These clients have agreed to share their story. Everyone’s situation is different, so their choices and outcomes will be different to yours. Consider your circumstances before deciding what’s right for you. The names and identifying details in the below case study and accompanying testimonial have been changed to protect the privacy of individuals.
Patrick Bollinger has an established SMSF with one property already in the SMSF, and wanted to purchase a second property. The existing fund had $300,000 of net assets. The SMSF was a single member fund with a sole director corporate trustee.
Patrick came to Blueprint Wealth two years after the second property had already been purchased off the plan with a $5,000 deposit, but prior to its final settlement. He had just paid a further $50,000 progress payment at lock-up stage and Patrick had restarted the final loan approval process to move toward settlement. At this time however, the property was revalued lower by $87,000 and finance approval was withdrawn. Patrick had only 10 days in which to secure finance before settlement by the time Blueprint Wealth became involved.
Patrick’s SMSF failed to meet the 10 day deadline as a number of previously unforeseen issues arose. The original offer and acceptance was made in Patrick’s personal name instead of in the trustee’s name. This took considerable time to work around before settlement could be completed.
The new lender arranged by Blueprint Wealth reviewed the titles during the finance application process and found that there were in fact two titles, one for the residence and one for the carpark allocated to the residence. The lender was unable to finance the carpark, which meant that Patrick’s SMSF had to purchase the carpark outright (without borrowed funds). The SMSF’s loan to value ratio, as a consequence, dropped below the lender’s minimum standard and Patrick was required to inject more funds into the SMSF to increase the equity inside the fund.
To gather more funds inside the SMSF, Patrick’s partner joined the SMSF and rolled over her super into the SMSF, but he was still short $136,000. To come up with the extra funds, Patrick was able to make a wage payment to himself from his private company. The first $50,000 into the fund was made as a concessional contribution, partially offsetting the additional tax bill from the wages drawn from his company. The remaining $86,000 was structured as a loan from Patrick to the SMSF. Patrick suffered a considerable personal income tax bill because of the additional wages he was forced to draw from his private company, however structuring the remaining $86,000 as a loan to the SMSF meant that these funds were recoverable back out of the fund at a later date and Patrick could potentially reduce income draws in future years as the loan was repaid. Patrick also avoided the need to make excess contributions and potentially face the tax penalties that they would have incurred.
In the end, Blueprint Wealth was able to help Patrick through all these difficulties and his loan settled 27 days later. He avoided default and the potential loss of his $55,000 progress payments.
The key learning point from this case study is that it is better to engage your advisor before you put in an offer on a property. The advisor will work with you to establish your borrowing capacity, ensure that you understand the rules around buying property inside your SMSF, help you navigate around the common pitfalls which are prevalent in SMSF borrowing strategies and can refer you to an affiliated property advisor to help ensure that you are selecting property that fits with your overall portfolio strategy.
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