July 30, 2013
With changes in law, purchasing property within self managed super has become extremely popular during the last few years. This new opportunity opens up all the benefits that come along with investing in property but in a significantly more tax effective structure.
However, investing in property within self managed super can be an expensive lesson in what not to do unless you follow these important tips below.
1. Having a Corporate Trustee
All SMSF's must have a trustee which can either be the members individually or a corporate entity with the members as Directors. When investing in property within super a corporate trustee is highly recommended. It allows changes to the membership of the fund without changing the owners of the property, which means avoiding paying stamp duty and possible capital gains.
2.Property type restrictions
You can use your SMSF to buy residential or commercial property. However, any property held by your SMSF must meet the sole purpose test of providing retirement benefits to fund members. This test rules out buying residential property from a related party of a member. Additionally, the family home is also not allowed within an SMSF. A popular option is purchasing our own business premises within self managed super. But keep in mind the sole purpose test and make sure all transactions including sale price and lease arrangement are at arms length.
3. Borrowing to buy property
The recent changes have made it possible for SMSF's to borrow money to buy property. Generally, borrowings must be in the form of a limited recourse loan, which means that any recourse the lender has under the borrowing arrangement is limited to the single asset purchased under that arrangement. So it is important to make sure the property is classed as a single acquirable asset. For example two adjacent blocks of land with separate titles need separate loans. If buying off the plan, the deposit can be paid in cash and can enter into a Limited Recourse Loan to pay the balance upon settlement.
4. Investment Strategy
As with any super investment, you need to make sure it fits in with your investment strategy and that it is part of a balanced portfolio of assets. A key point is, upon the untimely death of a member their benefit must be paid out to their beneficiaries. Without sufficient cash reserves or other liquid assets, it may mean a forced property sale and related expenses. So keep this in mind and always plan for the future.
I cannot understate the importance of having a finance broker who is experienced in limited recourse borrowing due to the complications involved. So I would recommend seeing the team at Mortgage Choice in South Melbourne who can take you through the process step-by-step.