You heard that property is a great investment for an SMSF and you are looking at establishing an SMSF to buy an investment property.
Before your next step, you have to evaluate other factors that must be complied with. If your acquisition is not in line with the rules stipulated by ATO, the ATO could impose civil and criminal penalties or the freeze your SMSF assets.
Have a glance at following rules and tips. This will help you to understand the compliance requirements and stay compliant to derive myriad benefits an SMSF has to offer;
The property acquired under the SMSF must be maintained for the sole purpose of providing benefits upon death or retirement of the members. The SMSF cannot purchase a property so that you or a related party can live in the property even though should they pay a rent or a related party cannot later move in or rent the property.
Related Party transaction
The SMSF cannot purchase the property from you or a ‘related party’. A related party could be a member of the SMSF, an employer-sponsor of the SMSF or a relative of members, the directors of the trustee company of the SMSF, partners of a member in a business partnership and the spouses and children of that partner; and companies in which the member controls the company.
However, business real property is an exemption to this rule where the business real property is used wholly and exclusively in one or more businesses, whether carried on the SMSF or not. We could help you to identify whether the property is business real property or not.
The SMSF cannot borrow money to fund the purchase unless it is through a limited recourse borrowing arrangement whereby the money borrowed will only be used to acquire the property or for associated cost such as conveyancing fees or stamp duty. In addition, the borrowed funds can be used to maintain or repair the property but it cannot be used to improve the property. Under this arrangement, the property will be held on trust for the benefit of the SMSF. Once the loan is repaid, the custodian trustee will transfer ownership to the SMSF.
In case of a default, lender’s rights are limited to the property that has been acquired. Lenders are permitted to request personal guarantees from other persons to secure the loan. The asset subject to the Limited Borrowing Recourse should not hold other mortgage or charges.
Tips for a efficient purchase of property under SMSF?
You need to consult your accountant or financial planner before purchasing the property to ensure that your proposed investment is appropriate for your SMSF and will be compliant with the rules. In this aspect, Rands Financial Services Pty Ltd can help you. Please visit https://randstax.com.au/smsf-1 for our credentials.
Don’t purchase a property owned by a related party of the SMSF unless it is a “business real property”. If you consider the “business real property” exemption, ensure that your accountant confirms that the property meets the requirements of this exemption.
Visit your lawyer with the contract before you sign it so that they can review it and ensure that it is appropriate.
If borrowing money for the purchase, Rands Financial Services could help you as we are a Mortgage Broker too. let us know before signing the contract to confirm any specific requirements the bank may have for the contract and whether the bank require personal guarantees.
The finance approval process may take a longer time than usual. The documentation and approval process is more complex than a regular residential property purchase. Moreover, There would be additional legal fees when you obtain an SMSF loan.
If you consider purchasing a property through your SMSF, please contact us as we could advise on your investment decision, if buying a property is a the right strategy for you, we could arrange the loan for you. In addition, we could help you to stay in compliance in terms of Tax returns and Audit throughout.