The Process

1. Establish/review the SMSF

(a) The Trust Deed establishing the SMSF must give the Superannuation Fund Trustee
power to:
(i) purchase real estate,
(ii) borrow money, and
(iii) mortgage property to secure repayment of that borrowing.

(b) The proposed investment must comply with the requirements of the Supperannuation Industry Supervision Act 1993 (SIS Act) (including the "sole purpose test - see section 62 of the SIS Act which requires that regulated superannuation funds are obtained solely for the provision of retirement benefits to members).

(c) Ensure that the investment in real property is in line with the SMSF's overall investment strategy (note that superannuation funds must have a written investment strategy), and the proposed purchase complies with all other requirements of the SIS Act (including but not limited to the "in-house asset rules" and the restrictions on acquiring assets from "related parties".

2. Establish the Property Trust Deed

The Property Trust Deed is a key document. Care is required to ensure there are no adverse GST, taxation or stamp duty consequences. It is important that the SMSF Trustee itself is not the Property Trustee. 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 the interests of the trustee and the beneficiary.

Red Rock can introduce you to a provider who help you establish a Property Trust quickly and easily in a cost effective way. These advisers will work with you and your own lawyer to ensure the Property Trust is correctly established and stamped. These advisers do not take the place of your own lawyer.

3. Instructions to Solicitors/Conveyancers

Accountants should ensure that the lawyer / conveyancer acting for the SMSF on the purchase of the property understands that the property must be purchased in the name of the Property Trustee. This is an essential part of the structure - the SMSF cannot be the registered proprietor).

4. Obtain loan approval

Loan approval should be obtained from Red Rock Mortgages in the ordinary way. Red Rock Mortgages has a broad range of products specially designed to cater for SMSF borrowing arrangements. The structure of the loan is:

(a) Borrower: SMSF fund;
(b) Security: a charge over the SMSF's beneficial interests in the property, with recourse for repayment of the loan limited to the property; a mortgage over legal estate owned by the Property Trustee, again with recourse limited to the security; a guarantee by all the fund's members and possibly a mortgages over other real estate owned by the guarantors outside the SMSF fund. The SMSF fund cannot give collateral security. The loan proceeds can only be used to purchase the property and there can be no subsequent advances.

5. Contracts exchanged

When contracts are exchanged between the seller as vendor and the Property Trustee as purchaser, the deposit will be paid by the SMSF. There is no need for the deposit to be paid through the Property Trustee, although this can occur if you wish.

6. Loan documents issued

The lenders lawyers will prepare the loan documents in the ordinary way and send them to the SMSF's lawyer/conveyancer for signing and return. The SMSF borrowing structure uses normal loan and mortgage documents with special provisions to provide the limited recourse against the asset. Accordingly, the SMSF fund has its own discrete loan and provides its own discrete security.

7. Settlement

The purchase is completed. After registration of the transfer on the mortgage, the transaction/title documents will be held on behalf of the lender.