Top 5 MyThs ThaT Could CosT you Thousands!

www.superpropertyconcierge.com.au

Busting the

Your Complete SuperProperty Solutiuon

For More Than 10 years now I’ve been assIsTIng ClIenTs Turn TheIr dreaMs and desIres InTo realITy. helpIng TheM To Make new lIves and CreaTe wonderFul MeMorIes by MakIng and IMpleMenTIng InTellIgenT FInanCIal sTraTegIes.

Now whilst we all have many goals we’d like to achieve over our lifetime, one key objective often defining the culmination of our entire life’s hard work is our financial independence in retirement and the quality of life we are able to support in our golden years.

Some of the most powerful strategies that can assist clients achieve their retirement objectives exist in superannuation, an environment which is a mystery to most and something many people are reluctant or even scared to consider.

To build credibility and confidence in dealing with an environment many financial advisers struggle to understand completely, I developed, in addition to my normal financial planning and finance practice, a superannuation consulting service for family law practitioners, in 2002.

I have since developed and run training courses for family law practitioners, presented at their conferences and have even been published in the Law Society Journal, underscoring my knowledge and expertise in this field. I am now also recognised as an SMSF Specialist Advisor™.

Through the Super Property Concierge, I now turn my experience and expertise to ensuring the super property borrowing strategy realizes the dreams and expectations of my clients rather than robbing them of a retirement they have worked so hard to achieve.

abouT The auThor

Martin Jandera

ConTenTs

Top 5 Myths that Could Cost you Thousands! 4

Background 5

Myth 1It’s too expensive! (Is This Strategy For Me?) 6

Myth 2The banks are your only financing option (Financing Options) 9

Myth 3You can buy your retirement property in the fund (Super Property Options) 10

Myth 4You won’t pay tax when you sell in the pension phase (Exit Strategy) 12

Myth 5I can ask my financial adviser if this strategy is appropriate for me (Who should I talk to?) 13

The Offer 14

4

welCoMe and Thank you For TakIng The TIMe To regIsTer For your Copy oF our laTesT ebook, The Top 5 MyThs ThaT Could CosT you Thousands!

The ability to borrow money in super and purchase property is truly one of the most exciting strategies available to assist you in growing your superannuation assets with greater speed and efficiency. I believe if done properly this strategy is a fantastic one and not only because of its true potential benefits but also because it has sparked a genuine interest in superannuation resulting in people like yourselves taking a closer look at what for many years was a neglected asset. For the first time in my client meetings I’m not having to bring up the dreaded ‘S’ word, people like you are now looking to engage me to focus on superannuation and demand a strategy be developed to allow them to take the fullest advantage of these recent changes.

The real danger though is that many people have and will continue to overlook the fact that these changes, made to allow borrowing in super, have not made the environment of superannuation any less complex, in fact it has made it even more so. Not respecting this fact will quickly see many fall into one of the many pitfalls of superannuation and ultimately find themselves at risk of losing up to half of the value of their superannuation savings to the ATO.

In this ebook we look at some of the myths that have already been asserted and likely to lead you astray. Understanding the basis for some of these assertions may ensure that you make the correct decisions about who you approach for more information, assessing the strategies suitability, assessing your financing options as well as your property strategies.

Finally, you will also get some understanding of the importance of considering your exit strategies which are key to ensuring you get the most out of this strategy.

Should you get lost in the complexity or want to ensure that you fully benefit from the strategy and avoid all the pitfalls, feel free to arrange a meeting to discuss your options and see the potential on offer with borrowing money in super to buy property.

Happy investing and may you enjoy a longand prosperous retirement.

Top 5 MyThs ThaT Could CosT you Thousands!

Welcome

5

how Can any MyThs arIse FroM whaT Many belIeve Is quITe a sIMple TransaCTIon. IF I deTerMIne ThaT I’d lIke To buy a properTy wheTher To lIve In or as an InvesTMenT surely The MosT dIFFICulT aspeCT oF The enTIre proCess Is dealIng wITh The real esTaTe agenT and CoMpleTIng The MorTgage paperwork, The resT Is generally quITe sTraIghT Forward, rIghT?

Well, not quite.Buying property is quite a common transaction and one many Australian’s aspire to, whether it is participating in that great Australian dream and owning your own property or simply purchasing a property for investment. Most of us understand the process and it often is as simple as finding the property you want and arranging finance. Shouldn’t it then be just as simple inside super?

Whilst many of the same sets of regulations govern the process for buying your own property and for buying property through super the key differentiator is the fact that superannuation is also governed by the superannuation laws and these provide the added complexity few understand.

Most of us accept that superannuation is a ‘forced’ saving to help us provide for ourselves in retirement and reduce or eliminate our reliance on the government at this time. To help ensure our accumulated savings are there for us in retirement the superannuation laws have been drafted in a way to try and protect us from high risk investment strategies. One such strategy that falls into this category is borrowing money to invest. Up until mid-2007, superannuation funds could not borrow to invest to ensure that they would never owe more than they owned. This underlying premise continues today and is why any financing arrangement must be done on a non-recourse basis.

Lending on a non-recourse basis, ensures that the lender can only recover the outstanding loan amount from the asset that the loan was used to purchase. This protects all the other assets owned by the fund. Importantly though can you start to see how this might begin to complicate things, I mean would you be happy lending money out on the basis that you had no right to any other asset if the loan couldn’t be repaid?

Given the additional risk lenders are taking you can understand that this is then reflected in the interest rates applicable to these loans and so the differences begin……There are many more differences and some with very important and costly consequences, so you can see that borrowing money to invest in super in no way reflects the same transaction done personally.

The purpose of this ebook isn’t to bore you with all these technical details but instead to offer a number of assertions that have already been published in the general media which could be leading you astray. Understanding the true potential of this strategy and respecting the complexity of the transaction itself will ensure that you put yourself in the best position to assess this strategy and then take the fullest advantage of this opportunity if you deem it appropriate.

baCkground

6

IT’s TooexpensIve!(Is ThIs sTraTegy For Me?)

Myth 1

wITh Many advIsers seeIng The opporTunITy For super Funds To borrow Money and InvesT In properTy as a ThreaT To TheIr own busInesses, a MyTh In relaTIon To The expense oF The sTraTegy was born.

Now, what is true in relation to the expense incurred in establishing the super property borrowing strategy:

1. Interest rates are hIgher than normal personal resIdentIal loans

This makes sense given the additional risk taken on by the financier (bank) as their only recourse in recovering any outstanding debt is the property itself. Some financiers have taken advantage of the most recent changes to the super laws allowing personal guarantees to be given by the trustees, meaning the trustees own personal assets are at risk in the event the mortgage is not paid back and the property fails to realize the outstanding debt through any forced sale.

2. addItIonal fees to enter Into thIs strategy

There are certainly additional fees associated with this strategy which either cannot or should not be avoided, these include:a. Professional advice fees – assess and develop the strategy;b. Self managed super fund (“SMSF”) set up fees – only if an SMSF doesn’t already exist;c. Bare trust establishment – the property is required to be held by the SMSF through a separate trust; andd. Legal fees – charged by the banks and other solicitors that may need to review the various legal documents that need

to be executed.

3. reduced negatIve gearIng benefIt

One of the much publicised benefits of buying an investment property are the negative gearing benefits, this is essentially where any costs that exceed the income generated by the investment either offset other income and thus save tax on that income or result is some proportionate refund. With the super fund being taxed at 15% in the accumulation phase this tax savings of refund will only amount to 15% of the excess investment costs. Comparing this to an investment purchased personally where the individual’s marginal tax rate is say 38.5% you can see that this is likely to lead to a greater tax saving.

Whilst there is no getting around these additional expenses when compared to a personal property purchase it is a very short sighted argument and one that can sway many people into avoiding the super property borrowing strategy altogether. If the argument is made by one’s accountant or financial adviser it adds more weight and eliminates further discussion.

You may find that making the mistake to stop investigating the strategy further could end up being quite a costly one.

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1. Interest rates are hIgher than normal personal resIdentIal loans

Any adviser that is prepared to run this argument is clearly demonstrating their serious lack of understanding of the super property investment strategy. The reason for this being that this argument would only make sense if the super fund was able to borrow the same amount as an individual and this is not the case. A super fund can in most circumstances borrow up 80% of the value of the property whereas an individual with using equity from another property can borrow up to 95% of the value a property.

Consider a $500,000 property, a super fund can borrow up to $400,000 whilst an individual could borrow up to $475,000, calculating the interest costs at the present time would result in the super fund having an interest liability of $29,680pa at 7.42% (as at 13 March 2012 with St George) and an interest liability personally of $31,920 at 6.72% (as at 13 March 2012 with St George Advantage package).

You can see that the true interest cost will come down to how much is borrowed and it must not simply be assumed that the super fund annual interest expense will be more on the basis that the interest rate is higher.

2. addItIonal fees to enter Into thIs strategy

Whilst there is little that can be done about these, incurring professional advice fees should ensure that you only enter into this strategy if it is appropriate and this advice should also assist in helping you avoid all the pitfalls, with one of these pitfalls resulting in a second payment of stamp duty, most advice fees would be covered simply by ensuring that this penalty was avoided.

Many also claim that these fees are tax deductible and give you the impression that you will eventually recover them. Making this claim alongside one which states that no tax will be payable if sold in the pension phase may be a bit misleading given that if no tax is payable the original expenses were then fully incurred as they did not reduce any tax as none was payable.

To fully assess whether or not these fees can be recouped can only be done through running various projections and these can be done to demonstrate that even by incurring these fees, the long term returns can justify the initial expense.

3. reduced negatIve gearIng benefIt

This justification is possible one of the most misleading. It is generally couched in terms of income and completely stays silent on two issues. The first being that nothing is said in relation to how long it may take a property to become positively geared in which case there is a net positive income flow from the investment and the lower taxation environment will effectively mean that you will enjoy more of the income than if it was received personally.

Generally, most landlords increase the rent they ask for their property on a regular basis. There will come a time when this income is more than the interest cost and property running expenses, this is the time that the super fund will provide superior income returns. Subject to interest rates and achievable income returns this may occur sooner than you think.

MythBusted

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This biggest issue however comes when you decide to sell the property. If this happens to coincide with the fund being entirely in the pension phase then there is likely to be no tax liability raised when the property is sold, that is you get to enjoy the full benefit of your astute investment. Selling the investment property personally however will mean that whilst you may qualify for the 50% capital gains tax discount up to half the capital gain will be taxed at your marginal rate.

If we put this into figures you will see:

Initial property purchase: $500,000Value at time of sale: $1,000,000Capital gain: $500,000Tax if sold in the pension phase in the fund: $0Net value in the pension phase in the fund: $1,000,000Tax if sold personally assuming no other income: $89,800Net value if held personally assuming no other income: $910,200

You can therefore see that if the property is indeed held in the super fund and sold when the fund is paying a pension, you are likely to enjoy the full value of the sale price, whereas holding the property personally is likely to see you give up $89,800. No doubt you could do quite a bit with $89,800.

You should now see that much of the hysterical assertions that the super property borrowing strategy is more expensive than investing in property personally is very much a myth and can only be determined once the property, loan structure and expected returns are assessed. You can also see that with some many issues that need to be assessed any adviser really needs to take their time in assessing this strategy for each client to be able to provide them with appropriate and accurate response.

Falling into the trap of believing this myth could be a very expensive exercise.

MythBusted

IT’s Too expensIve! (Is ThIs sTraTegy For Me?)Myth 1

9

The banks areyour only FInanCIng opTIon(FInanCIng opTIons)

Myth 2

Many people InTroduCed To ThIs sTraTegy by TheIr FInanCIal advIser, aCCounTanT or even TheIr MorTgage broker would assuMe, as would TheIr advIser, ThaT TheIr Fund’s only opTIon To raIse Money To purChase a properTy lIes wITh The banks. In FaCT, There Is anoTher opTIon.

Whilst the banks are the main source of funding enabling super funds to complete their real estate transactions, you might be surprised to know that you may be able to lend your fund the money to complete the same property purchase. How is this possible you may ask? Well, the super fund is allowed to enter into a lending arrangement with you so long as this transaction is at ‘arms length’ and on commercial terms. This is generally referred to as a ‘related party loan’.

This does not mean you can treat your fund more favourably or harshly than a normal lending institution in fact you must apply the same approach they would in setting interest rates and chasing down payments. Not doing so would see you breach the super laws and result in various penalties being applied.

Why would anyone consider this you may ask and where would I get the money?

Well, you will need to raise the necessary funds from somewhere, so the bank may still play a role in lending you money. If you have equity in your home, you may elect to borrow the money against your home and on lend it to your fund.

The benefit in doing this is that you may be able to secure a loan for say 6.72% as in the discussion above and on lend it to your fund at 7.42%. Doing so would result in you personally pocketing the difference of 0.7% and on a loan of $400,000 equate to a net personal income receipt of $2,800 for the year.

This means that the personal loan would be positively geared increasing your income cash flow with minimal risk given that you are investing the loaned funds against an investment your super fund owns. There is a reasonable level of flexibility as super fund loans can be refinanced so if you need the money back from your super fund, you should be able to refinance this loan and recover the originally lent proceeds, allowing you to redirect these funds to another purpose.

Whilst this may not be available to everyone, there are certain circumstances where this can be quite a useful strategy and one that add value to your personal financial position.

It is important to note that many adviser are not aware of this option and how it may be applied and mortgage brokers are certainly not licenced to be able to discuss this option with you. You therefore need to be very careful about discussing your financing options with the super property strategy as you may not be exploring all your options.

You may now appreciate that in overlooking your financing options you may actually be missing out on an opportunity to make more money.

10

you Can buy your reTIreMenT properTy InThe Fund(super properTy opTIons)

Myth 3

huMour Me FroM a MInuTe, IF you are aT leasT More Than 10 years FroM reTIreMenT or even say 5 years away, Close your eyes and Try To IMage where you see yourselF reTIrIng To. Is a quIeT beaChsIde Town, a CounTry Town or even soMewhere In The CITy you are already lIvIng.narrow your FoCus To The Type oF sTreeT you wanT your reTIreMenT house To be In, Is IT Close To your ChIldren and grandChIldren or very Far away? sTarT To buIld The hoMe you see yourselF lIvIng In when you reTIre In your MInd, Is IT Two sToreys or one, a bIg baCk yard wITh loTs oF grass or a TIny FlaT wITh a balCony and a MagnIFICenT vIew?

If you struggled to see and smell the location, the salt in the air, the sound of crashing waves, the drifting aroma of freshly cut grass or the sounds of horns, ambulances and the smell exhaust you probably also struggled to get a clear picture of the property itself, its rooms, stairs, pictures on the wall, carpeting, floorboards, garage etc. Don’t worry most people struggle to imagine where they want to live let alone specifically isolate the actual property they want to retire to, plus most want to keep their options open.

Consider now, you have built your retirement home, put your emotions to one side and need to ascertain whether or not this property will attract a tenant willing to make market or above market rent, will there be a high tenant turnover and will new tenants be easy find? More importantly though, will the property appreciate strongly over the coming years and will it be easy to sell if you are required to so quickly?

You must never forget, regardless of whether or not you want to move into the property in retirement, until you do the property is an investment of the fund. If it doesn’t perform they could be severely limiting your ability to have your retirement income needs met and this could mean that you will need to work for a few more years or reduce your lifestyle expectations.

This becomes an even bigger issue if you don’t decide to move into the property in retirement as you could have forgone this property for the sake of another one with much stronger investment fundamentals and thus possibly achieved your retirement lifestyle objectives.

11

It is very much laughable to assume firstly that most people will be able to identify the actual property they want to retire to and this could see them miss out on additional returns they could have achieved if they’d only invested in a genuine investment property, making an investment decision rather than an emotional one. You should note though that your super fund will need to have an investment strategy in place as per the superannuation laws, how will you pass of an emotional purchase over an investment one, will you be prepared to lower your investment expectations so that you can try and predict where you want to live in the future?

The next issue which many proponents of this strategy forget to mention is that you will need to transfer the property out of the fund in order to move into it. Now this poses a number of concerns. The first is that if you simply transfer the property out of the fund, you may be personally liable for stamp duty on this transfer. Now if you don’t have the liquid assets to pay this liability, you may need to approach your fund and draw more money out to meet this liability.

Such a transfer will also result in a significant reduction in assets from which you can draw a pension. Now, you might argue that you could sell your house and thus raise the necessary funds, the only issue in doing this though will be that these amounts may be more efficiently and effectively invested inside the super fund where no tax may be payable on any investment returns but due to the contribution caps you may be forced to retain quite a sizeable amount in your own name and thus expose your investment returns to the personal marginal tax environment. Rather than transferring the property out of your fund, you may then elect to purchase the property with the funds raised from the sale of your own home, this may be a little more efficient but may still see you retain some of your realised assets in your own name.

You can see then, that whilst it may be possible to purchase a property in your super fund to which you eventually retire, doing so isn’t without its risks and could be a very costly exercise if you get it wrong.

12

you won’T pay Tax when you sell In The pensIon phase(exIT sTraTegy)

Myth 4

one oF The bIggesT and probably besT InCIdenTal beneFITs oF purChasIng a properTy In super Is The FaCT ThaT IF The properTy Is sold, when The Fund Is In The pensIon phase or when The properTy Is one oF The asseTs supporTIng a pensIon, no Tax Is payable on any InCoMe InCludIng any CapITal gaIns.

Yes, this myth is true, but WaIt there’s more. You need to understand that in order to benefit from this most attractive incidental benefit of superannuation, you must sell the property whilst a pension is running.

So? You might ask, what’s the problem with this, I’d be more than happy to sell the property if it meant locking in a benefit like this….Ah but will you?

Two things must be considered, the first is that few people are ever going to advise you to sell a property, mainly because one can never be sure the property market has peaked and secondly a property asset can provide a fair degree of security and comfort given its general lack of volatility.

Furthermore, do you know when you’re going die? Most of us don’t so why would you sell a property giving you security and a solid income stream if liquidity isn’t a problem and you feel like you could live another 10, 15 years or more? Herein lies the issue, timing the sale to occur reasonably close to the time you expect to pass on.

Can you see that you are probably most likely to continue holding onto the property as long as you can, again assuming that your fund is able to meet its pension obligations i.e. there are enough cash assets to pay your pension. Not knowing when you are likely to die means there is a good chance that you will die before you get the opportunity to sell the property, in which case, the pension will cease on the day you die and the property will effectively be sold in the accumulation phase and be subject to tax.

It has been my experience professionally that clients in their retirement years having held an investment property for more than a decade tend to hold onto the property, particularly if the rental returns are attractive and reliable being quite prepared to pass on any tax issues to the next generation. At these times in your life it has been my experience that people value financial security over tax savings.

Therefore, it is either important to ensure that you do sell the property in your super fund at some point during your retirement and therefore lock in those taxation benefits or alternatively enter into the transaction understanding the impact of any taxation consequences on your passing.

It is important that you are prepared for both outcomes.

13

I Can ask My FInanCIal advIser IF ThIs sTraTegy Is rIghT For Me(who should I Talk To?)

Myth 5

wouldn’T IT be greaT IF you Could ask your FInanCIal advIser or aCCounTanT IF ThIs sTraTegy Is rIghT For you and geT an honesT and Frank response, unForTunaTely ThIs Is noT always goIng To be possIble.

Many clients assume that as their financial adviser or accountant deals with their superannuation savings that they would provide them with a considered response, sadly this may not always happen and I have come across this quite often in recent times. In my experience it is often the ‘private client’ advisers that have been very quick to steer clients away from the super property borrowing strategy and have either encouraged clients to invest in a basket of managed funds and or direct shares or have simply indicated that a super fund would be better off using cash rather than borrowed funds to purchase the property in question. In none of my experiences has a considered and justified response been put to the client asking the question.

There may be many reasons for advisers immediately responding in the negative, I’d hate to think that it had anything to do with maintaining fund’s under advice but can understand how clients may read this into the responses received as not many financial planning practices are structured to bill for advice of this sort. It doesn’t take a genius to figure out that if an adviser is receiving a management fee and their deal group is benefiting from any other fees associated with the platform on which the investments are held, they are likely to see their earnings fall if they are to advise a client to invest in this property strategy.

One reason I prefer to offer though is that superannuation is quite a specialised environment and the average adviser doesn’t truly understand the complexities beyond structuring an investment and insurance strategy. Moving beyond this can get quite confusing and there are many things that need to be understood from a regulation point of view, both in relation to the superannuation laws as well as taxation laws.

On this basis clients need to ensure that their adviser does not have a conflict in advising them to move out of their present investments and into direct property but more importantly should ensure that there adviser has the experience, knowledge and expertise in dealing with superannuation.

So what should the response of any adviser be if asked the question, is the super property borrowing strategy appropriate for me? It depends!

If you get an immediate yes or no, then there is a good chance you should speak with someone else who may be more capable in making an assessment in your best interest. If you think back to the first myth you will see that there were a number of considerations just in assessing whether or not the super property borrowing strategy was more expensive than buying a property personally. These considerations cannot be done in one’s own head and when put on the spot.

You should expect that any response is presented to you in the form of a statement of advice. The main reason for this is so that you can see the thought process and justifications that the adviser has relied on in answering your simple question, as this will never, ever be a simple question.

Overlooking this strategy on the basis of a “no” response could be an extremely costly oversight, well worth the expense to investigate it professional and completely.

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Exclusive offer

Available to all those who use the Super Property Concierge’s complete service solution.

To validate this offer your ebook registration details need to be held by Super Property Concierge or you must have registered as an attendee at one of our events. Offer only available within 3 months of registration. The Super Property Concierge is able to apply or withhold this offer at its own discretion and can withdraw the offer entirely without notice.

This offer does not include the Bare trust deed, borrowing documentation or any other legal documentation required to complete the super property borrowing strategy/transaction. All fees in relation to any and all strategic advice must be paid before the fees to establish the Bare trustee company will be waived. This offer and its conditions will be agreed prior to Super Property Concierge entering into any service agreement.

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