy a house?

You been a property investor want to see property prices go up, so schemes like this will only encourage that to happen.

What do you think will happen.. Auction day comes, 20 buyers are there, now all of the sudden all 20 buyers can use their super to buy a house? Who has this helped? The property owner selling, as he will get more for their house..

 

The smart people who have taken advantage of the super co contributions. Theyll have like 10k more than the others...

What happens when the people grow out of this house and need a new one, they wont be first home owners so they cant use super again, it will encourage people to buy the best from the start.

Id like to see it happen, it could be one of the only things that help young people...

 

Calliva SuperAccess already have this facility in place, though bit expensive for me personally.
Also I have heard of SMSF unitising properties do to this (real business properties, not residential). Calliva Group - Managed Funds and Investment Opportunities

It will be interesting if things go down the residential property track.

Cheers,

Dan

This is generally available information in the public domain. Before making an investment decision speak to your FPA registered financial planner, accountant or tax adviser.

 

Hi Nigel
I thought SMSFs could have been using installment warrants for some years now, provided it was consistent with the fund's investing strategy. I don't have an SMSF yet, but I'm in the process of planning one, and installment warrants are something I'd definitely be looking at, since installment warrants are inherently geared, pay juicy franked income and can be rolled, so there is little chance of a forced sale.
Is there an ATO ruling on this, or has it not been tested? Is the Bill aimed at providing clarity, or just to play catchup with ATO policy?

 

Calliva are very expensive and you can end up paying stamp duty twice!!!! Plus its purely Commercial property.

I for one would love to be able to borrow with my super and leverage it again. However it does seem contrary to the governments desire to protect super moneys from risk.

As for allowing people to access super to buy their own homes, this would seem a risky strategy to me as per peoples comments above.

 

Nigel,

House prices will go through the roof.
Stock market through the floor !

Fred.

 

An Update - if I'm on the same page..

It's called a DIT or Debt Installment Trust - and I think the legislation's passed.

This is the structure Installment Warrants use and is now open to interpretation for use on art, antiques, resi property the list goes on.

I don't know much (at all) about them yet, but watch this space because I'm sure the likes of Macquarie will be releasing some form of retail product in the not to distant.

The highlight - you still can't encumber your super fund so security's gotta come from somewhere else. Super remains protected.

I've attached an article that helps to explain.

 

Thanks for the heads up Property

 

Most welcome MattR,

It's nice to be able to throw some info back into the forum.

And...further to my comment about my 'watch this space' for Macquarie to come to the market with a retail related product...

I just had coffee with a Macquarie guy and asked if anything was earmarked - apparently they have already kicked off the R&D and recruited two prominent super/structure lawyers in Melb & Syd to get it rolling. They don't miss a beat that lot. I'll post more as I hear.

 

looking very much forward to hearing more regarding this.... id imagine the expense will only be justifiable for those with very large balances at the begining though but hopefully it gets filtered down...

 

I am currently researching this. Somersoft has a couple of threads , also in this months API mag its on page 20.
I believe you need to have 120k in your super to start up your own SMSF.
Some lenders will do 70% LVR, I have not heard of 80% yet but I am sure there will be one soon.
Your 9% employer contribution can also help fund any shortfall if it is negatively geared - the first years interest also needs to be paid up front.

Looks very good to me, if you can start to access at aged 55. I am 40 - so it looks like a "landbanking" project might be appealing....

 

I was talking to Richard Sheppard about this on Wednesday evening, after being put in contact with him by Adam at Navra.
He is setting up a portfolio with 16 investors in all - buying commercial property in Brookvale and a couple of houses in two other places with good capital growth expected.
Then today I see Richard in the Sun-Herald, talking about using installment warrants within the Investor section !!
Looks interesting - might be a good subject for the next SIG Meeting ?