The legislation for Self-Managed Super Fund (SMSF) allows for borrowing to acquire properties when specific criteria are met. There are 2 main ways self-managed super funds are buying property.
- Outright – If there is enough money to cover the purchase price and legals and costs by the SMSF, there is no special structure and the property can be owed directly.
- Borrowing – a special structure (Custodian) is required where the property title must be held in a Custodian or Bare trust whose trustee must be different to the SMSF trustee.
The borrowing must be non-recourse, that is the lender has no recourse for compensation (should the loan be defaulted or called in) to any other assets or money in the SMSF. The only security is the property asset itself. A Custodian/Bare trust is a trust where the title holder, holds the property for a specified beneficial owner in this case the SMSF trustee, and has NO other role. Then the SMSF trustee is the operator of the property and receives the rent and meets the expenses as if the trustee was the title holder.
What is involved in setting up the gearing structure that is accepted by both the banks and the Regulator (ATO) to be approved by the Auditor?
1. Ensure the SMSF is allowed to purchase the property. Review the trust deed to ensure that borrowing is allowed and also check or update the investment strategy to allow for property holding and the possible risk that the strategy will be mean low diversity with the property being predominant. Ensure there are sufficient funds to meet the leveraging requirements.
2. Most lenders prefer a Corporate Trustee, so set up the company (Custodian Trustee) that will be the bare trustee and holder of the property. Note the bare trustee cannot be the superannuation fund trustee, but can be any other existing company or individual trustee.
3. Find the property, assess the numbers – potential growth in the location, likely yield, amount of deposit, length of loan.
4. Note the following restrictions:
- Residential properties in an SMSF cannot be purchased from members or related parties;
- Residential properties in an SMSF cannot be leased to members or related parties;
- Banks will not usually lend on vacant land;
- The property cannot have improvements or be developed while the mortgage exists over the property that changes the nature of the asset, eg. from domestic to boarding house;
- Existing properties in an SMSF cannot be geared or borrowed against (no recourse on other assets of SMSF).
5. Obtain approval in principal from the bank for the borrowing by your SMSF.
6. Have a conveyancer review contract for sale and prepare the bare trust documentation that gives beneficial ownership from title holder to the superannuation fund trustee and other conditions as required by the SIS Act.
7. Secure the property in the name of the bare trustee (not the bare trust nor SMSF nor SMSF Trustee names!). Any deposit is to be paid from the superannuation fund’s bank account (BOTH of these are important for stamp duty purposes at the conclusion of the loan, to avoid another payment of stamp duty on transfer to the SMSF).
8. Submit the loan application to the bank. This will require – the bare trust documents, SMSF Trust Deed, and SMSF financials
9. Complete the purchase with the fund paying all of the acquisition expenses from its bank account.
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