If you are thinking about purchasing a property using your Self-Managed Superannuation Fund (SMSF), you will need to consider how this is funded and structured so it is compliant with the superannuation rules.
Some of the questions you will need to consider before deciding on an appropriate structure are:
- Does your SMSF have the funds available to purchase a property outright?
- Are additional funds required? Can additional funds be accessed from other entities or can the additional funds be financed from other sources such as a bank?
- Can contributions be made to your SMSF to assist with the purchase?
- Do you only want to commit a certain amount of funds from your SMSF?
- Is the property you are purchasing an already established property or is it land? Do you intend to develop or build on the property?
Depending on your response to the above questions, an SMSF will generally have 3 main options to purchase a property, each with its own legislative requirements.
- Direct Property Purchase;
- Indirect Property Purchase via a Related Fixed Unit Trust; or
- Limited Recourse Borrowing Arrangement (LRBA)
Note in all options that if the property being purchased is residential, the property cannot be lived in or rented by a member or related parties.
1. Direct Property Investment
If your SMSF has sufficient liquid funds, it may be able to purchase a property outright. You may wish to do this if you do not want other entities involved and your fund Investment Strategy allows you to commit 100% of the purchase price from the SMSF.
Please note the property is unable to be used as security.
2. Indirect Property Investment – Fixed Unit Trust
This option allows the SMSF to provide a portion of the funding for the property purchase. The portion of the property not funded by the SMSF would be funded by a related party (such as a family trust).
The SMSF and the related party would subscribe for units in the Fixed Unit Trust and have defined unitholder ownership interests so each unitholder receives income and capital from the Trust in proportion to their respective ownership interests.
This option should be considered if you want the SMSF to commit only a certain amount of funds towards the property purchase.
Please note the main restrictions for this structure include:
- the property is unable to be used as security
- the Fixed Unit Trust cannot borrow or maintain any loans
- the Fixed Unit Trust is restricted to only investing in direct property (unable to invest in shares for instance)
3. Limited Recourse Borrowing Arrangement (LRBA)
The most complex and costly option, this option also allows the SMSF to purchase a property with funding assistance provided by a lender via a Limited Recourse Borrowing Arrangement (LRBA).
An LRBA is a strict arrangement that specifically limits a lender’s claim against a borrower to the security asset. Where this arrangement is applied in the context of an SMSF, the other SMSF assets are not subject to claim by the lender in the case of a default.
The SIS provisions have complex borrowing rules that prohibit the SMSF from improving or changing the property whilst any borrowings exist. Therefore, this structure would not be suitable for financing the construction on land and or/ developing property.
To comply with the LRBA rules, the property must be structured with a bare trustee owing the property on bare trust for the SMSF. Different states have different requirements on timing of the setup of this type of structure so it is important to obtain the right advice prior to the signing of a contract to avoid the impost of double stamp duty.
Please note each of the options explored in this article must continue to comply with the superannuation provisions to remain a compliant structure.
We are here to help
Our team is here to support you with all areas of SMSF, including the complexities associated with superannuation and property. If you have any questions regarding purchasing a property with your SMSF, or any general SMSF inquiries, please contact our Manager of Self Managed Superannuation Funds Simon Abbott on 03 5244 6867.
This article was written by Accountant Liam Robinson and Manager of Self Managed Superannuation Funds Simon Abbott.
Disclaimer: The information provided in this article is factual in nature and objectively ascertainable and, therefore, does not constitute financial product advice. Importantly, the factual information that has been supplied does not take into account your personal circumstances, objectives or goals.