Tips for borrowing through your DIY super for property investment
Suddenly, borrowing to invest in direct property through self-managed super funds is much more appealing. Following the recent release of a SMSF draft ruling, countless fund trustees would be feeling more confidence in the strategy – particularly when investing in older properties.
In the draft ruling, the ATO explains in detail its interpretation of the SMSF borrowing laws in relation to the purchase, maintenance, improvement and other fundamental changes to geared real estate.
And the regulator effectively provides a blueprint for SMSF trustees on how far they can go in looking after and improving their properties within strictly-controlled borrowing arrangements – according to its interpretation of the law.
For most SMSF investors in geared direct property, the draft ruling suggests they can maintain their assets with a fair degree of freedom using money borrowed under the original loan arrangement.
Meg Heffron, co-principal of specialist SMSF administrator Heffron and a former member of the Cooper superannuation review, puts the draft ruling into perspective.
“This is a ruling – and a draft ruling at that – rather than a legislative change,” Heffron emphasises. “It is simply the view that the ATO intends to take in regulating SMSF borrowing.”
Although noting that a court could one day reach different interpretations on some issues, Heffron realistically adds that many SMSFs prefer to follow the ATO’s thinking rather than risk a clash with the regulator.
Sydney tax lawyer Robert Richards succinctly adds: “The value of the draft ruling is the examples [see case studies below] as to what will, and as to what will not be, acceptable to the Tax Office.”
In other words, SMSF trustees who are considering gearing property should pay close attention to the draft ruling.
Although the final ruling will no doubt contain some changes after consultations and submissions, it will almost certainly mirror what has been described as a pragmatic and practical approach to interpreting the laws involving maintaining and improving geared property in SMSFs.
Previously, many SMSFs would have been uncertain about the extent they could go to with renovations, maintenance, improvements and changes to geared properties without contravening the law – or at least the ATO’s interpretation of the law. (The final ruling will apply to gearing from July last year when key changes were made to the SMSF borrowing laws.)
SMSF advisers are typically expecting a marked pickup in the gearing of properties by funds. It would be difficult to believe otherwise.
Here is our three-point, no-nonsense guide to the draft ruling:
Understand what is an acceptable geared asset
Detail: In July last year, superannuation law was amended to stipulate that a SMSF is only permitted to borrow to buy what is called a “single acquirable asset”. This means that a separate borrowing arrangement is necessarily for each geared asset. A difficulty is that it is not always clear to fund trustees whether a property – such as a building constructed across two titles – is a single asset or not.
Draft ruling: Here the ATO displays its pragmatism. “Fortunately,” says Heffron, “the ruling indicates that the ATO will take the view that where the two [assets] cannot be separated, they will be treated as a single asset.” This is the position even if a property is over more than one title.
“This is a new, far broader and more practical interpretation,” Heffron adds. “Previously, the ATO has effectively equated ‘asset’ with ‘title’.”
Case studies from draft ruling: A factory is built over three titles yet, under the draft ruling, the ATO would treat the property as a single asset that could be acquired with a single borrowing arrangement.
An apartment and its car park are on separate titles. And state law, in this case, does not allow the properties to be sold separately. Under the ruling, the ATO would treat the properties as one asset.
A SMSF wants to buy two adjacent blocks of land that the vendor will only sell together. However, there is no physical or legal reason why the blocks are not sold separately. The ATO would treat the blocks as separate assets. And therefore, the fund must enter into separate loan arrangements to gear the properties.
A SMSF wants to buy an off-the-plan apartment. Under the draft ruling, the ATO would allow the fund to use its own cash to secure the purchase. And then the fund could enter a borrowing arrangement to buy what the ATO would treat as a single asset.
Source : By Michael Laurence. Property Observer Wednesday, 12 October 2011
Stamp Duty Concession changes in NSW
Property developers have welcomed the NSW government’s plan to scrap stamp duty exemptions for existing homes, arguing it will help improve affordability and boost construction.
From January 1, 2012, the stamp duty exemption will be limited to newly built homes, including dwellings under construction bought “off the plan”.
The changes are part of Treasurer Mike Baird’s 2011/12 budget delivered on Tuesday.
Urban Taskforce, the peak body for property developers, has welcomed the government’s plan to scrap stamp duty exemptions for existing homes worth up to $600,000.
“We actually think the policy wasn’t working before,” chief executive Aaron Gadiel told reporters on Tuesday.
“In parts of Sydney where first-home buyers predominate, we were seeing prices being pushed up … so it’s inflated housing prices but hasn’t contributed to supply.
“This reform will make housing more affordable for first-home buyers by boosting the new housing supply.”
CEO of the NSW Business Chamber Stephen Cartwright said it was “a very smart change to an existing tax incentive”.
“It’s economically and fiscally sensible,” he said, adding that it would save taxpayers over $1 billion and provide “a shot-in-the-arm” for the housing construction market.
“NSW has underperformed in terms of new housing stock for a range of reasons and this initiative will help address that underperformance,” he said.
Mr Gadiel also said restricting transfer duty exemptions to newly built homes would help the building sector.
“By targeting the scheme, particularly at new housing, what we can expect is that it will stimulate new housing construction,” he said.
But Mr Gadiel criticised the government for not dedicating more funds to new roads in the outer suburbs of Sydney.
“It does show how little is spent on new roads – that will be something the government needs to work on in further budgets,” he said.
He calculated the northwest rail link in Sydney would cost $8-$12 billion, compared with $2.5 billion set aside for new roads in 2011/12.
For the 2011/12 financial year, the government dedicated $600 million towards the planned northwest and southwest rail links in outer Sydney.
A total of $13.1 billion will be spent on transport and roads this financial year, with $7.7 billion for operating and expanding public transport services and $5.4 billion for roads and maritime services.
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