Gearing your SMSF to acquire an investment property
Are you aware that the current SIS legislation allows a self-managed superannuation fund (SMSF) the ability to borrow to fund the purchase of an investment property?
It may be a commercial property such as an office, warehouse or factory (perhaps where you run your business from), a residential property, a farm etc. So long as the property is an eligible investment for your SMSF, then a gearing strategy should be possible.
There can be many benefits in embarking on such a strategy such as;
Superior long term returns where the income and capital growth on the property exceeds the borrowing costs
Deductible superannuation contributions up to the contribution caps, can be used to repay the loan principal
Access to your superannuation as a source of funds to pay for the deposit on the property
Currently only 10% capital gains tax applies if the property is sold whilst you are in accumulation phase and no tax if you are in pension phase
You can access additional funding by having up to 4 members within the SMSF
Purchasing a strategic asset such as a property where you conduct your business from. No issues dealing with your landlord and you have security of tenure.
With these possible benefits in mind, it may be the right time for you to consider such a strategy.
When SMSF gearing was first introduced, it was a complicated transaction to implement – legal fees to set up the structure was costly (complying deeds could cost up to $10k), bank finance was relatively difficult to obtain and interest rates charged were above normal property loan rates. However, now that SMSF gearing has been around for some time, the costs are becoming much more affordable. Whilst there are still complexities with setting up such a strategy, with the right advisers assisting you, the strategy implementation is no longer difficult.
Here are some of the main issues involved with implementing an SMSF gearing strategy;
Does the current SMSF trust deed allow for gearing? If not, the trust deed can be amended to allow for it.
You should have a corporate trustee for your SMSF. If your current trustees are individuals, you should appoint a company to act as trustee. Banks will usually allow for a much higher LVR for an SMSF with corporate trustee.
The property must be a single acquirable asset i.e. would normally be on a single title (there may be some exceptions to this, such as car parks).
A bare trust must be established to hold the property beneficially for the SMSF.
A separate company (to the SMSF trustee company) should act as the trustee for the bare trust. This company will be the purchaser of the property and its name will appear on the title as the owner. Note, do not mention that the company owns the property as trustee for, as this may attract multiple layers of stamp duty.
There needs to be a complying legal agreement between the SMSF and the bare trust, documenting the terms of the arrangement.
If you are purchasing a commercial property and GST applies, you need to ensure your SMSF is GST registered.
The SMSF would normally borrow from a bank, but can borrow from a member, so long as the loan terms are commercial and similar to a bank loan.
When the superannuation fund fully repays the loan, the ownership of the property would transfer from the bare trust to the SMSF. If the strategy is implemented properly, there should be no stamp duty payable, as there is no change in beneficial ownership of the property.
Here at GRA, we have extensive knowledge of implementation of gearing strategies for SMSF’s. In fact, I have recently undertaken this strategy in my own SMSF, and have also helped other clients with implementation of this strategy. I have the expertise and I have the contacts i.e. bankers and lawyers, which can make this happen for you.
There has been talk recently that the Government may legislate against gearing within SMSF’s to purchase property, as some argue it has contributed to an overheating of the property market. If this does occur, you would expect that the legislation would not be retrospective, and existing SMSF gearing arrangements would be grand-fathered. Therefore, if you are considering such a strategy, it may be wise to implement sooner rather than later.
Direct property held through an SMSF is a proven wealth strategy, and has worked for many of my clients. However gearing is not for everybody and may not be appropriate in your individual circumstances. If you would like to discuss this strategy further, please do not hesitate to contact GRA on 0425 854069.
