Given the uncertainty of global share markets we have seen an increase in the number of people using their superannuation for the purpose of investing in property. This is mainly being achieved through the use of “limited recourse borrowing arrangements” and self managed superannuation funds (SMSFs).
Can a SMSF invest in property?
An SMSF can invest in property provided that it is not acquired from a related party. An exception to this is business real property which may be acquired from a related party in particular circumstances.
How can a SMSF fund the investment?
Essentially there are 2 main options for an SMSF to fund the acquisition of an investment property:
- Fund the entire acquisition amount from the funds held by the SMSF;
- Borrow the funds from a third party (e.g., a financier) (this is known as a limited recourse borrowing arrangement, i.e. the only recourse as against the super fund for the lender is to the acquired asset).
How does a limited recourse borrowing arrangement operate?
The borrowing arrangement essentially operates as follows:
- A security trust established and the acquirable asset is held on trust so the SMSF acquires a beneficial interest in the asset;
- The SMSF has a right to acquire legal ownership of the asset by making one or more payments; and
- The rights of the lender and any other person against the SMSF trustee for default is limited to the acquirable asset.
Set out on the next page is a diagram of a typical SMSF limited recourse borrowing structure and how the arrangement works.
Are there any limitations in respect of property investment?
One particular issue that needs to be considered is whether there is a restriction on the use of the property. Some restrictions include:
Residing in the property or use it as a ‘holiday residence’;
Renting the property to related parties (e.g., members, children, grandchildren etc);
Acquiring property other than at arm’s length. How can we help? Careful consideration is required as to the structuring of any property acquisition as there are a number of superannuation and tax matters to get right. We can assist in a number of ways, including:
- Establishing an SMSF;
- Entering into borrowing arrangements with a financier or a related party lender;
- Establishing the entities and other ancillary documents required to acquire the property;
- Providing advice on superannuation legislation compliance;
- Providing advice on the GST, income tax and duty issues with acquiring the asset and subsequently transferring legal title to the asset to the SMSF once any limited recourse borrowing has been repaid.
Click here to view diagram.