There seems to be a lot of interest surrounding Self-Managed Super Funds (SMSF) and being able to invest in residential property with them. Here we explain when you can use your SMSF to invest in residential property and how they work.
Like other super funds, SMSFs are a way of saving for your retirement. The difference between an SMSF and other types of funds is that, generally, the members are also the trustees. This means the members run it for their own benefit. Of course, with added control comes added responsibility and workload.
You can only buy property through your SMSF if you comply with the rules:
However, your SMSF could potentially purchase your business premises, allowing you to pay rent directly to your SMSF at the market rate. See the Australian Taxation Office's webpage on self‑managed super funds for more information.
Borrowing or gearing your SMSF into property must be done under very strict borrowing conditions called a 'limited recourse borrowing'. A limited recourse loan is where the amount recoverable on default is limited to the secured property itself, and all other assets of your SMSF are protected.
If you currently don’t have a SMSF then you need to set one up and this can take up to 6 weeks. Your solicitor, Accountant or Financial Planner will generally do this on your behalf. Once the Self-managed super fund is established and a bank account is set up in the name of the SMSF then other super funds are then rolled in to the SMSF.
Funds in the SMSF are then used to pay deposit and costs for the new purchase. A Bare Trust is established prior to signing a contract to purchase a property, the Bare Trust is the purchaser on the contract. The Bare Trust is the owner of the property and the beneficiary is the SMSF. The Bare trust can only purchase one property. If another property is purchased then a new bare trust must be set up for the new property.
Is now a good time to purchase a property in a SMSF?
Most experts believe that the property market is at the bottom of the cycle outside Sydney, Melbourne and possibly Perth. That coupled with low interest rates could signal a good time to buy. As always it's important to do your research and seek professional advice if you're unsure about anything.
How much money do you need in your SMSF
This is something that you would certainly need to discuss with your accountant or financial planner and will be dependent on how much you are planning to spend on a property. Keep in mind you will generally need at least 30% of the purchase price of the property, plus purchase costs, loan set up costs and if you don’t currently have a SMSF and a Bare Trust in place you will also need to cover the cost of this as well. It is also a good idea not to use up every cent you have in the fund to allow for the unexpected.
This information does not take into account a person’s particular requirements, objectives or financial situation. Before making a decision about whether to acquire a credit or lending product, a person should seek independent financial, legal and taxation advice.
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