Since changes to superannuation legislation in 2007, which allowed for self-managed super funds (SMSFs) to borrow money for property assets, there has been a dramatic increase in the number of people setting up a SMSF in order to purchase an investment property. Whilst there are many benefits to this, there are strict rules which must be followed.
An SMSF can borrow money to buy any type of asset that it is otherwise legally able to invest in. This includes property, both residential and commercial.
The key rules to be aware of are set out below.
Single acquirable asset
The asset purchase with borrowed money must be a single acquirable asset as defined by superannuation law. This generally means that the borrowed money can only be used to buy one property. You cannot, for example, purchase more than one property under the one borrowing arrangement, nor could you purchase an apartment where the apartment and any associated carspace are on separate lots unless there is some legal restriction on selling the carspace lot separately from the apartment lot.
No property development
An SMSF can generally not buy an asset using borrowed money to buy an asset to be improved upon or redeveloped while the loan is still outstanding.
Limited recourse borrowing arrangement/bare trust
To ensure that you do not place other SMSF investments at risk, the asset that is purchased under a borrowing arrangement must be held in a specific holding trust until the loan is repaid (often referred to as a “bare trust”). Further, the only asset that can be used as security for this loan is the asset that is held within this trust.
The following diagram outlines what a typical borrowing arrangement looks like:
What you need to know before purchasing?
Prior to purchase of any property:
- Establish if you have pre approval for finance and ensure you understand what the lender may request.
- The lender may request a Statement of Advice prepared by a Financial Planner to show how the fund will provide for repayment of the loan. Settlement can be held up if the lender requests this in the final stages of the process.
- The lender may request that a Lease Agreement be in place prior to settlement. In any case, if the Lender does not require this the Auditor will as we will need to verify the commercial content to the Lease between the trading company and your super fund. It would be prudent to have the Real Estate Agent provide an appraisal of rent value at the time of purchase to use for this purpose.
- Ensure that all monies in relation to this purchase are paid from the Superfund. (You or your company cannot pay an amount on the fund’s behalf)
- Ensure you have commenced any action to have funds rolled over if this is required as the rules are strict in relation to where monies are paid from (see point 2)
- Be aware that the fund cannot buy land and build or develop an existing property. Should substantial alterations be required please contact us to discuss prior to committing.
Before Settlement settlement, the Bare Trust Deed needs to be stamped by SRO.
After Settlement (within 30 days) the associated proof of purchase and form 8 needs to be lodged with the SRO.
At Victorian Property Settlements we have been involved in several SMSF property purchases and can assist you with all aspects of the conveyancing transaction.
Call us at Victorian Property Settlement on (03) 9783 0111 if you would like advice about the conveyancing of property in to a self-managed super fund.