Self-Managed Super Funds: Obtaining a Loan for Investment Properties
Since legislative changes allowed self-managed superannuation funds (SMSFs) to obtain loans to purchase real property, there has been an increase in such investments. It is not difficult to understand this trend, given the concessional tax implications available through these investments.
Whilst purchasing through an SMSF has significant benefits and tax concessions, it is important to ensure that these investments comply with the strict requirements.
The key question here is ‘How does an SMSF acquire property?’
- Correct SMSF Structure
Before embarking on the journey to purchase a property, the SMSF needs to be set up with the correct structure. This includes deciding who would hold the Title to the property as current legislation does not permit an SMSF to be registered as the proprietor of the property. Therefore, a Bare Trust is usually set up to be the registered proprietor of the property and hold it on trust for the SMSF.
This structure is illustrated below:
It is also important to note that an SMSF can only borrow money to purchase a property if this strategy is outlined in both the trust deed and the investment strategy statement. It may be that the Trust Deed and Investment Strategy may need to be updated before the SMSF can purchase a property.
- Loan Pre-Approval
Banks are still wary of loaning to SMSFs for the purchase of property due to the relative newness of the practice. Generally, obtaining pre-approval before entering into a contract to purchase a property is wise because banks usually require higher deposits to be paid (amongst other restrictions).
If a contract is entered into and the loan is then not approved, the SMSF faces the likelihood of defaulting on the transaction.
- Choosing Property
Any property an SMSF purchases needs to be for the sole purpose of providing benefits for its members.
Property that cannot be purchased by an SMSF includes property to be occupied by its members or related parties, property owned by the members or related parties of the SMSF. The SMSF is also restricted regarding multiple property developments, vacant land to subsequently build a dwelling and addition of another structure on an existing dwelling.
The golden rule when signing the contract of sale is ensuring that the name of the purchaser is correct. If the contract is signed in the wrong name and the property, there will be negative tax repercussions to remedy the mistake.
As with any real property purchase, it is advisable to obtain legal advice prior to entering into such transactions. If you would like to discuss this further, please feel free to contact our office to make an appointment.
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