Guide for a SMSF to purchase and borrow

1. Obtain loan approval

InShape Home Loans can obtain an indicative approval prior to the client going to the expense of establishing the SMSF and/or Security Trust. For many clients this is an essential first step.

Loan approval should be obtained from the Lender in the ordinary way. InShape Home Loans has a range of lender products specially designed to cater for SMSF borrowing arrangements.

 

In all cases:

(a) The SMSF fund cannot give collateral security.

(b) The loan proceeds can only be used to purchase the property and there can be no subsequent advances.

 

2. Establish/review the SMSF

(a) The Trust Deed establishing the SMSF must give the Superannuation Fund Trustee power to:

(i) purchase real estate,

(ii) borrow money, and

(iii) mortgage property to secure repayment of that borrowing.

(b) The proposed investment must comply with the requirements of the SIS Act (including the “sole purpose test” – see section 62 of the SIS Act which requires that regulated superannuation funds are obtained solely for the provision of retirement benefits to members).

(c) Ensure that the investment in real property is in line with the SMSF’s overall investment strategy (note that superannuation funds must have a written investment strategy), and the proposed purchase complies with all other requirements of the SIS Act (including but not limited to the “in-house asset rules” and the restrictions on acquiring assets from “related parties”).

 

3. Establish the Security Trust Deed

The Security Trust Deed is a key document. Care is required to ensure there are no adverse GST, taxation or stamp duty consequences.

 

4. Instructions to Solicitors/Conveyancer

Accountants should ensure that the lawyer/conveyancer acting for the SMSF on the purchase of the property understand that the property must be purchased in the name of the Security Trustee. This is an essential part of the structure – the SMSF cannot be the registered proprietor.

 

5. Contracts exchanged

When contracts are exchanged between the seller as vendor and the Security Trustee as purchaser, the deposit will be paid by the SMSF. There is no need for the deposit to be paid through the Security Trustee.

 

6. Loan documents issued

The Lender’s lawyers will prepare the loan documents in the ordinary way and send them to the SMSF’s lawyer/conveyancer for signing and return.

 

7. Settlement

The purchase is completed. After registration of the transfer on the mortgage, the transaction/title documents will be held by the Lender.

 

Borrowing within a SMSF

(also referred to as a Limited Recourse Borrowing Arrangement) Self Managed Super Funds (SMSF) can now borrow to buy an asset. This asset could be a commercial or residential property or a collection of identical shares.

 

Here are a few rules on borrowing in a SMSF:

  • Borrowing must be for the acquisition of a single acquirable asset (a collection of 1,000 BHP is a single acquirable asset, as they are identical assets. A mixture of BHP, CBA, ANZ are not identical, likewise two off the plan apartments are not identical).
  • Borrowing can also be used to incur expenses in connection with the acquisition of the asset (stamp duty, solicitor fees, loan establishment costs etc).
  • In SMSFR 2011/D1 (draft ruling released 14 Sept 2011), the Commissioner of Taxation has indicated that repairs and maintenance can be funded from subsequent draw downs of an existing loan. However, if an asset is already owned outright, a SMSF cannot borrow to fund repairs or maintenance.
  • Title of asset is held on trust, for the benefit of the SMSF
  • Title of asset passes to SMSF when the loan is repaid
  • There should be no Capital Gains Tax, Stamp Duty or GST on the above transfer (the requirements vary state to state)
  • Can refinance and can draw down on loan for repairs and maintenance (not improvements)
  • Improvements – ATO recently (14 Sept 2011) issued draft ruling on this ruling SMSFR 2011/D1, looks like improvements can be carried out but not from borrowed monies. This means other money within the SMSF could be used for the improvement. Trustees need to be careful here, as if they pay for the improvements from their personal funds, this will be deemed a contribution.
  • The asset the improvement is carried out on cannot be entirely replaced or altered to such an extent that it now has a different function or purpose.
  • The lender and any other person involved in the borrowing, only has recourse against the acquirable asset in question, not the other super benefits (however all banks require a directors guarantee to give them further comfort)
  • Almost everything else operates as per normal. The full value of the asset appears in the Balance Sheet, as does the loan liability. Rent is recorded as income and expenses as expenses, all in the SMSF’s accounts. The bare trust does nothing other than hold the title of the asset in question. It does not have a bank account, lodge tax returns, prepare financial reports or have a TFN or ABN.

 

Some key considerations:

  • Title of property transfers to SMSF on repayment of loan, with no GST, Capital Gains Tax or stamp duty (the stamp duty is state specific and needs very careful consideration when the structure and documents are set up)
  • Best Practice is to have the full structure in place before you sign the contract. Be careful of using “and/or nominee” clauses, especially in states other than Victoria (if not done correctly, this may give rise to double stamp duty)
  • A bank, member or related party can be the lender
  • All loans, interest and rent must be at commercial terms
  • Lender and any other entity only has recourse over the asset in the security trust
  • Can only hold one property per security trust structure. Similar assets can be held in the one security trustee, eg. 1,000 BHP shares
  • With a Business Real Property (commercial property) you can (a related party to the SMSF) operate your business from the property your SMSF owns – providing everything is at commercial terms
  • Your SMSF can borrow to acquire Business Real property from yourself or a related party (at market value). This cannot be done with residential property.
  • A SMSF cannot acquire residential property from members or from a related party of the fund.

 

Back to top