16 November 2010

INVEST IN PROPERTY THROUGH YOUR SMSF
AND AVOID SOME TRAPS

Many self managed superannuation fund (“SMSF”) investors see property as a good investment opportunity and look to enter the market.  The normal practice is that an SMSF trustee selects a property (such as a residential or commercial property for capital and/or income return. In accordance, with superannuation law, the purchase of the property must usually be made on arms’ length terms (i.e. the property is purchased from an unknown third party) unless an exception applies.  However, before we get the purchase underway let’s step through some of the traps:

• Firstly, it is important that the SMSF Trustee ensures that they have properly set up their SMSF trust - the trust deed and offer document (the governing rules) are complying documents and they also have appropriate powers for owning direct property and the SMSF’s investment strategy is clearly defined to include this asset class;

• Secondly, before any substantive assets are placed on trust by the SMSF trustee, the SMSF Trustee must ensure that the trust itself is properly constituted, which is generally known as seeding a trust. The SMSF Trustee must ensure that this is completed properly, otherwise more stamp duty than necessary can become payable by the SMSF Trust;

• Thirdly, before embarking on any property purchase SMSF Trustee’s should look at their funding needs and associated costs. The SMSF Trustee must be capable of making the loan payments for the lending arrangement. This is important so they do not breach their SMSF trust deed covenants or lender’s terms;

• Fourthly before acquiring a property the SMSF Trustee must establish a bare trust structure to ensure legal title to the property is held on trust by an independent trustee (sometimes these trustee’s are called a “Security or Property Trustee”) for the lending arrangement. Some parties establish a corporate entity to be a trustee of the new bare trust to hold the property for the SMSF and comply with superannuation law. There are a number of legal implications to getting this right (for example the doctrine of merger states that you cannot have the same parties as SMSF Trustee and Security Trustee). If you don’t get this right there can be legal and/or tax implications;

• Fifthly, upon setting up the bare trust structure the SMSF Trustee has the task of identifying a lender to approve and ensure that the SMSF trust deed and bare trust structure meets the lender’s requirements. If it does not, there is more expense in fixing this problem to gain a lender’s approval. You should also be wise to never sign an unconditional contract until you have a lender’s final approval given an indicative letter of offer is not a final approval of the lender;

• Further, in accordance with superannuation law, your lending arrangement must be on a limited recourse basis (this means the lender’s rights are limited in the event of default to recourse to the property; thereby ensuring the SMSF’s other superannuation assets are excluded to any claim made by the lender). Normally, the lender will take security over the property with the SMSF Trustee and the Security Trustee (as noted above). There are varying forms of security documentation each lender requires such as a grant of mortgage and/or guarantee and indemnity over the property in favour of the lender. The important point here is the terms are limited in recourse - given some lenders will seek to obtain personal guarantees from members of the SMSF which are not so limited in recourse. Check your documentation carefully and get proper legal advice;

• Additionally, the rent from the property will be paid directly to the SMSF (sometimes from a property manager if one is appointed). The SMSF can make loan repayments to the lender according to the lending terms and can deal with their property how they like, as you can deal with ‘normal’ investment properties (e.g. lease, repair, or sell them). The SMSF can pay out or reduce the mortgage depending upon the terms of the loan terms with your lender. This is an important point so if you wish to make additional payments check this documentation carefully;

• Finally, when the mortgage is paid out in full, title to the property may be transferred to the SMSF by the Security or Property Trustee. What becomes problematic at this point is if the structure is not correctly set up then tax and/or stamp duty issues can arise upon any transfer of the property. Therefore, it is important that the SMSF Trustee get its legal structure right from the start to mitigate such implications to the extent possible.

Millinium has looked over a number of these issues when designing Millinium's SMSF Property Solution. Please talk to us about it or go to our website at www.millinium.com.au.

Please call me, Mark Jenkins, directly on 07 3004 8832 if you have any questions or email us on smsfproperty@millinium.com.au

 

Regards

Mark Jenkins

 

 

If you do not wish to receive future emails from us please click here

Disclaimer: © Millinium’s SMSF Property Solution (“SMSF Property Solution”) is issued by Millinium Asset Services Pty  Limited (“Millinium”), a corporate authorised representative AR No. 374382 of Millinium Capital Managers Limited ACN 32 111 283 357. AFSL No. 284336 (“Millinium Capital”). The SMSF Property Solution is not a financial product pursuant to Part 7.9 of the Corporations Act 2001 (Cth). This document does not constitute an offer or recommendation for credit or property or personal advice. Investors should consider whether this product suits their objectives, financial situation or needs. This document may be amended, withdrawn or replaced without notice and does not form a contract between parties. The return of capital or income is not guaranteed.Any acquisition of real property or borrowing involves a degree of risk and potential investors should obtain financial, legal and taxation advice and consider all risks before making any decision about investing. Before investing, SMSF trustees should obtain their own advice as to whether this investment is allowable with regard to their SMSF’s investment strategy and otherwise appropriate for their SMSF. Millinium, its parent company and/or its related bodies corporate, directors, personnel or contractors disclaim any liability or loss as a result of a person’s reliance on this document and to the extent the law allow this.