The legislation for Self-Managed Super Fund (SMSF) allows for borrowing to acquire properties when specific criteria are met, but it is stringent and harsh penalties are given if you get it wrong.
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 (but the truth is they get the trustees or directors to sign Guarantees! Be aware). 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 it was the title holder.
What is involved in setting up the gearing structure that is accepted by both the banks and the regulator (auditor!)?
- Step-byStep Property in SMSF
The summary –
- 1-3 SMSF, Strategy ready – To complete and sign
- 4 – Finance Pre-Approval – Broker to advise
- 5-7 Custodian Structure – To complete
- 8 – Qld SA NT (not apply VIC) – Sign at correct time
- 9-15 Purchase Property – When you find one
A typical borrowing by an SMSF has the following steps and the order of these steps is important to minimise any difficulties in completing the transaction.
The steps are as follows:
- Determine (often with the help of the fund’s accountant or financial planner) that borrowing would be an appropriate strategy to leverage investment
- Check the SMSF trust deed to ensure trustee has power to borrow, grant security and allow assets to be held by custodians/nominees for the trustee (if not, amend the trust deed)
- Check the SMSF investment strategy to ensure it allows for the acquisition of the investment asset and permits borrowing for that purpose (if not, amend the investment strategy)
- Investigate borrowing arrangements with the lender including in-principle loan approval
- Determine who is to be the custodian – if a new company, purchase the new company
- Custodian (Property Company) resolves in writing (Custodian/Bare Trust DEED) to act as custodian for the super fund trustee in the purchase of the asset
- SMSF trustee resolves in writing to purchase the asset and to appoint the custodian to act for the super fund trustee as bare trustee of the bare trust
- Sign the bare trust deed (Qld, SA, NT need to sign BEFORE the Contract)
- Source the asset for purchase, negotiate the price and reach agreement with the vendor
- Signing of the purchase contract by the Custodian/Bare Trustee is Purchaser (note: not SMSF trustee) eg Custodian Company required by most lenders
- SMSF trustee provides all the deposit money for the purchase (should come directly from the super fund’s account) – if the deposit initially comes from the pocket of the SMSF trustee, then this deposit amount should be paid into the SMSF as a superannuation contribution within several weeks and notation made to that effect in the SMSF’s records
- Custodian and SMSF trustee sign the bare trust deed (NSW, ACT, VIC, TAS, WA)
- SMSF trustee signs all loan documents with the lender (note: SMSF trustee is the Borrower)
- Purchase of the asset is completed using only money coming from the SMSF’s account or from the loan by the lender
- The bare trust deed is submitted to the Office of State Revenue for payment of stamp duty (if required by applicable State) – Conveyancer
- When the loan is eventually repaid the asset can be transferred from the custodian to the super fund trustee for no stamp duty provided the bare trust deed has been stamped already.
Want to know the options and how property works in SMSF? See our FREE slides SMSF & Property Overview
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