It is now possible to borrow to invest in property within a Self Managed Super Fund under recent changes to Superannuation Law. This is an attractive option to many investors, especially those with a bias towards ‘bricks and mortar’!
While not as straightforward as traditional investing, for many people the benefits far outweigh the inconvenience as they can tap into equity previously quarantined from their property investment strategies. Also, lenders will assess the strength of the investment on its own merits, and providing the rent and any other income from the fund cover the loan repayments, and the property itself meets certain requirements, then an application for finance will be considered. This is particularly useful if income outside of Superannuation is committed elsewhere.
- A tax effective investment that enjoys the special Superannuation taxation concessions.
- Commercial investment property may be purchased from, or leased to, associates (and family members) providing all values are at fair market rates.
- Other assets within the Super Fund are protected from the banks, and cant be forfeited in the case of loan default (this is called a non recourse loan).
- If the property is sold capital gains are calculated at Super Fund taxation rates which means significant savings!
- Can be expensive to set up with the correct trustee structure as required under Federal Legislation.
- You may not purchase residential investment property off a family member, or lease it to a family member.
- You cant purchase a residential property for your own use.
- You cant develop or significantly improve the property.
- You cant refinance the asset to draw down on the equity for further investments.
Is it right for you?
If you are considering the purchase of either residential or commercial property within a Self Managed Superannuation Fund (SMSF) then you will need to surround yourself with a team of professionals to ensure that each step is completed correctly as this type of investment is heavily regulated under Federal legislation.
These are the people you will need to talk to prior to making an offer to purchase:
First of all, speak to your accountant and/or financial planner. They will assess your needs to see if establishing a SMSF is appropriate to your circumstances, and whether property investment within that fund would meet your financial goals and requirements. They will also be able to help you set up a SMSF if you do not already have one.
If you are looking to borrow funds to assist with the property purchase it would also be appropriate at this stage to chat with your bank or mortgage broker to ascertain how much you could borrow within the fund. (Note that this is a service that we provide).
Then, once you have decided that property investment within the SMSF is right for you, speak to a lawyer to set up the correct trust structure for the property purchase. The property is controlled by a separate Property (or Bare) Trust to the Super Fund, with the Super Fund having beneficial ownership. There is a very specific way that this must be done to satisfy legislative requirements, and it is important to have the correct advice for this.
And then, once all this is in place you can go shopping! It is very important that you have the correct structure in place first as your purchase contract must be worded a certain way to correctly reflect the ownership of the property with consideration to the SMSF and the controlling Property Trust.
Call us if you would like to find out more!