borrow Want to to buy property in your SMSF?
A Self Managed Super Fund (SMSF) gives you investment flexibility. Some typical investment options for SMSFs include term deposits, direct shares, and managed funds. However, the investment opportunity within SMSFs that is currently receiving a lot of interest is the ability to purchase property. With an SMSF, you can invest directly in residential or commercial property using the funds you ve accumulated in your super which can provide your fund with additional diversification across your portfolio. Further, buying a commercial property through an SMSF can include an office or other commercial dwelling that can be used by your business. It can also be a tax efficient way to invest in property as you will generally pay less capital gains tax in an SMSF than you would if you owned an investment property in your personal name. What if I don t have enough money in my SMSF to purchase a property outright? If you want to purchase an investment property within your SMSF, but haven t quite saved enough, your fund may be able to borrow money for the purchase under what is referred to as a limited recourse borrowing arrangement (LRBA). 2
investment flexibility What is an LRBA? An LRBA is a type of loan structure where the only SMSF asset that the lender (or any other party) has access (recourse) to is the asset that was purchased using the loan, if the fund is unable to meet its loan repayments. These arrangements involve establishing a security trustee to legally hold the asset on behalf of the SMSF. This bare trust arrangement broadly recognises that the asset is to be held by the security trust until the debt is repaid, at which point legal ownership can pass to the SMSF. In most situations, an LRBA is used to purchase an investment property, but it can also be used to purchase direct shares or even managed funds. However, an LRBA can only be used to purchase a single acquirable asset. What is a single acquirable asset? In the context of a property investment, this generally relates to an asset held on one legal title, or one where all parts of the asset must be treated as one asset under law. As an example, an apartment building cannot typically be considered a single acquirable asset if the individual apartments in the building have different ownership titles. You can also borrow funds using an LRBA structure to purchase an identical parcel of shares in one company only. So, for example, you could borrow to purchase a parcel of ordinary BHP shares, as long as those shares are purchased at the same price, on the same day. However, you would not be able to purchase additional shares in another company unless you setup another LRBA. Additional restrictions also apply to buying shares in this way, for example, you also need to sell them in the one parcel. Why do I need to set up an LRBA? There is a general rule that an SMSF cannot borrow under superannuation law. However, there is a very specific exemption for arrangements that meet all of the requirements of an LRBA. It is important to meet all of these requirements otherwise the fund will be in breach of the superannuation rules and may face penalties. Is an LRBA right for your SMSF? There are many things to consider when purchasing a property within your SMSF. There s even more to consider when purchasing the property using an LRBA. Firstly, you must ensure that the arrangement fits within your investment strategy, but some questions you should also consider include: Is the SMSF trust deed set up for borrowing to buy property? What are the costs involved? Who will lend you the money? Do they require a corporate trustee to be in place for your SMSF? Will they require you to provide a personal guarantee? How will you service the loan repayments? What happens if you cannot find tenants for the property? What happens if you are unable to make contributions to fund the loan repayments? Do you plan to improve or develop the property? Do you understand the limitations on what the fund can and cannot do with the property? Do you need protection (insurance) if a member dies and you want the property retained in the SMSF? You should seek professional advice from a specialist lawyer or financial adviser, when determining if an LRBA is right for your SMSF as it is a complex area. 3
How do I purchase a property using an LRBA? If your SMSF is already set up, it generally takes around 2 weeks to put the necessary structure in place to allow you to buy a property using an LRBA. Borrowing to buy property in an SMSF is quite complex and generally includes the following steps: 1 2 3 4 5 6 Decide that purchasing a property using an LRBA is the right strategy for your SMSF. Select the property (ensuring you buy it in the name of the holding trust) and engage with a lender to obtain finance. Ensure your SMSF s trust deed allows the fund to borrow and buy property. Settle on the property by using the loaned funds (and any SMSF money) to complete payment. Set up a holding trust. Begin receiving rent payments in the SMSF bank account and making loan repayments to the lender. You should involve a specialist lawyer or financial adviser to understand whether it is advisable for the Security Trust Deed to be stamped (to simplify and minimise tax to the SMSF when the loan is repaid). Rules vary by state. Why AMP? AMP, Australia s experts in self managed super, provides you with access to SMSF Specialists to support you in setting up your LRBA. If you decide you re looking for more support, we have financial advisers throughout Australia who can contact you directly. We can help you setup the security trustee and bare trust arrangement, so you can focus on finding the right property for you. If you need help with upgrading your trust deed, investment strategy or require insurance, we can help with that too. AMP Bank has a specialist SMSF loan facility called the AMP SuperEdge Loan that can assist with your lending requirements for residential property. You can choose from fixed and variable interest rates and can borrow up to 80% of the value of the investment property. Call us and we ll help you determine what your fund can borrow. If borrowing to invest in property in your SMSF is the right strategy for you, AMP can help you put the structure in place to simplify the process, so you have the freedom to focus on what s important to you. 4
What are the administration costs associated with purchasing a property using an LRBA? AMP offers two packages for your SMSF administration; Essentials and Platinum. Essentials is a simple SMSF solution that allows you to purchase one property in your SMSF. Platinum provides greater flexibility and allows you to purchase multiple properties. Service Essentials Platinum Initial LRBA set up and administration $400 $400 LRBA documents and trust $1,200 $1,200 Loan set up documents (if there is a personal loan) Establish a security trustee company (generally required by most lenders) $400 $400 $990 $990 Fund administration for property $300 per year First property included in package $300 per year for each additional property How do I set up an LRBA? If you ve already established an SMSF with AMP, you can log on to your Member Dashboard, select the Add Services tab and then select the tick box in the Limited Recourse Borrowing Structure section. Your Client Manager will contact you directly and assist with completing the LRBA application form. If you would like to find out more about how AMP can help you borrow to invest in property, contact us on 1300 767 483 or visit amp.com.au/smsf. What you need to know Any advice in this document is general in nature and is provided by Australian Securities Administration Limited (ASAL), ABN 83 002 905 and does not take into account your personal objectives, financial situation or needs. Therefore, before acting on the advice, you should consider the appropriateness of the advice, having regard to those matters. The features of SMSFs outlined above apply only to complying funds. There are financial and civil penalties for potential contraventions for trustees of SMSFs. AMP SMSF Solutions is offered by ASAL, AFSL No. 233182. ASAL is a member of the AMP group of companies. Before making a decision about the service, consider the AMP SMSF Solutions Administration Services Guide and Financial Services Guide available from us at amp.com.au/smsf or by calling 1300 767 483. Contact us phone 1300 767 483 web amp.com.au/smsf email smsf_solutions@amp.com.au 22605 10/13