We are often asked as accountants if we can setup aSelf-Managed Super Fund (SMSF) for clients so they can borrow to buy aproperty. Borrowing in SMSF can be a good investment however you need toconsider if it is right for you.

Tips and traps

Not only do you need to consider the type of property(residential or commercial), there are many regulatory and financialconsiderations. To name a few:

-         Does the SIS legislation allow the purchase?

-         What are the long term plans for the property –does it require renovations or repairs?

-         How much does the Fund have to fund the depositrequired by the bank?

-         Can the Fund cover the stamp duty, legal feesand structure setup costs?

-         What is the settlement period of the property?

-         Whose name should the purchase be in?

-         Are you willing and have the time available to“self-manage” your Fund?

Substantial cash deposit required

To make a borrowing in self-managed superannuation workthere must be enough cash to fund the deposit required by the bank, the setupfees and the stamp duty on purchase. It is also prudent to ensure that therewill be enough cash reserves in the Fund should the property not be rented foran extended period of time due to a change in market conditions, naturaldisaster, damage by tenants etc. Otherwise the Fund may require proppingup by Trustees/Members to make its loan repayments, payment of rates,insurance, repairs etc.

Generally the banks require a 20% deposit on residentialproperty and 35% deposit on commercial property which will require substantialcash being spent initially.

Changing the asset

Borrowing in SMSF is also restricted to purchasing a “singleacquirable asset” of which the nature of the asset cannot be changedsubstantially. A couple of examples that the ATO deems as changing theasset and therefore not allowed within the SMSF borrowing regime:

1.       Purchasinga block of land and then building on it – the character of the land changeswith the building.

2.       Purchasinga house and land and then subdividing the block – this would create 2 assets

3.       Purchasinga house and splitting into 2 units

4.       Purchasinga house and then adding on another 2 bedrooms and another kitchen/bathroom area

Decision and implementation takes time
Finally, another hurdle our clients generally face is the timeframe betweendeciding to setup the Fund, wanting to do a borrowing strategy and then actuallybeing able to implement it. The timeline is generally as follows:

1.       Decisionto implement strategy (immediately)

2.       Setupof Structures required for borrowing (generally done within 24 hours)

3.       Applyto ATO for Tax File Number and ABN

4.       Applyto your current Fund to obtain a Rollover Exit form to complete. 

5.       Signcontract and organise finance – the banks generally like an 6-8 week settlement.

Our advice?
If you are considering the borrowing strategy in SMSF it is generally prudent to get the ball rolling in time with setting up of structures and applying for the ABN to help reduce the lag between deciding to implement the strategy and settling the property purchase.

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