Buying property with your Self-Managed Super Fund
Self-Managed Super Funds, until recently, have not been allowed to borrow money.
But that has changed, with superannuation laws now enabling SMSFs to borrow for purchasing an investment such as property or shares.
But there are strict rules and regulations and it is wise for small business owners to do their homework.
Matthew Johnson, a Senior Financial Planner with Infocus Sunshine Coast, has some smart advice for small business owners wanting to join the growing ranks of SMSF property investors.
What do the lenders look for when lending to a SMSF:
Deposit: Usually a 20 per cent deposit for residential and 30 per cent deposit for commercial are the minimum requirements (this will depend on a number of factors including type of trustee held, property being purchased).
Rental income: A lender will take into consideration the rental income being received and will normally apportion an amount of this income towards servicing the loan (once again this amount will vary depending on the lenders requirements)
Contributions to the Fund: A lender will want to see regular contributions to the fund as these will be able to be relied upon to help meet expenses of the SMSF.
Other areas to make sure are up-to-date prior to seeking to purchase a property and borrow:
1. Revisit the SMSF Trust Deed and Investment Strategy
Assuming the fund is already set up, you should always check to make sure that the SMSF, Investment Strategy and Trust Deed clearly details the ability to purchase a property and to use borrowed funds in the process. The ATO requires that a SMSF Investment Strategy must outline the Trustee’s key objectives and the framework for making investment decision to achieve those objectives.
2. Obtain SMSF Loan Pre-Approval
Traditionally SMSF were not allowed to borrow money, however since 2007 the law permits SMSF to borrow, under certain circumstances. It is a good idea to go to the lender prior to finding the property and get them to provide you with a pre-approval. This will give you a firm idea on how much you can borrow and allow the lender to run through the process that is required for a SMSF loan, as each of the lenders will have a different lending criteria. Given the restrictions of borrowing through a SMSF, it is a good idea to get all of this sorted prior to looking for a property.
3. Find the Property
All SMSF investments must be undertaken for the sole purpose of providing retirement benefits for the members. It must be an established property, being residential or commercial. There are some key differences between residential and commercial property purchases. If a SMSF purchases a residential property, its trustees cannot occupy that property until after retirement and only upon transfer of title from the SMSF to their own name. A SMSF must also acquire residential property on an arm’s length basis and not from a related party in order to comply with the in-house rule.
Commercial property that is bought for business purposes can be purchased from a member or related party and the members can occupy the property as a tenant making the SMSF structure a smart choice for business owners. Again with an ‘arm’s length’ commercial arrangement.
4. Set Up a security trust
Until the SMSF pays the loan in full, legal title of the property needs to be held in what is called a security trust (or bare trust). You will need to establish this security trust prior to purchasing the property.
Once the borrowings have been repaid, legal title of the property can then be transferred from the security trust into the SMSF.
There are other steps along the way that need to be taken into consideration. One of the most important things when looking to do any transactions within your SMSF is to ensure you obtain the correct professional advice prior to putting any arrangements in place.
This will include you seeking advice from a number of professional including, your accountant, solicitor and financial planner. Making sure you get the right advice will ensure your SMSF remains compliant and an important structure to assist with your retirement planning.
About the author
Matthew Johnson is a Senior Financial Planner with Infocus Sunshine Coast and has been providing quality advice since 2001. He deals with a range of clients from professionals, business owners and SMSF clients. He has a passion for educating clients to reach their goals and objectives.
(This information is general information only. You should consider the appropriateness of this information with regards to your objectives, financial situation and needs).
Join Matthew for a February 16 webinar, hosted by CCIQ, on SMSFs and Property. Register here