Investing in Property & Borrowing Through SMSF – Get Your Facts Straight

The popularity of self-manged super funds (SMSFs) due to the amazing tax benefits and investments options they offer. Investing in property though an SMSF has become a vital part of a smart investment strategy for many trustees. While before the possibilities of purchasing an assets such as a house or commercial property, where very limited, all this change when new more flexible rules were introduced in September 2007 regarding the process of borrowing money through your super fund. It’s important to know that borrowing arrangements within SMSFs still have some strict requirements. Therefore, before you decide to invest in real estate property through your SMSF, it’s essential to get more familiar with some essential aspects regarding this type of investments.

First lets see in what kind of property you can invest in. From residential and commercial space to industrial property, as a SMSF trustee you have the possibility to invest in all kinds of real estate property. Once you’ve deiced in what kind of property you want to purchase, the next step is to learn more about the SMSF borrowing rules. Actually the method of borrowing is not that complicated. In fact, it’s quite specific and straightforward. According to the Superannuation Industry Act, 1993 an SMSF is allowed to borrow money on a limited resource basis (LRBA) and only for the sole purpose of purchasing a “single acquirable asset”. This enables the lender to held the purchased property as security, however all the other SMSF assets cannot be used for the purpose of providing additional security.

The registered holder of the property is a bare trust SMSF structure which will receive any rental income and pay interest to the lender. The bare trust Smsf structure is made up of three different structures, including a corporate trustee, a custodian trust and a bare trust. As legal entities, the bare trust and corporate trustee are set up with the only purpose of holding the property as well as all the transactions made within the SMSF. There are some rules you need to follow when you use an LRBA to invest in property.

1. The borrowed money must be used for purchasing a single asset or a group of assets with the same value on the market.

2. You can’t use the LRBA money to renovate the purchased property, but you can use them for repair and maintenance purposes.

3. The legal owner of the asset is the bare trust, while the trustees receive the beneficial interest.

4. As a trustee, you can obtain become the legal owner of the asset by making oneor multiple payments.