Buying Property in a Self Managed Super Fund (SMSF) Our core purpose is ‘HELPING CLIENTS ACHIEVE FINANCIAL SECURITY’ MULCAHY & CO | P 03 5330 7200 | INFO@MULCAHY.COM.AU | 300B GILLIES ST NTH, BALLARAT
Before buying a property in a Self Managed Superannuation Fund, it is important that you do all the necessary checks particularly where borrowing is involved.
IS IT THE RIGHT INVESTMENT FOR THE SUPERANNUATION FUND?
SHOULD THE PROPERTY BE PURCHASED IN THE SMSF OR IN ANOTHER ENTITY?
HOW WILL THE PROPERTY BE MANAGED FOLLOWING THE DEATH OF A MEMBER?
The investment strategy of the SMSF needs to be considered in regards to the range of investments available to the trustee. If it is noted that the purchase of a property will cause the range of investments permitted under the investment strategy to be out of alignment, the trustees should meet to consider amending the investment strategy
Once the decision has been made in regards to the property to be purchased, the next consideration is the proper structure in which the property will be owned. Will the trustee of the SMSF own the property or will the SMSF own units in a unit trust that will in turn own the property?
Once the SMSF has purchased an asset, such as property, which forms a significant portion of the assets in the SMSF, consideration needs to be given to what would happen in the event of the death of a member. For example, it may be necessary for the property to be sold or transferred to beneficiaries, if the entitlements of those beneficiaries were required to be paid out of the SMSF. That would most likely occur when adult children or more remote dependents are the beneficiaries.
DOES THE FUND HAVE THE RESOURCES TO PURCHASE THE PROPERTY OUTRIGHT? Initial questions that the trustee needs to answer are:
Owning the property in a Unit Trust can provide a number of advantages in comparison to holding the property in the SMSF, such as: •
providing protection for other assets of the SMSF in the event of accidental injury at the property; or
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Will the property be purchased using the available resources of the SMSF;
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Is the SMSF prepared to commit a significant portion of the assets held towards the purchase of a property at the expense of diversification; and
enabling activities that would not be permitted if the property was being purchased by the SMSF/bare trustee under a SMSF borrowing arrangement, e.g. significant improvements or development of the property.
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Would it be more prudent to purchase a property of a value greater than the available resources.
WILL THE TRUSTEE BORROW TO ACQUIRE THE PROPERTY? Having decided on the purchase and the structure, the next decision will be whether the SMSF will be borrowing from a bank or other financial institution, or from a related party. Further to that, the amount that would be available for purchase under the borrowing would need to be ascertained.
Some Other Factors To Consider When Purchasing A Property In An SMSF Are... LIQUIDITY In the event of the disability of a member, particularly when the expected contributions in respect of that member are committed to meeting loan repayments, the fund can incur significant financial difficulties. Planning for this should be taken into consideration at the time of purchase.
IMPORTANT DISCLAIMER: This document does not constitute advice. Clients should not act solely on the basis of the material contained in this document. Items herein are general comments only and do not constitute or convey advice per se. Also changes in legislation may occur quickly and we therefore recommend that our formal advice be sought before acting in any of these areas. This document is issued as a helpful guide to clients and for their private information.
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MULCAHY & CO | P 03 5330 7200 | INFO@MULCAHY.COM.AU | 300B GILLIES ST NTH, BALLARAT
MULTIPLE TITLES
VENDOR
Generally purchases under the SMSF borrowing arrangements must be under a single title to meet the single acquirable asset provisions. Exceptions to this rule include apartments and car parks that cannot be separated, and farms and factories that have major buildings across multiple titles
If the vendor is a related party to the members of the SMSF, there are limitations on the assets that may be acquired. In particular, residential property could not be acquired from a related party.
DEVELOPMENT OR IMPROVEMENT If the proposal is to develop or significantly improve the property, a standard SMSF LRBA is unlikely to suit. In this case, the property can be purchased through a unit trust, most likely using related-party lending.
ANCILLARY ITEMS The single acquirable asset provisions would be breached if the borrowing is used to purchase ancillary assets, such as furniture in an apartment, machinery in a factory or equipment on a farm, Those items should be purchased using SMSF funds, rather than borrowed funds.
DOCUMENTATION AND SIGNING THE CONTRACT
TENANT
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Similarly, if the proposed tenant is a related party to members of the SMSF, the SIS legislation permits such an arrangement so long as the property is business real property and the lease is legally enforceable. If the property is residential, it must not be leased to a related party.
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The trustee of the SMSF should not sign the contract. Preferably the bare trust documentation should be available prior to entering into the contract so as to avoid any subsequent repercussions. Rules as to the timing of signing both the bare trust documents and the contract of sale vary across each state or territory. ACCOUNTING | FINANCIAL PLANNING | LENDING | LEGAL | INFORMATION TECHNOLOGY MULCAHY.COM.AU
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