A Comprehensive Guide to Buying Property through a Self-Managed Super Fund (SMSF)
Self-Managed Super Funds (SMSFs) are becoming an increasingly popular method for Australians to manage their superannuation. One of the advantages of using an SMSF is the ability to invest in property directly. However, the process of purchasing a property through an SMSF can be complex, particularly due to recent changes to bank and lender credit conditions and requirements, as well as modifications to the stamping of bare trust deeds. This article aims to provide an easy 5-step guide to execute a property purchase within an SMSF, incorporating these changes.
1. Setting Up the SMSF and Bare Trust
First, you need to establish an SMSF, which can have between one to six members. Each member will be a trustee or director, with responsibilities for the management of the SMSF.
In the context of an SMSF purchasing property, a Bare Trust arrangement is necessary. This separate legal entity is designed to hold the property on behalf of the SMSF until the loan is paid off. Recent legislative changes have altered the stamping process for Bare Trust deeds. It is crucial to ensure that your deed is properly stamped by the relevant state or territory revenue office, in accordance with the new regulations.
2. Formulate an Investment Strategy
Once your SMSF and Bare Trust are set up, you need to create a comprehensive investment strategy. The investment strategy should align with the objectives and risk profiles of all fund members. This strategy must also specifically address the intention to purchase property.
3. Loan Pre-Approval and Property Selection
With an investment strategy in place, the next step involves seeking pre-approval for an SMSF loan from a lender. Lenders have tightened their credit conditions and requirements for SMSFs, meaning pre-approval may be harder to secure than in the past. You need to demonstrate that your SMSF has a regular income stream to service the loan. Lenders typically only lend a maximum of 60-80% of the property value, subject to a postcode assessment and the funds income ( super contributions, rental income , interest) and serviceability .
Once pre-approved, you can proceed to select a property. Remember, the property must meet the ‘sole purpose test’, i.e., it must provide retirement benefits to fund members.
4. Property Purchase and Loan Finalization
After selecting a suitable property, your SMSF can make the purchase using funds from the SMSF and the borrowed money. The Bare Trust will hold the property title, while the SMSF effectively makes the loan repayments and received all income and all payments and lodges returns to remain compliant with tax and super laws.
It’s important to understand that any rental income and relevant expenses related to the property are funnelled through the SMSF, not the Bare Trust. Moreover, while the loan is in place, the property cannot be improved upon significantly – it can only be maintained.
5. Ongoing Management
Finally, ongoing management of the property within the SMSF framework is essential. This involves regular reviews of the investment strategy, ensuring all SMSF regulations are adhered to, and all loan repayments and property expenses are met.
You’ll also need to be prepared for changes in legislation, as these can impact your SMSF and its property investment. A recent example of such changes is the altered stamping process for Bare Trust deeds.
While buying property through an SMSF can be an effective way to grow your super and potentially provide strong returns, it’s a complex process that requires careful management. With changes to lender requirements and super and tax laws, it’s more important than ever to understand the process thoroughly and seek professional advice if necessary. As long as you remain diligent and vigilant, property investment within an SMSF can be a rewarding venture for your retirement future.