Utilising real property as a retirement asset has been growing in popularity since legislation was relaxed in September 2007 to permit borrowing in super. Limited recourse borrowing arrangements or LRBAs were born.
A Self-Managed Super Fund (or SMSF) can invest in real property such as residential, industrial, commercial and in limited circumstances farmland. Buying property within your SMSF may help to diversify your investment plan and be a tax effective way of purchasing business premises for your business (more on that another time). Always seek advice from a licensed financial planner when considering the suitability of an asset for your fund.
Except for two exemptions to the “no borrowing” in super rule to cover short-term cashflow issues, the LRBAs are the only way a SMSF can borrow money to purchase an asset within the SMSF.
There are strict requirements that the SMSF and LRBA must meet. A summary of these are set out below.
Check your Investment Strategy
1. The purchase of the asset must be in line with the SMSFs investment strategy. That is, does the risk & return of the asset meet the investment profile, age and current cashflow requirements of the members. We recommend sitting down with a financial planner experienced in SMSFs to review the needs of the members.
Purchase a Single Asset
2. A borrowing in super must be for a single asset or a collection of identical assets (e.g. a parcel of shares) that have the equivalent market value. That is, the borrowing arrangement can not be used to purchase multiple properties or a property then using borrowed funds to improve the property (e.g. subdivide).
Setup a Property Trust
3. A property trust (also known as a custodian trust or bare trust) must be established. The property trust sets out the requirements that the –
- Details of the asset i.e. address of the property
- SMSF trustee has the benefit interest in the property, but the legal ownership is held on trust. That is the contract for the property is made in the property trustee’s name not the SMSFs e.g. Joe & Mary Blogs Property Pty Ltd as trustee for Blogs Super Property Trust.
- SMSF trustees have the right to acquire the legal ownership by making one or more payments (i.e. by repaying the loan)
Understand the Lending Conditions
4. The lenders recourse is limited to the single asset (including rights to the asset’s income). That is the lender cannot take security over the other assets of the fund. A lender can be a bank or related party.
5. The lender may require a personal guarantee of the individual trustee or directors of the trustee company. However, it is limited to the shortfall after disposal of the LRBA fund asset. It is important
6. The loan is in the name of the property security trustee (i.e. the trustee of the property trust). Most banks in the SMSF sector require a separate corporate trustee for both the property trust and SMSF.
Know where the Income should be banked
7. The rental income is deposited to the SMSFs bank account and repayments on the loan debited from the SMSF. The property trust is not required to have a bank account to receive the rental income.
Before embarking on a purchase of property in a SMSF we recommend you sit down with a SMSF Administrator such as Goad Accountants in combination with a financial planner to ensure all aspects of the purchase are compliant. SMSFs that do not comply with superannuation legislation & regulations can face significant penalties and become non-complying.
If you are considering purchasing a property in your SMSF, feel free to contact myself or one of our qualified accountants in the tax & super team to make sure your purchase is complying.
Ph. 07 3849 3816