While borrowing to purchase property in your Self-Managed Super Fund (SMSF) may appear to be a legal minefield, with the right advice it should be a relatively straightforward process.
There are nine things you should consider when, as trustee of your own super fund, you intend to borrow to buy property.
- You can only purchase an asset that your SMSF would otherwise be legally permitted to purchase. This means that the trustee must still comply with the sole purpose test and also the in house asset rules. For example, you cannot buy a home for yourself or your children even if commercially rented.
- You cannot borrow to put a building on a block of land that you already own or to make improvements to an asset that you already own. You must be borrowing to purchase an asset so you may not borrow against an asset you already own.
- You may need to prepare an update of the SMSF’s rules. Lenders have very specific requirements for the wording of the borrowing and asset charging ability of the trustees of the SMSF’s.
- The trustees of the fund may also need to prepare a new investment strategy to provide for borrowing to acquire a particular type of asset.
- The preferred method for purchasing the asset when borrowing is by using a Bare Trust. This is to ensure that when you finally pay for the asset and transfer it back to the name of the SMSF trustee you do not incur stamp duty, GST or capital gains tax.
- You should make sure that the Bare Trust documents that you are going to use are acceptable to your lender before exchanging contracts. Banks have shown that they will be very strict when it comes to the Bare Trust documents, so it is important that they are carefully drafted by an experienced solicitor. You should also confirm the costs of these documents where the bank wants to use their own supplier.
- Because the relationship between the SMSF trustee and the company holding the property is a Bare Trust there is no actual name given to the trust relationship.
- It is critical that the conveyancing be done correctly as small errors have the potential to double or even triple stamp duty costs which may not become evident until you go to unwind the Bare Trust relationship many years later.
- All financial transactions are direct with the SMSF trustee. The Bare Trustee need not apply for a TFN or ABN. All rent is received directly into the account of the SMSF Trustee and all expenses are paid direct by the SMSF Trustee. The property is treated as a direct asset of the SMSF Trustee, and shown as an asset of the SMSF in the fund’s accounts.