Buying property in your Self-Managed Super Fund (SMSF) – Why it’s not for everyone

Self-managed super funds (SMSF’s) are certainly fashionable at the moment. Most days there is something written in the newspapers about them and everyone seems to know someone who has one.

Considering the poor performance delivered by most other super funds over the last few years, it’s perhaps not surprising that around 2,000 new SMSF’s are being established every month at the moment.

However, another driver behind the significant growth in SMSF’s is the ability to invest in property with borrowed money. This is known as a Limited Recourse Borrowing Arrangement (LRBA). It’s no secret Australian’s love property, so the ability to use superannuation money in conjunction with borrowings becomes a very appealing combination for many SMSF investors.

We have had a number of new enquiries relating to this situation lately. In many cases, the enquiries are coming from people who currently don’t have a SMSF, but are looking to establish one purely to purchase property under a LRBA.

Once we have understood their objectives, explained the process of establishing a LRBA and then spoken about the rules and restrictions that apply to such an arrangement, we are finding that a LRBA is not suitable for around 80% of people that initially enquired about it. There are better ways for them to achieve their objectives.

Why is this?

It often comes down to two things. Firstly, a LRBA is a complicated strategy and there can be considerable time and expense in getting the necessary mechanisms in place. Secondly, as the property will be owned by a SMSF, it must comply with the rules that govern a SMSF. This essentially means there are a number of restrictions and considerations that apply to a property purchased by a SMSF.

Here are some issues to consider before purchasing a property in a SMSF using a LRBA:

• For residential property, fund members and relatives cannot use the property. Nor can they rent the property from the SMSF.

• SMSF’s can only buy residential property on the open market, not from a fund member or related party.

• Improvements to the property (e.g. renovations) cannot be funded by borrowings, they must be funded from other assets within the SMSF.

• The character of the property cannot be altered under a LRBA. Nor can the property be redeveloped.

• A property purchase must be in keeping with the SMSF’s investment strategy and objectives.

• All ongoing costs associated with the property (e.g. insurance, maintenance, interest, rates) must be serviced by the SMSF, not by the fund members.

Whilst purchasing property in a SMSF using a LRBA can be a worthwhile strategy, it generally will not suit most investors. However, if you are looking to explore this path and the strategy is conducive to your objectives, we strongly recommend obtaining expert advice before making any decisions or arrangements.

As mentioned, this is a highly complex strategy and if mistakes are made, it will almost certainly cost more for you to un-do them than it would have cost to get the right advice upfront.

 


This advice may not be suitable to you because it contains general advice that has not been tailored to your personal circumstances. Please seek personal financial and tax advice prior to acting on this information.Opinions constitute our judgement at the time of issue and are subject to change. Financial Planning Expert Pty Ltd does not give any warranty of accuracy, nor accept any responsibility for errors or omissions in this document.
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Phone: (03) 9708 8126

Email: info@financialplanningexpert.com.au

 

 

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    Financial Planning Expert is an independent financial planning business based in Melbourne. We provide genuinely independent and conflict free financial advice. We’re experts in self-managed superannuation fund (SMSFs) advice and strategy, retirement planning, property and share investment advice, life and income protection insurance, tax planning, asset protection, estate planning and advice for Australian expatriates.