SMSF Property Investment – Buying, Lending and Borrowing Rules

It is not possible for your SMSF to lend money to you or your relatives to purchase any asset.

You can use your self managed super funds for buying property, and to purchase assets in the SMSF’s name outright or by using borrowings. But, you or related parties to you are not allowed to live in the self managed super fund property.

Read more below about self managed super funds property investment rules.  SMSF property investment is a great investment structure, but is not the structure that provides financial assistance to members or related parties — at any time.

Your SMSF can borrow money to purchase a property, but SMSF property investment has to be done in a certain way or your SMSF will be deemed non-compliant.

Ownership

An additional trust is required to be established to hold the ownership of the property while the beneficial ownership goes to your SMSF.

Your SMSF will receive all of the rental income, and pay all of the expenses of the property.  When the debt is paid back to the lender in full, the Directors/Trustee may elect to transfer property to the SMSF, as the legal owner.

Limited Recourse Borrowing Arrangement (LRBA)

In order for the lending arrangement to comply with the SIS rules, the lender can only have recourse over the SMSF property in question.  In this scenario, your SMSF is protected from a lender claiming other assets of your SMSF.

Single Acquirable Asset

Each SMSF property that you purchase under borrowing arrangements must have a new trust agreement established.  This means if you have multiple SMSF properties, each one will need a separate trust agreement.

Improvements

If you borrow to invest in a SMSF property you must be careful not to make any significant changes to the SMSF property that would be considered a different property.  Money from outside of the borrowing (from insurance) can replace a building in the case of fire, but the overall property must remain the same.  An example would be conversion of a residential property into commercial property.  Property development is not the intention of the SMSF borrowing rules.

Who can lend the money?

The SIS rules do not restrict who can lend money to an SMSF.  The lender can be a related party to the SMSF or an unrelated party.  If the lender is related to the SMSF all lending must be done at arm’s length, as if the lender was not a related party.

Is an LRBA right for your SMSF?

There are many things to consider when purchasing a SMSF property within your SMSF. There’s even more to consider when purchasing the property using an LRBA (Limited Recourse Borrowing Arrangement). 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 SMSF property investments?
  • 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 SMSF investment 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.

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 enter into a property contract offer and acceptance to purchase a property. Borrowing to buy property in an SMSF is quite complex, and generally includes the following steps:

  1. Decide if using an LRBA to buy property with a self managed super fund is the right strategy for your SMSF.
  2. Ensure your SMSF’s trust deed allows the fund to borrow and buy property.
  3. Set up a holding trust.
  4. Select the property (ensuring you buy it in the name of the holding trust) and engage with a lender to obtain finance.
  5. Settle on the property by using the loaned funds (and any SMSF money) to complete payment.
  6. Begin receiving rent payments in the SMSF bank account and making loan repayments to the lender.

Each state has different rules regarding stamp duty on the LRBA so it is advisable to get specialist legal help to determine if you need to get the security trust deed stamped (to simplify and minimise tax to the SMSF when the loan is repaid).

What are the costs associated with purchasing a property using an LRBA?

The structure establishment costs are as follows:

LRBA Structure (Bank Lender)$1,650*
LRBA Structure (related party lender)$2,050*

*Each pack includes; Corporate Trustee for the LRBA Structure, Trust Establishment, Loan Agreement, Trust Deed Update.
*Does not include; Stamping, Lodging or Legal advice on stamp duty or other matters. 

How do I set up an LRBA?

Once you have decided you want to commence an LRBA it is relatively easy to get started.  Complete the LRBA application form on our website here.

Supervision SMSF does not offer personal financial advice. We strongly recommend that you seek personal financial advice on the suitability and risks of entering into a LRBA. Supervision SMSF can assist in providing you a list of licensed financial advisers with expertise in this area.

Before you start the application, information will be needed.  Please see the information that you will need to get started.  You can download an information sheet here. Here are the main area’s below:

  1. SMSF Details
    1. Name of the SMSF
    2. Type of Trustee
    3. Individual or Directors Details
  2. Custodian Details (Trustee for the LRBA)
    1. Corporate Custodian Name (the name of the company that is the trustee for the custody trust.)
    2. Shareholders of that company
  3. Lender Details
    1. Lenders Name
    2. Lenders ABN
    3. Lenders Address
  4. Borrowing Arrangement Details
    1. Loan Amount
    2. Loan Amount Interest Rate
    3. Interest repayment (Monthly or Quarterly)
    4. Governing Law (State)
  5. Asset Details
    1. Asset Name
    2. Real Property Street Address
    3. Real Property Folio Number
    4. Real Property Lot Number