Pitfalls of buying property in SMSF

Leveraging self-managed super fund savings to invest in property is becoming an increasingly popular strategy amongst many Australians. Offering certain tax advantages, the potential for long-term capital growth and rental income, purchasing property via a loan held within SMSF can enable investors to leverage their superannuation savings to purchase higher-value assets than they may otherwise have been able to. However there are a number of important considerations and steps that need to be followed to ensure this more complex area of lending is setup correctly in order to provide the intended benefits. 

1. Setting up the SMSF

If you wish to invest in property via super and don’t already have an SMSF in place, you must first establish an SMSF. This involves setting up a trust, appointing trustees (who can also be members of the SMSF), creating an investment strategy, and registering the fund with the Australian Taxation Office (ATO). Typically, SMSF setup takes around 4 weeks. Once the SMSF is setup, funds then need to be transferred across from other superannuation accounts or sources which can take an additional 4 weeks. Setup and transfer of funds should be completed prior to purchasing a property as the property deposit must come from the SMSF. 

2. Establishing the LRBA/Bare Trust

Once the SMSF is set up, a separate Bare Trust will need to be established to purchase and hold the property through the LRBA. The Trustee of the Bare Trust will hold the property on behalf of the SMSF until the loan is repaid.  

3. Lending

When seeking a loan for the property purchase, it is important to remember that LRBA loans are non-recourse, which means that in the event of default, the lender can only recover the property held by the Bare Trust and not other SMSF assets. LRBA loans typically have higher interest rates than residential or investment property loans, can’t be leveraged and the serviceability is calculated differently than on other loans. If purchasing a commercial property, it’s also important to be mindful of GST and how this may impact funding.   

Due to their complex nature it is crucial to find a lender who is familiar with LRBA structures and willing to provide finance for this setup. There are a limited number of lenders in the Australian market with expertise in this area so additional time should be factored in to secure a suitable LRBA loan.  

4. Stamp duty 

Each Australian state has different stamp duty rules and rates, so it’s advisable to seek advice from a professional with expertise around LRBA’s to understand the stamp duty implications in your specific state.  

5. Payment of deposit

The SMSF can pay a deposit for the property using existing funds within the SMSF. It’s important to remember that the deposit, along with all future loan repayments and costs, must come from the SMSF’s assets and not from personal funds.  

6. Settlement of the property

Once the loan is approved and all legal documentation is in place, the settlement process can begin. The property must be purchased within the Bare Trust entity with all legal requirement satisfied before the property is officially owned by the SMSF. 

7. Lead times

Lead times for setting up an SMSF, securing a loan, and acquiring a property through an LRBA can vary depending on the complexity of the transaction and the efficiency of all involved parties.  As a general rule, anyone purchasing property using an LRBA within an SMSF should allow a minimum of 90 days to minimise the risk of any issues with settlement.  

While purchasing a property in Australia via an LRBA within an SMSF can be a lucrative investment strategy, it requires careful planning, adherence to legal requirements, and ongoing management to ensure compliance with superannuation and property laws. Seeking advice from a financial advisor, accountant, and legal professional with experience in SMSFs and property transactions is highly recommended to navigate this process successfully. 

We can help 

Partners Wealth Group are experts in LRBA’s and purchasing property within SMSF. Our inhouse team of financial advisors, SMSF specialists, legal and lending specialists work together to ensure a seamless, compliant transaction. Contact us today if you are interested in exploring this investment strategy. 

 

This information is general in nature and is provided by Partners Wealth Group. It does not take into account the objectives, financial situation or needs of any particular person. You need to consider your financial situation and needs before making any decisions based on this information.