Purchasing an investment property in a self-managed superannuation fund (SMSF) is an attractive, tax effective, option for many. However, it is important prospective purchasers are aware of the rules and requirements (legal or otherwise) for purchasing in their SMSF.
There are special rules which apply only to regulated superannuation funds. These rules include:
For an SMSF to be used to obtain a home loan, it must abide by strict borrowing conditions. A limited recourse borrowing arrangement (LRBA) is used by the fund to take out the home loan. This arrangement limits the recourse of the lender by requiring a fund to establish a separate property trust and trustee on behalf of the fund, outside the structure. The income and expenses of the property go through the fund’s bank account and the super fund must meet all repayments. If the fund fails repayments, the lender only has the property held in the separate trust as recourse, meaning the lender cannot access any remaining assets of the super fund.
It is important that SMSF purchasers consider the risks associated with purchasing in a self-managed superannuation fund.
For example, loans taken out for an SMSF can be more costly than other property loans. In addition to this, as mentioned above, repayments for the loan must come from the fund (as well as the deposit funds required to purchase the property). It is paramount that the fund has sufficient cash flow to sustain repayments and other expenses for the property. Arrangements for a self-managed superannuation fund are not able to be unwound. In the event there is an issue with your loan documents and contract, you may be forced to sell the property which, consequently, can cause losses to the fund.
There are also important tax considerations. Namely, you will be unable to offset tax losses from the SMSF property with taxable income outside your fund. Additionally, if the investment is in a commercial property, and your earnings are $75,000 or more, you will be required to register for GST. You should also consider the Capital Gains Tax (CGT) implications. For example, if you choose to sell the property, any applicable CGT will be payable.
Prior to entering into a contract to purchase in an SMSF, you should speak to a qualified financial advisor or SMSF expert in order to obtain advice relevant to your particular circumstances.
If you require any assistance documenting a superfund purchase or wish to discuss, please do not hesitate to contact us. We are here to help.
The information in this blog is intended only to provide a general overview and has not been prepared with a view to any particular situation or set of circumstances. It is not intended to be comprehensive nor does it constitute legal advice. While we attempt to ensure the information is current and accurate we do not guarantee its currency and accuracy. You should seek legal or other professional advice before acting or relying on any of the information in this blog as it may not be appropriate for your individual circumstances.