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How to Set Up an SMSF for Property Investment

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Using a self-managed superannuation fund (SMSF) for real estate investment is quite common and for good reason. Investing in property is relatively low risk compared to other investment options. Property investment can provide you with a plethora of benefits such as reduced capital gains tax, negative gearing, and increased purchasing power. 

Before you use your SMSF loan to buy a property investment, here are some things you need to know. 

Let’s cover the basics of SMSF loans

An SMSF loan is a lot like your typical real estate loan but differs in certain ways. There are strict rules you must abide by when using your SMSF for investment properties.

What exactly is an SMSF loan?

An SMSF loan lets you use your SMSF to buy an investment property through a loan. Your superannuation contributions will go towards paying for the investment property loan. With an SMSF, the expenses for the property investment will be paid for by the fund. No need for any out-of-pocket expenses. 

Since you’ll be tapping into your SMSF, you won’t have immediate access to any rental income or capital gains. The profit you get from properties you buy through an SMSF loan can be reinvested or accessed only when you retire. 

What are the conditions when buying a property with an SMSF loan?

When buying a property with an SMSF loan, you must abide by specific conditions. These include: 

  • The property’s sole purpose must be to provide retirement benefits to the fund members. 
  • The property should not be purchased from a related party of a fund member. 
  • The property should not be used as a residence by a fund member or parties related to a fund member. 
  • The property cannot be rented by a party related to a fund member. 
  • Buying commercial properties can be leased to a fund member for their business if it’s leased at a market rate and follows strict rules. 

Not following the rules above could result in hefty fines or civil and criminal penalties. Learn about what guidelines to follow by checking out the Australian Tax Office’s rules and regulations on SMSF

What do lenders consider when lending to an SMSF?

Some lenders have more stringent conditions when lending to an SMSF compared to a typical borrower. Usually, lenders require a deposit of at least 30% of the property’s value for those borrowing SMSF home loans. 

The fund members’ ability to make frequent and consistent fund contributions will also be considered. Lenders will also take into account the investment strategy and the structure of the SMSF to ensure it's compliant with the Australian Taxation Office (ATO) and Australian Securities and Investment Commissions (ASIC). 

A step-by-step guide to using an SMSF to buy your investment property

Setting up an SMSF for your investment property purchase isn’t as difficult as it may seem. Here are some of the steps you’ll need to take: 

Step 1: Prepare a trust deed

Everything starts with creating a SMSF trust deed, a document detailing the trustees and their powers. The SMSF trust deed is a complex legal document, and you should always obtain assistance from a qualified advisor when having it prepared. The deed includes details on how the contributions and benefits will be paid, and what type of investments the fund can be used for. Ensure that the trust deed states that fund members can use their SMSF to invest in properties. 

If you already have an SMSF set up, skip to step 5. 

Step 2: Name fund trustees and clear tax issues

An SMSF usually has two trustees, but you can still create an SMSF with only one or more than two members. The trustee is legally responsible for everything in the trust, in this case, the SMSF. A trustee is responsible for lodging the annual tax returns and ensuring that the fund is appropriately administered. 

You must also decide if the SMSF will be a regulated or non-regulated fund. Regulated funds garner tax benefits that non-regulated funds don’t have. Talk with your qualified advisors to figure out which is the right choice. 

Once you’ve made your decision, you need to fill out the appropriate application form at the Australian Business Register. You’ll be issued a tax file number and an Australian business number. Some SMSFs are subject to the Goods and Services Tax (GST). 

Step 3: Create your investment strategy

Trustees are required by law to create an SMSF investment strategy that outlines their key objectives and the framework for their investment decisions. Generally, fund auditors ask for a hard copy of the investment strategy for them to review as well. 

Both the deed and investment strategy need to have detailed explanations on how the fund manages issues, liquidity, diversification, risk and return, expected cash needs, liabilities, and how it will handle the different circumstances of members. If you intend to use your SMSF to invest in property, then the investment strategy should refer to purchasing an investment property through a loan. 

Step 4: Open a bank account

You will need to create an account for the SMSF with a bank, credit union, or building society. This is the final step in fully setting up your SMSF. Check out the different fees, minimum balances, interest rates, and policies to find the ideal account for your fund.  

Once you have the account opened, you can arrange the transfer of funds from your current superannuation account to the SMSF. Be patient as the transfer process may take some time. After the funds have been transferred to the SMSF account, you can start considering an investment in property. 

Step 5: Get an SMSF loan pre-approval

Getting an SMSF loan pre-approval helps you gauge how much you can borrow. This is especially helpful because SMSF loans are typically more restrictive with some lenders requiring higher deposits while offering lower loan amounts.  

With an SMSF loan pre-approval, you can better prepare for your purchase and see what else you’d need to do to get approved for an SMSF loan. There are lenders out there who will ask for a personal guarantee from the SMSF members. This means personally guaranteeing the repayment of the loan by the SMSF. In cases like these, it’s best to discuss the details with a lending specialist to see what the best steps to take are. 

Step 6: Find the perfect property

Once you’ve got your budget, it’s time to start looking for the ideal investment property. Ensure that the property you choose can pass the “sole purpose” test and meet the conditions stated above. Talk with your fellow investors about what type of property suits your needs while meeting compliance requirements set by the ATO. 

Remember, you’re not allowed to purchase a property or vacant land for development or refurbishment. When buying a residential property, trustees aren’t allowed to occupy it before retirement and only after the title is transferred from the SMSF. 

The residential property bought through the SMSF should also follow the in-house asset rule which states that no more than 5% of your SMSF assets should in any way directly benefit trustees before retirement. 

Commercial properties, on the other hand, have more lenient guidelines. SMSF members can purchase commercial property from a member or related party. The businesses of SMSF members can become tenants of the property, as well. 

Step 7: Create a security trust

When you’ve received approval for the SMSF loan, you need to set up a security trust. The trustee of the security trust or bare trust must be independent of the SMSF trustees, and is usually a corporate trustee. 

The security trust will hold the property until the SMSF fully pays off the loan. After the loan has been paid, the legal title to the property will be transferred to the SMSF. Your SMSF advisor must review the trust deed carefully to make sure it follows tax and stamp duty rules. 

Step 8: Settle the property sale

Once your SMSF loan is approved, you can finalise the contract of sale. The loan documents will be prepared by your lawyers and sent to the SMSF’s appointed lawyer or conveyancer. After all the required documents are signed and returned, the contracts are exchanged between the seller and the property trustee who will be assigned as the purchaser. 

Costs such as the down payment, balance, legal fees, taxes, and stamp duty will be paid for by the fund. No deposit will be made by the property trustee or fund trustees. After all the documents have been signed and the purchase is complete, the SMSF becomes eligible for potential tax benefits. 

Step 9: Manage the property and gain legal title

Your SMSF will have control over leasing, renovations, and other pertinent decisions regarding the property. The SMSF will make the loan repayments and receives any rental payments from tenants. The fund also manages any profit and pays for bills associated with the property. 

After the SMSF pays the loan in full, the legal title can be transferred to the SMSF. If you don’t want the legal title transferred, the property trustee can continue to act as a registered proprietor.  

Find the perfect SMSF loan with loans.com.au  

Learn more about SMSF property investment when you get an SMSF loan from loans.com.au. Get in touch with one of our friendly lending specialists today to discuss your property investment loan needs.

About the article

As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.

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