Frequently Asked Questions?
How does my SMSF purchase a property?
The SMSF chooses the property it wishes to invest in, in the ordinary way. Residential property must be purchased from an arm's length vendor. Non residential property can be purchased for full value from related parties so long as the property is let for business purposes.
The SMSF obtains a loan approval. The SMSF's own lawyer/conveyancer acts on the purchase in the ordinary way. The purchase MUST be in the name of the Property Trustee. The SMSF pays the deposit, the balance purchase money (less the amount borrowed), the legal costs, and stamp duty in the ordinary way. On completion of the purchase the Property Trustee mortgages the property to the lender. SMSF then manages the asset in the same way as you would with any other real estate investment.
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. This is possible if you transfer the property from your super fund to yourself after you retire.
I thought super funds could not borrow or charge their assets. Is this correct?
That was correct, until amendments to the Superannuation Industry (Supervision) Act 1993 (SIS Act) made in September 2007. Under the new section 67 (4A) of the SIS Act, SMSFs can borrow providing the following conditions are satisfied. The borrowed funds are used to purchase an asset (e.g. real estate) The asset is held on trust for the SMSF by another entity (ie the Property Trustee). 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 (ie the purchased property). The lender must not have a right of recourse against other assets of the fund.
What other restrictions apply?
SMSFs must ensure that the level of investment in real property is in line with your fund's investment strategy, including diversification of assets, liquidity, and maximisation of member returns in the fund. Although there is no prohibition on an SMSF acquiring up to 100% of the fund's total assets in the form of real property, SMSF Trustees must ensure that the fund has sufficient diversification of assets to meet the requirements of the SIS Act.
The SMSF must also ensure that it meets the other requirements of the SIS Act such as ensuring the fund has sufficient liquidity to meet its liabilities (such as pension payments). If the fund invests 100% of its assets in real property, it is especially important that the SMSF Trustee ensures that the fund continues to meet these requirements. The government has also made it clear that super funds investing in these types of investments must have appropriate risk management measures in place and must understand the risks of investment.
Who pays what and when?
As the beneficial owner of the property and the borrower of the loan, the SMSF is responsible to pay 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 rather than your super fund. For example, your SMSF will be required to pay: 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 with respect to 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). Of course, this position may change because of future changes in 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).
Who can be the Property Trustee?
The Property Trustee must be a separate entity to the SMSF Trustee, however, it is permissible for the Property Trustee to be a company with the members of the SMSF in their own right appointed as directors of that company. It is important that the SMSF Trustee itself is not the Property Trustee because such an arrangement may breach the requirements of section 67(4A) of the SIS Act and result in the SMSF being non-compliant. It is also undesirable for an individual member of the SMSF to act as Property Trustee due to trust law issues regarding the merger of interests of the trustee and the beneficiary.
Is there an ATO product ruling for this loan?
No, there never will be because each individual's circumstances are different. Red Rock has obtained its own legal advice (available for perusal by interested parties) but each borrower and/or adviser should seek their own expert tax opinion, based on their individual circumstances.
