Property Investment

At Superannuation Warehouse, we specialise in SMSF administration. We can execute the setup of a Bare Trust structure where the Trustees have decided to purchase a property with loans. The typical structure is set out below:

BareTrust-Structure

Bare Trust Structure

SMSFs can invest in commercial or residential property; however, neither Trustees nor related parties are permitted to live in the property or use the property as a holiday house. The sole purpose of the property must be as an investment of your SMSF.

Some important points regarding SMSF property investment:

  • It is important that the SMSF, including the structure above, is set up before you invest in any property. An SMSF can’t borrow money in its own right; hence, a Bare Trust structure must be put in place to facilitate the loans
  • The only purpose of the Bare Trust (also referred to as a Property Trust) is to keep title over the investment property until the loan is paid off
  • All property-related costs can be paid by the SMSF
  • The SMSF receives rental income and pays for all operating expenses and loan repayments
  • In this particular structure only one property is allowed
  • The property will revert back to the SMSF when the loan is repaid
  • Funds can be borrowed from the Trustees or the bank, or a combination of both
  • The loan type a bank can offer the SMSF is known as a limited recourse loan. Limited recourse means that, should the loan default, the bank has no right of recourse on the SMSF’s other assets
  • For this reason banks usually ask for a personal guarantee over the property from Trustees
  • With member-guaranteed loans, the maximum Loan-to-Valuation Ratios (LVRs) are usually around 80% for residential properties and 70% for commercial
  • When there’s a bank loan with a  60% LVR, the bank may waive the requirement for a guarantee from the Trustees
  • Trustees can also lend to the SMSF, so it’s possible to do it without a bank
  • Trustees can borrow from the bank and then on-lend to the SMSF – this tends to make the administration easier
  • The Bare Trust and Corporate Trustee are merely the legal entities that hold the property – all transactions take place within the SMSF
  • Superannuation Warehouse charges a one-off fee to set up these entities, after which there is no additional fee for their maintenance (it’s included in your fixed monthly fee)

An SMSF cannot normally take out loans per se. However, in order to purchase a property, an SMSF can use a Limited Recourse Borrowing Arrangement. To do this, the Trustees must provide the bank with a guarantee for the loan. You might want to use a mortgage broker to help you find the most suitable loan for your circumstances from a panel of lenders.

When we set up a Limited Recourse Borrowing Arrangement for an SMSF, we issue a new Trust Deed from Cleardocs. Within the industry, these Trust Deeds are regarded as the best because the banks will generally accepted them for SMSF property loans, thus ensuring that the loan approval process runs smoothly.

Repair and Maintenance

The cost of any repairs and maintenance undertaken on an investment property can be deducted in the SMSF. To find out more about the differences between repairs and improvements, click here and view the ATO guidelines.

What name should the SMSF use with property investment?

Rules differ in each state, so please verify titles below with  a legal professional. Generally, use the Custody Trust’s name. For example:

  • for an individual trustee, “John Summers ATF Declaration of Custody Trust for the ABC Super Fund”
  • for a corporate trustee, “ABC Pty Ltd ACN number ATF Declaration of Custody Trust for the ABC Super Fund”

Land registries don’t generally accept any reference to a Custodian Trust. The transfer of land should simply be registered in the name of the Custodian Trustee, for example:

  • when the Custodian Trust uses individual trustees, use the names of the individuals, e.g.  ”John Summers and Sarah Summers”
  • when the Custodian Trust uses a Custodian Trustee, use the name of the Custodian Trust, e.g. “ABC Custody Pty Ltd ACN number”.

When the loan is paid off, there is no need to keep the Custodian Trust. The property will then revert back to the SMSF. There should be no stamp duty implications as there is no change in beneficial interest in the property.

For more info on how you can invest in property in your SMSF, please watch the video below.

  • Sean Chamberlin

    I am considering creating a SMSF to invest in a residential investment property. We would like to eventually reside in the property ourselves and understand that the SMSF would have to sell the property to a fund member before a member is able to reside in it (with purchase price being at fair market value). My question is whether or not stamp duty would apply on the transfer of the property to a member at the time of sale and/or whether any other fees would apply? Thank you for your assistance.
    Sean.

    • superannuationwarehouse

      Sean, you are correct in that you can purchase a property
      from the SMSF. If you meet a condition of release, you can take the property as
      well as a pension or lump sum payment.

      On the stamp duty, my understanding is no stamp duty is
      payable as there is no change in beneficial ownership.

      The titles office does not recognise Trusts and the name of the Trustee will
      appear on title. So this may aide in the objectives you have. The notes above
      are industry consensus and not legal advice – this can be a legal matter.

      Trust this answers your question.

  • mark hobson

    Question: It concerns TAX and negative gearing on house investment in a SMSF. If a property is negatively geared does the negative geared tax accumulate year on year or does the TAX department pay the SMSF money back (based on input tax 15%)?

    • superannuationwarehouse

      Mark,

      In general, negative gearing in an SMSF is not a popular strategy. This is due to the relatively low tax effect in super of 15%. In a personal capacity, the higher marginal tax rates make negative gearing a more popular strategy.

      Additional to this, banks require an SMSF to have at least a 20% deposit in order to give a bank loan. This makes most properties positively geared from the outset.

      When the SMSF makes a taxable loss in the current year this loss will be carried over to the next financial year. This loss is then offset against taxable income in future years.

      A sensible strategy is to use a Quantity Surveyor report like BMT. This will bring forward tax depreciation in property and not only give a time value of money, but also ensure a maximum write-off in the accumulation phase, i.e. before the pension phase where tax is NIL. See our page on property depreciation for more info on this.

  • Jana

    Can I use SMSF to buy a land and then build two townhouses, sell one and keep one for renting? All expenses for purchasing land and constructions are to be paid by SMSF either from the existing fund or through borrowing under Bare Trust Structure.

    • superannuationwarehouse

      Jana,

      We set up a bare trust when there’s a loan in an SMSF. While a loan and bare trust is in place in an SMSF, you are not allowed to alter the characteristics of the property, e.g. adding a bedroom, add a granny flat or do a subdivision. You can do these alterations if there’s no loan on the property. For more rules on property, see the ATO examples by following this link:
      http://www.smsfwarehouse.com.au/smsf-investments/property/investment-rules/

      Trust this is helpful.

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Superannuation Warehouse is an accounting firm and do not provide financial advice. All information provided has being prepared without taking into account of the Trustees’ objectives, financial situation or needs. Because of that, Trustees are advised to consider their own circumstances before engaging our services.