Purchasing Property Using Debt Within Super
By Ken Raiss
In light of the ATO’s recent announcement regarding property investments within SMSFs, Chan & Naylor Director Ken Raiss offers his perspective on the issues an investor needs to understand when purchasing a property using debt within super.
The ability to purchase property within a Self Managed Super Fund (SMSF) has become increasingly popular among the financial adviser and property investment community, particularly those representing ‘Mum and Dad’ investors, as this mechanism is a valuable option for boosting retirement savings. However the previously complicated (and occasionally punitive) nature of the ATO’s guidelines relating to this matter has until now resulted in investor caution.
Historically an investor has always been able to hold property within their SMSF (not their retail or industry super) however there was not a great deal they could actually do with it. Guidelines issued by the ATO on 7 July 2010 noted that you could not renovate a property held within the SMSF (this would affect the value of that asset) or replace the asset should it be destroyed by a natural disaster. This was because the ATO defined an asset to be a single acquirable asset (SAA), which meant that renovations were not permissible where the property was secured with debt as this would change the original asset.
However the updated draft guidelines announced on 14 September (SMSFR 2011/D1) sees the ATO taking a more progressive stance in relation to their view of property as an asset, including their now favourable position on SMSF holders being able to undertake property renovations (unless the renovation substantially changes the original property purchased) using cash resources within the SMSFs. Whilst these new guidelines offer greater clarity, there are still many areas that remain unclear and so expert advice is still a necessity for Mum and Dad investors considering this type of investment.
For example the superfund deed must be reviewed to ensure it allows for borrowings and the documentation carefully prepared so as to not inadvertently trigger double stamp duties and CGT liabilities when the loan is paid off.
Also the borrowing must be a limited recourse which means that no other Superfund asset can be used as security, although the SMSF member can go guarantor for the loan or provide other non-superfund assets as security if required.
The latest guidelines also clarify where debt can be used in relation to the property. Debt can obviously be used to acquire the property, it can also be used to conduct repairs, property maintenance and to capitalise interest, but again there are some pitfalls relating to each of these points that require caution. The ATO has also acknowledged that it will view as a repairs and not a renovation any initial work to restore deterioration or functional efficiency (not material) to the property if identified and done at the time shortly after acquisition therefore allowing borrowed funds to be used.
While the 14th September guidelines are currently in draft form it is nonetheless encouraging to see that the ATO now believes that funds from within the SMSF can be used to improve a property. However I’d reiterate again that investors should still seek specific advice and consider that any improvements they undertake to an investment property must not result in the property becoming a different asset as a guiding principle.
Ken Raiss, Director of Chan & Naylor, for more information call 1300 250 122 or email
If you intend to rely on any of the information in this document to satisfy liabilities or obligations or claim entitlements that arise, or could arise, under a taxation law, you should request advice from a registered tax agent. This information does not take into account your individual objectives, financial situation and needs. You should assess whether the information is appropriate for you and consider talking to a financial adviser before making an investment decision. The information contained in this document is given in good faith and is believed to be correct at the time of publication, but no warranty of accuracy or reliability is given and no responsibility arising in any other way for errors or omissions (including responsibility to any person by reason of negligence) is accepted by Chan & Naylor, its officers, employees, directors or agents.