Borrowing inside an SMSF to purchase an asset is one of the more complex borrowing arrangements. This is driven primarily by the amount of legislation and regulations that govern an SMSF. Below are some points to consider when undertaking such a transaction.
1. Ensure your SMSF trust deed allows borrowing. Most SMSF Trust deeds established post 24 September 2007 will allow for this. It is possible to have an earlier deed revised to permit borrowing. Further changes were made to the Superannuation Industry Supervision Act (SISA) on 7 July 2010, and the trust deed should also incorporate these amendments.
2. Ensure that the correct borrowing structure is in place prior to purchasing, i.e., a bare trust and corporate trustee.
3. Make sure that the investment strategy of the SMSF permits borrowing.
4. If you are going to transfer a property that you already own into your SMSF, ensure that it meets the requirements of the SISA. In most circumstances the property would need to qualify as business real property.
5. Determine your budget and seek pre-approval from a lending institution.
6. Confirm with the lending institution what sized property they will allow you to purchase. Many banks will not lend for a property that is less than 50 square metres.
7. Ascertain that you can afford to borrow inside your SMSF, i.e., that income generated from the asset combined with contributions received will cover the fund expenses.
8. Ensure that you have an adequate deposit and that it is held in a bank account in the name of the SMSF.
9. If the property requires improvements, i.e., a kitchen renovation ensure that you have additional funds to do this as the actual loan may not be used to improve the asset only maintain and / or repair it.
10. Ensure that the interest rate is competitive. Historically many of the lending institutions were charging several percentage points higher than regular mortgages. This is no longer the case.
11. If you are intending to make principal and interest payments from the outset consider using an offset facility as this will enable you to redraw surplus funds without contravening the SISA.
12. Ensure that the appropriate minutes and resolutions are completed prior to the purchase.
13. The contract of sale should be signed by the trustee of the custodian (bare) trust not the actual SMSF.
14. The Transfer of Land document should be signed by the trustee of the bare trust.
15. The transaction should be settled with the money coming directly from the SMSF bank account or the actual loan proceeds.
16. Once the loan has been repaid the property will be transferred from the custodian (bare) trust to the SMSF. There should be no stamp duty or capital gains tax (CGT) consequences provided that the transaction is executed properly and was correctly entered into when the original purchase occurred.
