Buying Property in Super

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Changes to superannuation legislation now allow superannuation funds, and specifically Self Managed Superannuation Funds (SMSF), to borrow to invest, provided certain conditions are met.

If you have a SMSF you may now be able to borrow money to buy a commercial/residential Property through your fund.

How does it work?

Your SMSF wants to buy a commercial/residential property but cannot fund the full purchase price. It does, however, have enough funds for a percentage of the purchase price. The SMSF can purchase the property under an installment arrangement subject to certain criteria. The SMSF provides the funds for a partial payment of the property (i.e. deposit), pays all relevant fees and borrows the remaining funds to pay the balance.

The property is owned by a separate Holding Trust with your SMSF having a beneficial entitlement to the asset (the property). The Holding Trust may then lease the commercial/residential premises on commercial terms. The Holding Trust receives lease payments from the lessee and additional instalments from your SMSF. These are used to pay expenses and loan repayments relating to the property.

The property will be the sole security for the loan under a limited recourse loan. In the event of default, the lender only has recourse to the property, and any security provided by a guarantor (if at all), and cannot claim on any other assets within the SMSF.

After the loan is repaid, the SMSF then has the right, but not the obligation, to take legal ownership of the property.

 The arrangement will be entered into by:

  • The Trustee of the complying Superannuation Fund, as borrower
  • The Trustee of the Holding Trust as guarantor and mortgage provider
  • The Bank acting as the Lender, and
  • possibly Guarantees from Directors/Members acting in their personal capacity as guarantors, depending on individual Bank requirements.

The benefits of this strategy

  • The strategy can work well if you are a small business owner (as you can be the tenant of a commercial property or sell your existing business (commercial only) premises to your SMSF at market rates to free up working capital.
  • Accelerate wealth accumulation through leveraging.
  • Diversify your SMSF investments with Real property.
  • Your other SMSF assets are secure as the lender only has recourse to the asset purchased through the loan and held by the Holding Trust, plus any security provided by a guarantor.
  • Rental income from the property and superannuation contributions (i.e. Employer SG contributions) are used to help pay off the loan.
  • The trust is able to offset loan interest and expenses against rental income (i.e. Negative Gearing). Your SMSF is entitled to any net income of the trust.
  • Once the SMSF acquires the premises, income after expenses and any capital gain on disposal of the premises would be taxed at concessional tax rates between – 0% to 15%.

 Some things you should consider

    • Your SMSF trust deed must allow borrowing under an instalment arrangement.
    • Investment in the business premises should be consistent with your SMSF’s investment strategy.
    • The instalment arrangement must meet certain requirements to ensure that the SMSF remains compliant.
    • Your SMSF requires sufficient cash flow to service loan repayments over the term of the loan. Cash flow may be sourced from investment earnings, employer contributions or member contributions.
    • Arrangements must be at arm’s length and transacted at market rates.
    • You should weigh the benefits of the strategy against the costs of setting up and maintaining the instalment arrangement.
    • You should ensure that you obtain appropriate financial and legal advice on your specific situation to ensure the benefits outlined above will be available to you before undertaking this strategy.

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