Self Managed Super Funds
A better way to save
Self Managed Super Fund Loans
Super-leveraged property investment has arrived in Australia and Newstart Homes is here to assist in facilitating the growth of your property portfolio!
If you have a SMSF you are now able to use these arrangements to help you buy a residential or commercial investment property through your fund.
Superannuation funds can now borrow money to purchase real estate.
In Sept 2007 The Superannuation Industry Supervision Act (SIS ACT) was amended to allow super funds to borrow so long as a special structure is utilised.
Changes to super legislation now allow Self Managed Super Funds (SMSFs) to borrow for direct investments in real estate! Until recently, this has not been possible.
This exciting new development means that Investors can now have as much choice and control over investment properties inside as outside super!
How does it work?
Your SMSF wants to buy property (residential or commercial real estate) but does not have enough funds for the full purchase. The SMSF can now make an equity contribution on the property and borrow the remainder of the funds to complete the purchase.
Example of SMSF at work
Suppose your SMSF has $150,000 in the cash account. As the SMSF trustee, you want to buy an investment property worth $450,000. A trustee buys the property on behalf of your SMSF under an instalment arrangement.
The $150,000 is used to make an initial payment for the property. The shortfall of $300,000 plus stamp duty and acquisition costs is funded by a limited recourse loan, using the property as security.
The trustee arranges for the property to be leased to an unrelated party and the rent, together with other SMSF income and/or member contributions are used to make instalment payments.
Once the loan is paid off, the legal ownership of the property can be transferred to the SMSF.
The Benefits of using SMSF to purchase Real Estate
- Your SMSF can acquire property worth more than its available funds through the benefits of gearing.
- Your SMSF assets are secure, as the lender does not have recourse to your SMSF's other assets in the event of default.
- Your SMSF receives all income and capital growth even if the property has not been paid off.
- Your SMSF can use income from the property to help pay off the loan.
- Interest expense may be claimed as tax deductions by the SMSF and potentially reduce your SMSF's tax liability.
Features of SMSF Loans
The SMSF must purchase property from an unrelated party. Purchases must be arms-length.
Investment in property must be consistent with your SMSF investment strategy.
In the event of a loan default the lender only has recourse to the security property and cannot claim any other SMSF assets.
The property is held in trust for the SMSF, which is entitled to its income.
Your SMSF makes the loan repayments. After the loan is repaid the legal ownership of the property is transferred to the SMSF.
Choose any kind of property including residential, commercial or retail property.
The legal owner of the real estate will be the Property Trustee.
The beneficial owner of the real estate will be the SMSF.
The lender has no recourse to the other assets of the SMSF, providing the SMSF with absolute protection for its other assets.
The loans are personally guaranteed by the member/s of the SMSF.
SMSFs can deal with the property however and whenever they like, in the same way as investors can deal with "normal" investment properties (eg: lease, renovate, repair, or sell), (subject to the terms of the relevant loan and mortgage).
All rents are paid direct to the SMSF. Loan repayments are made in the ordinary way from the SMSF.
The SMSF can pay out or reduce the mortgage at any time (subject to the terms of the relevant loan).
When the mortgage is paid out in full, title to the property can be transferred to the SMSF or the Property.
Trustee can continue as registered proprietor.
The importance of financial planning
There are a number of rules and regulations surrounding superannuation and planning for retirement. A Financial Planner can provide advice about borrowing strategies for SMSFs that is personalised to your situation and goals. You should also seek professional tax, accountancy and legal advice. Newstart Home recommends you seek independent advice from appropriately qualified advisors before committing to any strategy with your superannuation investments.
How do I get started?
1. 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.
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 Superannuation Industry Supervision Act 1993 (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".
2. Establish the Property Trust Deed
The Property Trust Deed is a key document.
Care is required to ensure there are no adverse GST, taxation or stamp duty consequences. It is important that the SMSF Trustee itself is not the Property Trustee.
Such an arrangement may breach the requirements of section 67(4A) of the SIS Act and result in the SMSF being non-compliant. It is also undesirable for an individual member of the SMSF to act as Property Trustee due to trust law issues regarding the merger of the interests of the trustee and the beneficiary.
You must select a provider to help you establish a Property Trust quickly and easily in a cost effective way. These advisers will work with you and your own lawyer to ensure the Property Trust is correctly established and stamped.
These advisers do not take the place of your own lawyer.
3. Instructions to Solicitors/Conveyancers
Accountants should ensure that the lawyer / conveyancer acting for the SMSF on the purchase of the property understands that the property must be purchased in the name of the Property Trustee.
This is an essential part of the structure - the SMSF cannot be the registered proprietor).
4. Obtain loan approval
Loan approval should be obtained from your preferred financial institution in the ordinary way. Ensure your financial institution has a broad range of products specially designed to cater for SMSF borrowing arrangements.
The structure of the loan is:
(a) Borrower: SMSF fund;
(b) Security: a charge over the SMSF's beneficial interests in the property, with recourse for repayment of the loan limited to the property; a mortgage over legal estate owned by the Property Trustee, again with recourse limited to the security; a guarantee by all the fund's members and possibly a mortgages over other real estate owned by the guarantors outside the SMSF fund.
The SMSF fund cannot give collateral security. The loan proceeds can only be used to purchase the property and there can be no subsequent advances.
5. Contracts exchanged
When contracts are exchanged between the seller as vendor and the Property Trustee as purchaser, the deposit will be paid by the SMSF. There is no need for the deposit to be paid through the Property Trustee, although this can occur if you wish.
6. Loan documents issued
The lenders lawyers will prepare the loan documents in the ordinary way and send them to the SMSF's lawyer/conveyancer for signing and return. The SMSF borrowing structure uses normal loan and mortgage documents with special provisions to provide the limited recourse against the asset.
Accordingly, the SMSF fund has its own discrete loan and provides its own discrete security.
7. Settlement
The purchase is completed. After registration of the transfer on the mortgage, the transaction/title documents will be held on behalf of the lender.
Frequently Asked Questions?
How does my SMSF purchase a property?
The SMSF chooses the property it wishes to invest in, in the ordinary way.
Residential property must be purchased from an arm's length vendor. Non-residential property can be purchased for full value from related parties so long as the property is let for business purposes.
The SMSF obtains a loan approval.
The SMSF's own lawyer/conveyancer acts on the purchase in the ordinary way. The purchase MUST be in the name of the Property Trustee. The SMSF pays the deposit, the balance purchase money (less the amount borrowed), the legal costs, and stamp duty in the ordinary way.
On completion of the purchase the Property Trustee mortgages the property to the lender. SMSF then manages the asset in the same way as you would with any other real estate investment.
Can I occupy the property?
No. If a member of the SMSF occupies the property the "in-house asset rule" would be breached. However, the SMSF can buy a property that the investor intends to live in after retirement. This is possible if you transfer the property from your super fund to yourself after you retire.
I thought super funds could not borrow or charge their assets. Is this correct?
That was correct, until amendments to the Superannuation Industry (Supervision) Act 1993 (SIS Act) made in September 2007. Under the new section 67 (4A) of the SIS Act, SMSFs can borrow providing the following conditions are satisfied.
The borrowed funds are used to purchase an asset (e.g. real estate), the asset is held on trust for the SMSF by another entity (i.e. the Property Trustee).
The SMSF must have the right to acquire legal ownership of the asset by making payment. The lender's recourse against the SMSF must be limited to the underlying asset (i.e. the purchased property). The lender must not have a right of recourse against other assets of the fund.
What other restrictions apply?
SMSFs must ensure that the level of investment in real property is in line with your fund's investment strategy, including diversification of assets, liquidity, and maximisation of member returns in the fund.
Although there is no prohibition on an SMSF acquiring up to 100% of the fund's total assets in the form of real property, SMSF Trustees must ensure that the fund has sufficient diversification of assets to meet the requirements of the SIS Act.
The SMSF must also ensure that it meets the other requirements of the SIS Act such as ensuring the fund has sufficient liquidity to meet its liabilities (such as pension payments).
If the fund invests 100% of its assets in real property, it is especially important that the SMSF Trustee ensures that the fund continues to meet these requirements.
The government has also made it clear that super funds investing in these types of investments must have appropriate risk management measures in place and must understand the risks of investment.
Who pays what and when?
As the beneficial owner of the property and the borrower of the loan, the SMSF is responsible to pay all the usual amounts that you would expect to if you had bought an investment property and borrowed money on it in your own name rather than your super fund. For example, your SMSF will be required to pay: council rates, water rates, and land tax (if any); interest and other loan repayments; lender's fees; repairs; property management costs; and any insurance premiums.
What happens when the loan is fully repaid? Can legal title be transferred to the SMSF? Would any stamp duty or GST be payable with respect to the transfer?
When the loan is fully repaid, the SMSF is entitled to have the legal title transferred to it. Depending on how the trust structure is set up and administered, this transfer should be possible without incurring tax, GST, or stamp duty liabilities (other than nominal). Of course, this position may change because of future changes in the law.
How can I transfer the property?
The SMSF can direct the Property Trustee to sell to any third party (subject to paying out the mortgage loan and any other amounts which might be outstanding).
Who can be the Property Trustee?
The Property Trustee must be a separate entity to the SMSF Trustee; however, it is permissible for the Property Trustee to be a company with the members of the SMSF in their own right appointed as directors of that company.
It is important that the SMSF Trustee itself is not the Property Trustee because such an arrangement may breach the requirements of section 67(4A) of the SIS Act and result in the SMSF being non-compliant. It is also undesirable for an individual member of the SMSF to act as Property Trustee due to trust law issues regarding the merger of interests of the trustee and the beneficiary.
Is there an ATO product ruling for this loan?
No, because each individual's circumstances are different. Each borrower and/or adviser should seek their own expert tax opinion, based on his or her individual circumstances.
How can Newstart Homes help me?
Newstart can assist by packaging a house and land together to suit your budget requirements and in an area you prefer to have your investment property located.
Why a House and Land package and not established?
Massive benefits include less stamp duty (payable only on the land), loan is drawn only as needed, maximum tax deductions for depreciation, brand new with excellent inclusions but most importantly, YOU get the profit as you are simply buying the land and paying for the building contract – no 3rd party profiteering. The profit and capital gain will be all yours.
