When purchasing a property through your Self-managed Super Fund (“SMSF”) there are a number of rules and regulations that must be complied with. If your purchase does not comply with the Superannuation Industry (Supervision) Act 1993 (“SIS Act”) and Duties Act 1997 there can be penalties, assets of the SMSF can be frozen, and there can be significant stamp duty implications.
So, what are the key things to consider?
• Firstly, the purchase of the property by the SMSF must comply with the ‘sole purpose test’ set out in the SIS Act. This means that the SMSF must operate for the sole purpose of providing benefits upon death or retirement of the members. This effectively means that the SMSF cannot purchase a property for a member or related party to live in or holiday in, even if they will be paying market rent.
• The property cannot be purchased from a ‘related party’ of the SMSF. A related party of the SMSF is a member of the SMSF, an employer-sponsor of the SMSF or an ‘associate’ of either of those entities. An associate is defined broadly and includes relatives of members, the directors of the trustee company of the SMSF, partners of a member in a business partnership and the spouses and children of that partner and companies which the member controls.
An exception to this rule is if the SMSF is acquiring ‘business real property’ from a related party of the SMSF at market value. Business real property is real property used wholly and exclusively in one or more businesses and can include commercial, retail, farming and industrial property.
• The SMSF cannot borrow money to fund the purchase, unless through a limited recourse borrowing arrangement. Limited recourse borrowing arrangements are loans whereby the lender’s rights against the SMSF in the event of default are limited to the property being purchased, and does not extend to other assets of the SMSF.
• The money borrowed can only be used to acquire the property and pay related expenses such as conveyancing fees and stamp duty. While it is possible to use the borrowed funds to repair the property you can’t improve the property using those funds or acquire more than one asset such as a fully furnished unit or house with a furniture package.
• Where the SMSF borrows funds for the purchase, the property will be held on trust by what is commonly known as a bare trustee or custodian trustee for the benefit of the SMSF. Once the loan is repaid, the custodian trustee can transfer ownership to the SMSF. Provided the Duties Act has been strictly complied with on the original purchase and bare trust deed, additional duty should not be payable on the subsequent transfer to the SMSF.
• While the lender’s rights against the assets of the SMSF are limited to the property being purchased, lenders usually require personal guarantees from trustee directors and SMSF members.
So, what are our top 5 tips for purchasing a property through your SMSF?
1. Firstly, obtain expert financial advice before purchasing a property to ensure that your proposed investment is appropriate for your SMSF and will be compliant. If you don’t have an SMSF, you should be seeking financial advice long before you even start looking at properties.
2. Don’t purchase property from a related party of the SMSF unless it is “business real property”.
3. Seek legal advice from a lawyer experienced in SMSF property transactions before you sign a contract so that they can ensure the contract is properly drafted for a SMSF purchase and that your SMSF and custodian trust have been properly established.
4. If borrowing money for the purchase, speak to your lender before signing the contract to confirm any specific requirements they may have.
5. Finally, allow extra time for finance to be approved. The documentation and approval process are more complex than with typical residential property purchases.
If you only take one thing away from the above, it should be the need for expert advice, both legal and financial, when considering the purchase of property in your SMSF.