Maybe you are like me and have some property in your super scheme. We did it quite some time ago and while it was not easy at the time, it has been a good investment. Ian Rodrigues lays out the pros and cons of doing it today.
Kevin: We’re going to tackle a big topic now. Ian Rodrigues joins me. Ian is the director of Bishop Collins Group, and we’re going to talk about superannuation, having a super fund and residential property.
We’ll focus on residential property, I think, Ian, because you can put a lot into super, but let’s just focus on residential because it’s a pretty broad issue, isn’t it really?
Ian: Superannuation self-managed funds are increasing in popularity. There are so many more of these funds. There are over 550,000 of them in Australia, and they’re growing at a fairly rapid rate.
There are a lot of people voting with their feet and setting up their own fund. One of the first things they come to is “What do I do with it?” and the classic thing would be a term deposit, which is not really a great investment long term. Then they go to look at either property or shares. Residential property for a lot of people is a very comfortable and known asset class.
Kevin: We did it. We did it many years ago, and it’s certainly been a good investment for us. But I thought we might quickly run through, from your perspective and what you’re learning, some of the pros and cons. What do you see as some of the pros, Ian?
Ian: The major benefit for holding an investment in residential property in super is going to be taxation. We have personal tax rates at – call it – 50%, at the top rate and sliding down if you’re on lower incomes. We have a corporate tax rate at 30% at the moment and there is some slight variation to some of that with small business, but superannuation funds are taxed at 15%, and on capital gains currently, it’s 10%. When the fund is in pension phase, the income and capital gains are generally taxed at 0%.
Having an asset that you’re paying no tax on the income and no tax on the gain that may have accrued over 10 or 20 years is a very attractive proposition. Taxation has to be the number one reason.
Kevin: What about asset protection?
Ian: One of the things we do like about superannuation and self-managed funds is that a lot of our clients are business people and facing all sorts of risks from dozens of pieces of legislation and things that make them personally liable.
In the event that you’re facing personal bankruptcy, one of the few things you get to keep apart from the shirt on your back and…
Kevin: The kids.
Ian: …And your kids, yes. The bank seems to mortgage them, don’t they?
One of the few things you get to keep is, in fact, your super. You may potentially lose all of your other assets – you can try protecting them a bit – but super is one thing that in the legislation, you’re allowed to keep. It’s something that is protected by law.
Kevin: That’s a big plus, actually. Off air, you mentioned to me about land tax as well. There could be a benefit there too, is there?
Ian: For the listeners who are feeling the pain of land tax, if they’re investing heavily in one state or just have a few properties, they know how painful that is to get that bill each year. You only get one threshold and that sort of thing in each state. Super funds, again, your self-managed fund, is entitled to another threshold.
You can have a situation where someone is paying land tax in New South Wales, and if they bought another property in their name, they would be taxable on the full value, but in their self-managed fund, they would be entitled to another threshold and probably not paying land tax.
To be honest, land tax isn’t the sole reason. You’re probably in super, but a threshold being worth about $6000 per annum, it’s not an insignificant reason.
Kevin: No, it’s not. Having been through this myself, I know it’s not an easy thing to do to put property in there. Lenders, how are they looking at it right now, Ian?
Ian: Historically, if you asked me this question six months ago, lenders were looking at it. Since that time, there have been a lot of APRA changes and other things just with investor lending generally. At the moment, lenders are still doing it, they’re still keen, they’re in business, but there is a lot more complexity.
I think the best advice I have for clients now is to actually, more than ever, shop around because the lending policies of each lender seem to vary almost monthly of what they will and won’t do. There are some banks that will do super loans but not for residential property. Some won’t do them. Some do them but only if you’re a customer.
There are other lenders out there other than the Big Four as well, so my advice at the moment is to shop around. There is still an active market. They still want to do these deals. But just be realistic. You’re not going to get the discounted home loan rates. You may not get the highest LVRs possible and you may have to look around at places where you just don’t walk into your usual bank to get that loan.
Kevin: Shop around; that’s really good advice. Paperwork, understanding the paperwork, and I guess the other message here too, Ian, is just be very careful who you take advice from. They need to be an expert in this field.
Ian: Absolutely, Kevin. The risk with superannuation lending is that there are probably a dozen things that can go horribly wrong, and a lot of the horribly wrong things are in the paperwork, which is not what the taxpayers should be concerned about; it’s all stuff for their advisors. It can be an inadvertent mistake. It could be just stating the trust deed incorrectly. All of those things can go horribly wrong.
Where the deposit gets paid from is incredibly important. That can end up with paying double stamp duty down the track if you don’t pay the money from the right accounts and get the right names on things.
A lot of these repercussions are minor issues that people say “I paid it out on one account. I can fix that up.” But no, you can’t. It could cost you a lot of money, and sometimes it could stop the whole deal being structured in super. And sometimes these are the things you don’t find out until down the track and everyone is looking at each other.
Kevin: I had someone who relayed a horror story to me. Well, they didn’t relay it to me because they didn’t know that it was a problem. They had purchased a property in their super and they were actually living in it as a holiday home, and I said, “You can’t do that.” When they found out, they went and got some good advice then because they had been told that you could do that. But that’s one of the things you can’t do, isn’t it?
Ian: With holiday houses in super, I have reservations about those, full stop, whether they are actually a great investment anyway. But with any asset in super, the sole purpose test, which is the major test for a super fund, the sole purpose is to provide retirement benefits has been interpreted to be almost entirely black and white.
It would seem to me it’s not logical. It’s just a black and white rule. It means that you cannot rent residential assets to yourself or to associates, which is a very wide definition and would include your family members and sometimes quite further than that.
Kevin: Even business associates, I would imagine.
Ian: It can. If you read the definition of a “Part 8 associate,” it goes for pages. So, the short answer is if you’re thinking of doing anything other than this as a straight investment, you really need to make sure that what you’re contemplating is going to be allowed.
You always have people who think they might play a funny game and not put it through the books and all of that. To me, the problem with that is it isn’t a funny game when you’re sitting down and it’s all gone pear-shaped.
A lot of the penalties on super… The Tax Office don’t have a lot of penalties in-between like a slap on the wrist. They have “make the fund non-complying,” which is the nuclear option, or ignore it. And they don’t have a lot of discretion either. It is a bit of a problem in the legislation that they’re trying to address about having some penalties that are more commensurate with the crime. Otherwise, everyone seems to get the death sentence, so it’s not good.
Kevin: There are some other restrictions, too, with lending in there in terms of your ability to re-gear as well. Is that right, Ian?
Ian: Yes. The single biggest thing your listeners need to be aware of is that it’s great to have the tax, great to have the asset protection, great to have an extra land tax threshold, and all of those things make sense, but the biggest thing practically speaking for an investor is the fact that when you set the loan repayment or the loan at a certain level – so you have a $500,000 property with a $300,000 loan, say – if you pay down that loan, you can never redraw it. Even if the bank would like to give you the money, they can’t because that’s not how these loans work. There is no ability to redraw a loan.
Even if you don’t pay down the $300,000 and you save up your surpluses for a deposit on a second property, one day when that property might be worth $1 million, you cannot re-gear that property and increase the loan. You cannot redraw or increase the loan.
For some investors at their stage of investing, that is a major detriment. For a lot of investors, it’s not an issue whatsoever and the danger for them is that they happily go… When people have a loan, they have a tendency to try and repay it and then not be aware that it can’t be redrawn.
Kevin: In closing, what are the costs like in putting a residential property into super, Ian?
Ian: That’s a very common question, Kevin. A lot of people want to know what it’s all going to cost. As a guide, there are a lot of different people selling super funds with different vested interests than what they’re actually selling you, but if someone was just buying a super fund and doing their own investing, it’s probably going to cost you no more than $5000 to set up the fund and get all of the financial advice that you need to be able to get a super loan.
Providing a self-managed fund and advising on obtaining a super loan is financial advice, so it must come from a licensed person, which can be your accountant. Sometimes they are licensed, but otherwise, it has to be from a licensed person. And most of the banks require a sign-off from that person saying you have been given financial advice.
There are some costs on each deal, so each deal might cost $2000 or $3000 in terms of trust deeds and extra stamp duty that you need to pay on those things. But what you find is that the second one, you don’t have all of those setup costs. There’s a once-off setting up the fund and that type of thing, and then there are those transactional costs for each one.
If those are a big issue for people, then often, the size of the investment and the size of the fund isn’t quite where it needs to be. But for most people, they just need to know roughly what it’s going to cost.
Kevin: That’s a really great insight, Ian. But I think the bottom line here is make sure that you’re dealing with a company who knows what the rules are and what the regulations are because as you said earlier in our chat, if you get it wrong, boy, it can be really, really painful.
Ian: Yes, it can be.
Kevin: My advice: Bishop Collins Group – that’s where Ian is from – you’ll find them at their website, BishopCollins.com.au. Also a great blogspot as well, BishopCollins.blogspot.com.au.
Ian Rodrigues, thank you so much for your time.
Ian: Thanks very much, Kevin.