How to purchase property in an SMSF

Introduction

This depends on whether the SMSF needs to borrow money (either from a bank, a member or someone else) to make the investment.

No money being borrowed

If no money is being borrowed to make the investment then there is no need for a special trust.

However, the things to watch out for are:-

1. The fund's trust deed must permit the type of investment being made and also allow the fund to grant a tenancy or a lease. If it does not, usually it can be amended fairly easily.
2. The fund should have enough money to manage the investment properly - for example to do necessary repairs before letting, or to pay taxes and rates. If money is tight, the members may have to make a contribution to the fund. If they are aged over 65 and not working this could be a problem.
3. The investment strategy should be re-written to demonstrate a good business case for making the investment. This should closely examine and forecast the likely returns from the investment after tax, taking into account the up front and regular expenditure on the investment required from the fund. It should then consider whether the resources of the fund are adequate and will remain adequate to make and maintain the investment, and then consider whether the fund will be able to pay the appropriate pension or benefits at the time of retirement of its members, or earlier drawing of benefits if permitted.
4. The trustees should formally resolve to accept the new investment strategy and to make the investment and this should be recorded on the file of the SMSF. This should be done before making the investment.
5. The purchase should be made from the open market at arms length and not from a member or a related person without taking advice. This means that any contract to purchase property must be signed by the trustee on behalf of the fund. It cannot be signed by the fund's member(s).
6. The investment must be for the sole purpose of providing benefits to the members of the fund on retirement (the members or related persons cannot enjoy the investment in any way).

Where money is being borrowed

In the case of real property, in addition to the points made above:-

1. The fund's trust deed must permit the fund to borrow money and also to grant a mortgage or charge over a property investment.
2. The fund will need to establish a custodian trust (also known as a bare trust, borrowing trust, property trust, security trust or holding trust) under which a lender's recourse (in the event of the fund's failure to repay the loan) is limited to the investment itself (and cannot effect the other assets of the fund). This involves setting up a special purpose companyAlthough there is a difference of opinion about this, I do advise as explained in my setup packs that the bare trustee can be a special purpose company and does not have to be a trading company to act as bare trustee.
3. Although the arrangement can be set up where the SMSF has individual trustees, it helps to demonstrate separation of assets (between trustee and members) if the fund has a corporate trustee. Commercial lenders such as banks usually require that there is a corporate trustee. You may have to change the trustee. This must be considered at an early stage. I can provide a pack to achieve this - see custodian trust set up packs (opens in new window).
4. If anyone gives a guarantee for the loan, then a deed is required limiting the recourse of the guarantor (in the event of the guarantor repaying any part of the loan) to the investment itself (so that the guarantor has no recourse against the other assets of the fund).
5. The borrowed money cannot be used to improve the real property. And the real property cannot change in character once the arrangement is in place. This outlaws the purchase of land and the use of borrowed money to build on the land. Whilst off the plan purchases are permissible where the borrowed money is used to purchase a completed property, the fine print needs to be examined to make sure that the property will not be improved or change in character after settlement.
6. If the borrowing is from a member of the fund, or a person related, then it is essential to ensure that the borrowing is at arm's length and at market rates. The pack explains how to ensure that this is done.

How to do the things above

My packs contain all you need to achieve the above where money is being borrowed to purchase read property see custodian trust set up packs (opens in new window). This includes setting up the special purpose company (an ASIC fee is also payable to do this), necessary deed(s), sample amendment to investment strategy and all required resolutions. There are different packs depending on whether the fund is borrowing from a commercial lender or where a member or related person is providing the loan, and depending on whether the fund has individual trustees or a corporate trustee. Each pack has a comprehensive and easy to follow step by step guide which will guide you through each step and explain exactly what is required and why. They also contain a useful note whcih you can give to your conveyancing solicitor which provides an explanation about the arrangement and will help to keep your fund's conveyancing costs down.

Also if you have any queries or problems I am here to answer your questions. I am an Australian barrister and all the documents are carefully drafted and kept completely up to date. All work is fully insured under my professional insurance - see 10 good reasons to use my documents. I have hundreds of happy clients - see my testimonials on my home page. By all means contact me by email at or by mail at PO Box 354 Corinda QLD 4075 to discuss.

Jeremy Gordon
24 February 2017

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