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With housing prices in parts of Australia currently being some of the highest in the world, many investors are likely considering the potential of SMSFs to fund property acquisitions. However, because SMSFs are a relatively new and complex investment avenue, there appears to be a general lack of awareness around what information to gather and what questions to ask before attempting to use this funding option.
Blogger: Naomi Mitchell, partner,Younis and Co.
In this three-part series, I’ll aim to tackle some of these questions and provide information about some of the most fundamental, but commonly overlooked, aspects of SMSF property investing.
In this first blog, I’ll be focusing on the importance of not only getting your SMSF structure correct before signing a sale contract, but also properly understanding the restrictions placed on SMSF property investments.
1) Get your SMSF structure correct before signing the sale contract
Before you attempt to use your SMSF as an investment vehicle, it is important to consult professional advice to ensure that you establish the correct SMSF structure.
Depending on whether or not you’re borrowing in your SMSF to fund the purchase, your SMSF structure – and the requirements surrounding the structure – will be different.
If you’re not borrowing, you will need to have your SMSF structure established before you move ahead and sign the sale contract.
If, however, you are borrowing, you will be required to establish not only the SMSF structure, but also the borrowing structure. A SMSF itself can’t borrow money and, as such, you will need to set up a bare trust as well as a custodian company.
The main reason that it is important to get your SMSF structure correct before signing the sale contract is because the name on the sale contract needs be correct and, the name will differ depending on whether or not you are borrowing.
If the property purchase doesn’t involve borrowing in the SMSF, it will be the trustee of the super fund who will be required to sign the sale contract, and the super fund that will need to pay the deposit. If, on the other hand, you have SMSF borrowing in place or intend to do so, it will be the custodian that will be required to sign the sale contract.
If your structure is incorrect, and you go ahead and sign the sale contract in the wrong name, you will need to rectify the mistake post-exchange. This process is not only complex, but it can incur significant costs.
2) Understand the restrictions placed on SMSF property acquisition
One of the key things that prospective SMSF property investors must recognise is that there are tight restrictions on the type of property that a SMSF can acquire. For example, a SMSF generally can’t acquire assets from a ‘related party’. Under SMSF regulations, the term ‘related party’ refers to fund members and trustees, as well as relatives and business partners of fund members/trustees.
A prospective SMSF investor must also consider the intended purpose of their purchase – that is, how they plan to use the property. For example, a property acquired through a SMSF can only be for commercial or investment purposes, and not for the fund members or their associates to live in.
This restriction works to preclude a number of different possibilities in terms of how an investor can use their property post-purchase. For instance, if an investor is looking to buy a property to rent out to their children or to holiday in every three weeks, a SMSF is not going to be a suitable investment avenue for them.
It is for this reason that it is so important to understand what you can and can’t purchase within a SMSF. Investors can potentially waste a great deal of time and money – as well as incur legal liability – if they head down the SMSF property investment path without fully understanding the associated rules and regulations. As such, it is always wise to engage a qualified accountant specialising in SMSFs before taking the idea any further, as they will be able to advise you on your compliance obligations and give you a clearer idea as to whether or not a SMSF is an appropriate funding mechanism for you.
About Naomi Mitchell
Naomi Mitchell has over 17 years’ tax and business advisory experience. She specialises in superannuation, overseeing over 120 self managed superannuation funds with assets over $40 million. Her clients cover a diverse range of industries including food manufacturing, construction and engineering, and hospitality.
For more information on SMSFs or the various services that Naomi and her team at Younis and Co offer, please visit http://www.younisco.com.au/.