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Purchasing Property in an SMSF

Buying property in a SMSF is a complicated process and it is essential that it is done correctly to ensure there are no adverse tax consequences.

 

Depending how you purchase the property will depend on the level of complexity.  To assist, we have provided below the iSUPER® Borrowing Matrix that will guide you through some of the processes of purchasing property in an SMSF.

 

Note: Please remember that the matrix provides some of the considerations, not all, so please seek professional advice before making any purchase.

Residential Property – Without Borrowing

 

Before any purchase is considered, always consider whether the purchase of property in the SMSF is consistent with the investment strategy of the fund.

 

Once satisfied, generally the SMSF will be able to purchase a residential property as long as the vendor is not a related party.

 

One of the main issues we find is not disclosing the correct name on the contract.  If you have a corporate Trustee (ABC Pty Ltd) and the fund name is the XYZ Superannuation Fund, the purchase contract should show the purchaser as ABC Pty Limited as trustee for the XYZ Superannuation Fund.

Residential Property – With Borrowing

 

Before any purchase is considered, always consider whether the purchase of property in the SMSF is consistent with the investment strategy of the fund.

 

Once satisfied, generally the SMSF will be able to purchase a residential property as long as the vendor is not a related party.

When borrowing to invest in property within a SMSF, the arrangement will need to be under a Limited Recourse Borrowing Arrangement (“LRBA”).  This, in effect, will limit the recourse of the bank to your other SMSF assets.

 

As part of this arrangement your SMSF will need to establish a custodian or bare trust to hold the asset.  This is a complicated process, however, for simplicity the following diagram gives you the concept.

 

 

 

As with any trust, the Bare Trust will need a trustee.  It is important to note that corporate trustee of the SMSF cannot be appointed as the corporate trustee of the Bare trust – it has to be a different company.

If you need assistance with the Bare Trust, iSuper is able to assist with setting up the required documentation.

 

The Purchase Contract

Given the above arrangement, it can be confusing as to who signs the purchase contract.  Ultimately, the property will need to be purchased in the name of the Bare trust, not the name of the trustee for the SMSF.

For example, ABC Pty Limited is the trustee of the ABC Superfund.  The ABC Superfund would like to borrow to invest in a residential property.  

To implement the purchase the ABC Superfund will need to establish a Bare trust to hold the property – XYZ Pty Limited as trustee for the Property No 1 Trust.  When executing the purchase contract, the name on the contract will need to be XYZ Pty Limited as trustee for the Property No 1 Trust.

 

Commercial Property – Without Borrowing

Before any purchase is considered, always consider whether the purchase of property in the SMSF is consistent with the investment strategy of the fund.

Once satisfied, generally the SMSF will be able to purchase the commercial, even if it is from a related party.

Disclosing the correct name on the contract is also another important part of the process.  If you have a corporate Trustee (ABC Pty Ltd) and the fund name is the XYZ Superannuation Fund, the purchase contract should show the purchaser as ABC Pty Limited as trustee for the XYZ Superannuation Fund.

 

Commercial Property – With Borrowing

Before any purchase is considered, always consider whether the purchase of property in the SMSF is consistent with the investment strategy of the fund.

Once satisfied, generally the SMSF will be able to purchase the commercial property, even if it is form a related party. When borrowing to invest in property within a SMSF, the arrangement will need to be a Limited Recourse Borrowing Arrangement (“LRBA”).  This, in effect, will limit the recourse of the bank to your other SMSF assets.

As part of this arrangement your SMSF will need to establish a custodian or bare trust to hold the asset.  This is a complicated process, however, for simplicity we have provided a diagram below.

 

 

As with any trust, the Bare Trust will need a trustee.  It is important to note that corporate trustee of the SMSF cannot be appointed as the corporate trustee of the Bare trust – it has to be a different company.

If you need assistance with the Bare Trust, iSUPER® is able to assist with setting up the required documentation.

How to Complete the Purchase Contract

Given the above arrangement, it can be confusing as to who signs the purchase contract.  Ultimately, the property will need to be purchased in the name of the Bare trust, not the name of the trustee for the SMSF. For example, ABC Pty Limited is the trustee of the ABC Superfund.  The ABC Superfund would like to borrow to invest in a commercial property.

To implement the purchase the ABC Superfund will need to establish a Bare trust to hold the property – XYZ Pty Limited as trustee for the Property No 1 Trust.  When executing the purchase contract, the name on the contract will need to be XYZ Pty Limited as trustee for the Property No 1 Trust.

iSuper Borrowing Matrix

Residential

Without Borrowing

Commercial

With Borrowing

iSUPER® assisting with your purchase

 

 

Once you have established your SMSF and you have decided that you would like to invest in property, we can introduce you to a lender or work with your current bank – the choice is yours.

Choosing a lender to assist with your purchase is a difficult part of the process. At iSUPER®, we have established relationships with all the major lenders to ensure your loans get processed with minimum fuss. Each provider has different terms and conditions, so we take the time to go through these with you to give you a better understanding of the agreement.

We will continue to guide you through the process to ensure all transactions are compliant and there are no nasty surprises.

 

Borrowing Capacity

Banks have different lending criteria and it is important that you speak to the bank directly. However, our clients have noted that there are some similarities when borrowing in superannuation.

Most lenders will allow a SMSF with a corporate trustee to borrow up to 80% of the property value on residential property. There are limits where the 80% is no longer applicable, however this is usually with properties that are valued greater than $2 million. Once again this will vary from bank-to-bank so it is important that you check with the bank directly.

If your intention is to purchase commercial property, the lending ratio will vary from bank-to-bank. Ordinarily, banks will lend around 65% on a property less than $5 million. Once again, it is important that you check directly with the bank as these limits will vary.

Servicing the repayments for a SMSF loan can also be a limiting factor. The banks will ordinarily look at:

the rent that will be generated by the property (usually discounted);

the superannuation guarantee that has been contributed by your employer; and,

any other regular income in the fund.

These amounts are normally aggregated to calculate the serviceability of the potential loan.

Contact Details

t: +61 2 9377 0766       

f: +61 2 9377 0788


e: info@isuper.com.au

Office Address:
8/234-242 George St, Sydney 2000

Postal Address:
GPO Box 3759, Sydney NSW 2001

t: +61 2 9377 0766       

f: +61 2 9377 0788


e: info@isuper.com.au

 

Office Address:
8/234-242 George St, Sydney 2000

 

Postal Address:
GPO Box 3759, Sydney NSW 2001