Azure Property Group

Is an SMSF for me?

There are many advantages to SMSF’s. However, you need to be sure it will suit your needs and your situation. The ATO recommends you consider the following:

• Is the fund strictly for retirement benefits?
• Do you have the time to manage your own fund?
• Will the benefit be worth the cost?
• How will switching to an SMSF affect your current superannuation benefits?

Getting sound advice is crucial. Your accountant or financial adviser can help you work out the best strategy for you. If you don’t already have an adviser then we can place you in contact with an expert in this field to assist you. We will also work with your accountant or financial adviser to make sure you have selected the right property for your SMSF.

What is the legislation surrounding a SMSF?

In September 2007, the Superannuation Industry Supervision Act (SIS Act) was amended to allow SMSF to borrow to invest in property. Included is the requirement that a lender must have ‘limited recourse’. Specifically, the lender’s recourse in the event of default by the borrower (the SMSF) is limited to the security property that is the subject of the loan, and excludes any access to the other assets of the SMSF. The banks cannot legally require the SMSF to provide any further security. Instead they seek personal guarantees from the members of the SMSF – the ultimate ‘beneficiaries’ of the loan.

To facilitate the SMSF borrowing from the bank, a document known as an “Instalment Warrant” is used, which outlines the responsibilities of the bank and the borrower.

Can I buy an investment property through a self-managed super fund?

Yes, although it's often not as simple as people think and requires an expert to set up the right structure for you.

Can I put an existing investment property into the fund?

Only if it’s a property used as your business premises. Otherwise, there are regulations preventing super funds from acquiring assets from fund members, so you can’t sell an investment property to the fund, or transfer it across as a personal super contribution.

Can I use the money in my fund to buy an investment property from someone else?

Yes, as long as it's not a related party.

Can I occupy the property?

No. If a member of the SMSF occupies the property, the “in-house asset rule” would be breached. However, the SMSF can buy a property that the investor intends to live in after retirement. To do this, you need to transfer the property from your super fund to yourself after you retire.

I thought super funds couldn’t borrow or charge their assets. Is this true?

The amendments to the SIS Act 1993 changed this rule. Under the new section 67 (4A), SMSF’s can borrow providing the following conditions are satisfied:

1. The borrowed funds are used to buy an asset (like real estate), which is held on trust for the SMSF by another entity (i.e. the Property Trustee).
2. The SMSF must have the right to acquire legal ownership of the asset by making payment. The lender's recourse against the SMSF must be limited to the underlying asset (i.e. the purchased property). The lender cannot pursue other assets in the fund as recourse.

What if I want to use the future income in my super fund to increase its share of the property?

This is regarded as the fund acquiring an asset from its members, so it’s problematic and generally not recommended.

As a general rule, once the ownership split is set, it is fixed.

Can I rent the property myself or rent it to my children?

No. Renting to a related party is prohibited under the in-house assets rule.

Why does my Fund need an Investment Strategy?

Under the SIS Act, the Trustee of the SMSF is solely responsible and directly accountable for the management of the members’ benefits.

That means Trustee is responsible for making, implementing and documenting decisions relating to the investment of the assets of the fund and carefully monitoring their performance. A key part of this duty involves formulating and implementing an investment strategy. In fact, it’s prescribed in the SIS Act as a “covenant” – an obligation of the Trustee.

The investment strategy must encompass the circumstances of the entire Super Fund, including:

1. the risk involved in making, holding and realising the SMSF's investments, and whether the likely return from these investments meets the SMSF’s objectives and its expected cash flow requirements;
2. the composition of the SMSF's investments as a whole, and whether the entity is at risk from insufficient diversification;
3. whether the liquidity of the entity's investments meet the expected cash flow requirements, such as: payment of tax, superannuation surcharge liability of the members, lump sum benefits if a member leaves the SMSF, or regular pension payments; and
4. the ability of the SMSF to discharge its existing and prospective liabilities.

The purpose of this obligation is to protect members’ retirement benefits, minimise the risk of irresponsible or incompetent investments and ensure investments are made in compliance with the SIS Act.

The Trustee should implement a due diligence process to foster strategic and responsible decision-making. This also protects the Trustee from action by members if the investments fail.

If you don't have a valid and complying “investment strategy”, then the ATO may decide that your SMSF is non-complying.

Who pays what and when?

As the beneficial owner of the property and the borrower of the loan, the SMSF is responsible for paying all the usual amounts that you would expect to if you had bought an investment property and borrowed money on it in your own name. That means your SMSF will be required to pay things like council rates, water rates, and land tax (if any); interest and other loan repayments; lender's fees; repairs; property management costs; and any insurance premiums.

What happens when the loan is fully repaid? Can legal title be transferred to the SMSF? Would any stamp duty or GST be payable on the transfer?

When the loan is fully repaid, the SMSF is entitled to have the legal title transferred to it. Depending on how the trust structure is set up and administered, this transfer should be possible without incurring tax, GST, or stamp duty liabilities (other than nominal). This may all change with future alterations to the law.

How can I transfer the property?

The SMSF can direct the Property Trustee to sell to any third party (subject to paying out the mortgage loan and any other amounts which might be outstanding).

Is there an ATO product ruling for this loan?

No, because each individual's circumstances are different. Each borrower and/or adviser should seek their own expert tax opinion, based on his or her individual circumstances.

What happens if the SMSF or the members are unable to keep up with their respective loan repayments?

If the SMSF, or any related parties that have funded the SMSF, cannot meet repayments on a timely basis, the Financier will enforce its lending and security rights and the Trustee may be forced to sell the underlying property. In the event there is a loss (after repayment of the Financier’s loan and the Trustees selling costs); no further action can be taken by the Financier or the Trustee against the SMSF. However, the Financier will seek recovery of any shortfall from each of the members, because they would have borrowed the loan in their own names and then on-lent it to the SMSF. In these circumstances, the members may be required to liquidate or refinance other personal assets to meet any shortfall.

What happens at the Completion Date?

At the Completion Date (which is normally the same date as Loan Term, which could be up to 30 years) the full amount of the outstanding balance of the purchase price becomes payable. If any outstanding balance is not paid, the warrant is terminated. Any capital growth (after fees and charges) will go to the super fund.

After I retire, can I take the property out of the fund as payment of my benefits?

Yes, there are ways that you can take the property as payment of your benefits and you may be able to do this without triggering any tax liability. Talk to your financial adviser for more information on how to do this.

Can the super fund sell the property to me at some stage after final payment has been made?

Provided you pay market price, it’s legal. And in certain circumstances, the sale could be tax-free. Talk to your financial adviser about this.

General Advice Warning: Nothing on this page constitutes financial advice. Nor is it a specific recommendation. Your personal situation has not been taken into account and you must seek your own legal, financial and taxation advice in determining what loan structures are best for your unique circumstances and goals.