29 November 2010

Millinium's SMSF Lending Solution

 

Mr and Mrs Dixon have two individual superannuation accounts – they want to combine these into a SMSF and diversify the investments to include direct property.

They consult their financial adviser, who arranges for a solicitor to draw up an appropriate SMSF Trust Deed and other governing documents and assists to get their SMSF set up. Their financial adviser also assists them with their investment strategy that allows borrowing to acquire a commercial property asset for their SMSF. Mr Dixon is 46 and Mrs Dixon is 45, and the combined SMSF will hold cash and shares to the value of $500,000 prior to purchasing a property.

They have identified a commercial property for $550,000 with rental income of $44,000 per annum (8% yield). The property is tenanted, with a 5 year lease and a further 5 year option. To retain some cash and shares and still acquire the property, Mr and Mrs Dixon need a non-recourse loan for the acquisition.

Using just over $200,000 to cover equity contribution and costs, Mr and Mrs Dixon’s SMSF applies for a non recourse loan of $357,500 (65% of the purchase price) to assist fund the acquisition.

At an indicative 8.5% interest rate over 10years – 2 repayment options are offered:

• Interest only – gearing the commercial property and leaving a surplus after interest costs of $1,135 per month from rent (without taking into account any other costs);

• Principal and Interest – requiring an additional payment of $766 per month on top of the rental income.

Using the first option of interest only, the SMSF Trustees only need to ensure that they cover the interest payments with their lender (and later principal payments) given they don’t need to cover the additional principal payments on the loan until the terms require them to make principal payments. The SMSF is free to further invest interest payments under its investment strategy to grow more assets in the accumulation phase. This would be a prudent to diversify their superannuation contributions into other investments until capital repayment fall due.

Over an indicative loan term of 10 years and by using the full monthly income from the rent as the monthly loan repayment, the loan would be paid down to $144,080. Over this time, even if the property was sold for the same price it was purchased for - the $200,000 used in equity would have more than doubled. Also, if the property was sold during the pension phase of the SMSF they may obtain capital gains concessions on the property’s sale. This strategy alone could result in significant savings if a property is purchased at a low point in the market, held for a period and then the property is sold when the property market has recovered. There are of course tax implications and timings for the sale of the property that their financial planner can assist them with for their strategy.

Until any sale of the property, the SMSF retains beneficial ownership to the property in a bare trust that is set up to hold their commercial property. Millinium’s SMSF Property Solution assists with this set up.

Millinium as trustee of the Property Trust bares all the risks in relation to the Property Trust - see Tricks and Traps of your SMSF Borrowing.

SMSF Lending Solution
We have recently issued a lending solution for Self Managed Superannuation Funds ("SMSF") called Millinium’s SMSF Property Solution. We have recently entered into an arrangement with a major Australian bank for referral of credit lending activities without the need to continually get their approval for our structure.  The main features of our product are:

• Competent structure: A bare trust structure to allow an SMSF to acquire an investment property in accordance with the Superannuation Industry (Supervision) 1993 Act (Cth).

• Centralised Administration: An administration structure that records all transactions for the property in one administration service.

• Specialist Lender(s): A product that identifies lenders who provide limited recourse lending to the property so a claim cannot be made against other SMSF assets. However, some lenders may require a personal guarantee(s) from a member for any shortfall on a loan depending upon their loan agreement(s).

• Entitlements: The SMSF is entitled to all income generated by the property and any capital gain or loss in the property’s value.

• Portability: A product that allows for your SMSF to transfer the property to your SMSF once all loan repayments are made taking legal ownership to the property.

• Upkeep: The ability for the SMSF to deal with the property in the same way that a normal property investor would deal with their property, for example, lease it out, renovate, repair or sell the property. However, this is subject to the terms and conditions of the relevant loan agreement and our service to you.

• Flexible Terms: The SMSF can pay interest only or reduce the principal of the loan at any time (subject to the terms and conditions of the lender and loan agreement).

• Loan payments: All rent to be paid directly to the SMSF with loan repayments being made in the usual way from the SMSF to the lender to help pay off the loan.

• Reporting: Provides year end reporting and identification of upcoming bills and payments.

• Tax effective: Depends upon the SMSF and investors for tax effect in super.

• Competitive pricing: The product’s pricing for services is competitive with advisers having the ability to enter into fee for service arrangements with their SMSF clients.

If you would like to know more you can visit our website at www.millinium.com.au.

Please email me, Mark Jenkins, if you have any questions at smsfproperty@millinium.com.au or you can call me directly on 07 3004 8832.

 

Regards

Mark Jenkins

 

 

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Disclaimer: © Millinium’s SMSF Property Solution (“SMSF Property Solution”) is issued by Millinium Asset Services Pty  Limited (“Millinium”), a corporate authorised representative AR No. 374382 of Millinium Capital Managers Limited ACN 32 111 283 357. AFSL No. 284336 (“Millinium Capital”). The SMSF Property Solution is not a financial product pursuant to Part 7.9 of the Corporations Act 2001 (Cth). This document does not constitute an offer or recommendation for credit or property or personal advice. Investors should consider whether this product suits their objectives, financial situation or needs. This document may be amended, withdrawn or replaced without notice and does not form a contract between parties. The return of capital or income is not guaranteed.Any acquisition of real property or borrowing involves a degree of risk and potential investors should obtain financial, legal and taxation advice and consider all risks before making any decision about investing. Before investing, SMSF trustees should obtain their own advice as to whether this investment is allowable with regard to their SMSF’s investment strategy and otherwise appropriate for their SMSF. Millinium, its parent company and/or its related bodies corporate, directors, personnel or contractors disclaim any liability or loss as a result of a person’s reliance on this document and to the extent the law allow this.