This month I share with you some of the most common mistakes I see people making when they purchase property in their Self-Managed Super Fund (SMSF).
Your Self-Managed Superannuation Fund can borrow money to
a) Purchase a property (including all acquisition costs),
b) Pay for repairs and maintenance and
c) Capitalise interest.
You cannot use borrowed funds to improve the property. Improvements include additions, granny flat, extensions etc. For these activities cash resources of the fund must be used. It is critical to keep good records in your SMSF to identify whether borrowed funds or internal cash is used. When debt is used, the property must be held in a Holding Trust with a Corporate Trustee and not directly in the SMSF.
Apart from the legislative requirement to not hold the property in the SMSF there are real and practical reasons why you would not want to hold it in the SMSF.
2. Associated Party Loan
Many people use external funds to assist them in purchasing property in their SMSF by contributing the cash as a non-concessional contribution. The problem is that once contributed you cannot get the funds back until retirement or worse still you cannot put in sufficient funds within the allowable limits. You can however lend the funds to your superannuation which allows its release if refinanced and there is no limit on the amount of the loan.
The mistake that many people make is to lend the funds with a simple loan agreement. The loan agreement must meet the limited recourse borrowing requirements of the legislation as well as clearly identifying all terms and conditions.