Trustees of self-managed super funds (SMSF) now have the opportunity to purchase property, either residential or commercial, through their SMSF after amendments to superannuation legislation in September 2007, which allows for these SMSF trustees to borrow for the purpose of single asset acquisition.
As long as the SMSF has sufficient funds for a deposit that addresses the lenders loan valuation ration (LVR), the lender will provide the remainder of the purchase price. However, due to the reduced tax rate applicable to super funds, trustees need to be mindful to the fact that negative gearing in a super fund is not practical, even though banks may only require a minimal deposit.
The amended legislation necessitates that the loan must be a Limited Recourse Borrowing Arrangement (LRBA). Once this arrangement is entered into, it consents for the lender to hold the property as security. It does not allow the lender to use any existing or other assets of the SMSF as additional security, in which case the lender may require the members of the SMSF to provide personal guarantees.
Borrowings of the trustees can be provided by a bank, financial institution, or from a related party, i.e. the members or an entity controlled by the members.
The property acquired with borrowed monies needs to be held by a bare trust, with the SMSF being the beneficiary of the trust, in line with LBRA regulations. The registered holder of the property until the loan is repaid is the bare trust. Any interest paid to the lender will come from the SMSF, which will also obtain rental income from the lessee. The investment property will revert to the legal owner, the trustee of the SMSF, when the loan is discharged. The trustees of the SMSF and the bare trust cannot be one of the same, & according to each particular lender’s requirements, may require a corporate trustee company registration for both entities on some occasions.
Attempt to borrow with no/minor deposit, the SMSF must have cash to pay for same.
Sign any contracts without first getting professional advice.
Leave yourself open to potential additional stamp duty by signing the contract in the wrong name.
Forget that any limited recourse borrowing must only be used to purchase a NEW single asset.
Start any major renovations on the property acquired using a LBRA, as the property cannot be substantially altered.
Purchase properties on multiple titles thinking that one bare trust is sufficient. Each title needs a separate trust if they can be sold independently.
Believe that negative gearing works in a low tax (superannuation) environment. It doesn’t.
Forget each bank has their own particular lending requirements and rules. You have to dance to their tune to get what you want!