Borrowing by self managed super funds

Superannuation Industry (Supervision) Act 1993, section 67 (4A), provides that a superannuation fund can borrow money if:

• The money borrowed is used to purchase an asset

• The asset is held on trust so that the fund acquires a beneficial interest

• The super fund has the right to acquire legal ownership by making payment

• The rights of the mortgage lender against the super fund on default are limited to the security

The Process

• Establish/review the self managed super fund (SMSF)

• Establish the Property Trust Deed

• Obtain loan approval

• Contracts signed/exchanged

• Loan documents issued

• Settlement

What paperwork is involved?

• Property Trust Deed: under which the Property Trustee holds the property as trustee for the SMSF

• Contract for Sale: to purchase the property (entered into in the name of the property trustee)

• Loan Agreement: between the mortgage lender and the self managed super fund

• Mortgage: over the property between the mortgage lender and the Property Trustee

• Personal Guarantee: by members of the SMSF

Frequently Asked Questions about SMSF's

How does my self managed super fund (SMSF) purchase a property?

The SMSF chooses the property to purchase and a Contract of Sale is entered into by the Property Trustee. The SMSF obtains loan approval, pays the deposit, balance purchase money (less the amount borrowed), legal costs and stamp duty in the normal way. On completion, the self managed super fund borrows from the mortgage lender and the Property Trustee mortgages the legal title to the property to the mortgage lender. The SMSF then manages the asset in the usual way.

Can fund members occupy the property?

No. If fund members or related personal occupy the property, the 'in-house asset rule' will have been breached. However, the SMSF can buy property that the members intend to live in after retirement.

Are they are any other restrictions?

The SMSF must comply with all regulations applying to superannuation funds. They must also ensure that the level of investment in real property is in line with the fund investment strategy. There is no specific prohibition on 100% of the funds total assets being in real property, but the self managed super fund may not be able to meet its diversification requirements under such a strategy.

Who pays what and when?

The SMSF is responsible for paying all the usual overheads that any investor would expect to pay. For example,

• council rates, water rates and land tax (where applicable)

• interest and other loan repayments

• Lender's fees

• repairs and property maintenance

• property management costs

• insurance premiums

How can I sell the property?

The self managed super fund can direct the Property Trustee to enter into a contract for sale of the property to any third party. On settlement, the home loan is paid out.

What happens when the home loan is paid out?

The SMSF is entitled to have the legal title transferred to it. This transfer should be possible without incurring tax, GST, or stamp duty liabilities (other than nominal).

Who can be the Property Trustee?

The property trustee must be a separate entity from the SMSF Trustee. It is possible, but not desirable, for an individual member of the SMSF to act as a Property Trustee due to trust law issues regarding the merger of the interests of the trustee and the beneficiary. It is recommended that a special purpose company be registered to act as Property Trustee.

For more information about buying property with a self managed super fund, speak to one of our mortgage brokers on 1300 55 10 45.