A self-managed superannuation fund (SMSF) is a trust structure that is used to manage retirement savings on behalf of the fund’s members. Investing in property as part of an SMSF is a popular superannuation strategy because it is tax-effective and provides good financial benefits, plus it allows members to take personal control of the assets invested.
However, while SMSFs can borrow funds to purchase assets, the borrowing must satisfy certain requirements set out in superannuation legislation. It is also important to understand that the system leaves little room for error. This means it is essential to engage a lawyer from the beginning, who can negotiate the terrain and ensure that your transaction is compliant.
What do I need to consider?
Various rules are attached to buying and selling property through an SMSF. The kinds of things your lawyer can advise you on include:
- What is an ‘acquirable asset’? That is, what kind of property are you allowed to acquire
- Repairs vs improvements - That is, what will constitute ‘repair’ (which is allowed) and what will constitute ‘improvement’ (which is not)?
- Beneficial ownership - How can the asset be held (ie what kind of trust can hold it)?
- Legal ownership - Who can the actual beneficial owner be and when (ie, the trustee of SMSF)?
- Default - What recourse does the lender have in the event of default?
- Restriction on replacement assets - What happens if, for example, the asset is destroyed by a fire? What restrictions apply when you want to replace it?
- What exemptions apply to any restrictions?
- What funding options are available?
What is the process?
Various steps are involved in the process of buying property through an SMSF. These include:
- Collating financial data (eg your superannuation balances and contributions)
- Applying for a loan
- Ensuring you have the necessary powers under your trust deed and amending this if required
- Considering any risks of the investment and how these can be minimised
- Establishing a separate corporate trustee of the holding trust, to protect against risk and higher fees, and preparing any necessary associated documentation
- Negotiating with the vendor
- Structuring the transaction to avoid a higher rate of stamp duty
- Ensuring all payments relating to the purchase are paid from the right account
- Ensuring any rental income is paid into the right account
- Registering the SMSF trustee for land tax
- Registering the SMSF for GST, if necessary
- After payment of the loan, transferring the asset from the holding trustee to the SMSF trustee
Be aware that this process is complicated and it should not be undertaken without legal assistance. Otherwise you risk exposing yourself to higher fees, or financial and legal problems either now or in the future. Also be aware that every transaction is different and may require a different process (particularly because the rules are not the same in each state): this is why your lawyer must be experienced in this field.
What are the risks?
Some of the most common errors we see in SMSF transactions include:
- Using out-of-date SMSF trust deeds, which do not contain the necessary powers of the trustee
- Not seeking pre-approval of loans and/or not understanding a lender’s requirements, and therefore incurring costs
- Buying a property before the SMSF is established or the holding trustee is registered (in which case you face double stamp duty and capital gains tax issues)
- Not establishing the SMSF and holding trust correctly (this can lead to finance delay/refusal and also exposure to litigation)
- Failure to implement any rules under relevant legislation or guidelines (eg relating to ‘single acquirable assets’)
- Signing up the wrong trustee as the borrower
- Paying any amounts related to settlement of the property from the wrong account
Any mistakes could have financial consequences for the fund (ranging from double stamp duty, to capital gains, GST and land tax consequences). They can also weaken the ‘absolute entitlement’ of the SMSF to the asset. This is why you need to engage an experienced lawyer who can guide you through the process.