SHOULD I PURCHASE A PROPERTY THROUGH MY SMSF?

 

Any thought of acquiring a property with your Self Managed Super Fund (SMSF) needs to undergo a rigorous analysis of whether this is an appropriate thing to do with your retirement savings.

The following are a list of factors to consider in this process particularly where borrowing is involved.

1. Is it the right investment for the superannuation fund?
Make sure the investment strategy of the SMSF includes the opportunity of acquiring a property.

2. Does the fund need to borrow to purchase a property?
Reviewing the level of resources of the SMSF required to acquire a property will determine if this is an appropriate investment. The trustees may need to consider if it would be prudent to purchase a property by using borrowed funds and allow for appropriate asset diversification in the fund.

3. Should a property be purchased in the SMSF or another entity?
The structure in which to hold property is also a consideration. The purpose for which a property is purchased is a big consideration. For example if a residential property is purchased with the intention of improving or developing the site under a Limited Recourse Borrowing Arrangement (LRBA), then such a purchase would not be permitted under the current rules. Using a Unit Trust structure may be more appropriate in such circumstances however we would caution its use as the ATO are currently reviewing these structures.

4. Will the trustee borrow to acquire the property?
Having decided on the purchase of a property & the structure, the trustee must then determine whether the fund will enter into a LRBA. In deciding upon this course of action the trustees should ensure they deal with a financial institution that is experienced at this type of lending as it is somewhat different to an ordinary style of loan.

5. Estate Planning is a key element of the structure
The decision to acquire a property in a SMSF must also consider the circumstances where a member/trustee dies. Such considerations will ordinarily involve who should be trustee and the discussion will revolve around whether to use individual trustees or a corporate trustee.

6. Liquidity
The SMSF must maintain sufficient cash to meet ongoing obligations of the property & the fund. Careful planning of cash flow requirements at the outset should be undertaken. We would recommend that a fund maintain at least 20% of its assets in cash.

7. Will the property be on more than one title?
Generally, purchases under the SMSF borrowing arrangements must be under a single title to meet the single acquirable asset provisions.

8. Development or Improvement?
If the proposal is to develop or significantly improve the residential property, a standard LRBA structure is unlikely to suit. A purchase through a Unit Trust where the SMSF holds units in the trust and the trust uses related party lending, may overcome this restriction. As previously stated, this type of structure is currently under review by the ATO.

9. Ancillary Items
The acquisition of furniture for a property using borrowed funds would breach the single acquirable asset provisions. Such items should only be purchased using SMSF cash funds.

10. Use a Bare Trust where a LRBA is to be used
The trustee of a SMSF is precluded from signing purchase contracts for a property. An appropriately constructed bare trust provides compliance where an LRBA is to be used.

11. Vendor
A SMSF cannot acquire residential property from a member or a party related to a member.

12. Tenant
Similarly, a proposed tenant cannot be a related party to members of the SMSF where a residential property is concerned. This rule does not apply to business real property.

The rules relating to a purchase of a property in a SMSF are complex and require a specialist to help you navigate the process. We at the Garis Group are SMSF specialists and we can ensure that the complicated is made simple for our clients.

Call us on 02 4969 4699 for an obligation free assessment of whether a SMSF and property are right for you and take a step towards creating a beautiful financial future!

For those in the Port Stephens area, The Garis Group and Total Financial Security along with Adavance Finance Solutions, will be holding the ULTIMATE SMSF & Property Investment workshop on Tuesday, 21st March 2017. It’s FREE!

Creating a beautiful financial future

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