As auditors we have seen a growing trend amongst SMSF’s where they have moved away from direct share investment towards property.
In 2007 the government relaxed the rules applicable to self managed superannuation funds when it came to borrowing for the acquisition. Prior to 2007 funds were not allowed to borrow.
The change in 2007 was via a restricted form of borrowing called Limited Recourse Borrowing, essentially it means that only the property being borrowed for can be given as security against the loan. In the event that the loan goes bad the lender has only limited recourse against the property that was borrowed for.
Trustees need to firstly look at their trust deed to see if it allows for such borrowing. Assuming it does, then reference to the SMSF’s investment strategy is required. Does property form part of the investment strategy.? Consideration needs to be given to diversity, risk, age of members, liquidity etc. The trustees need to be conscious that there are two types of return via this investment:
A. You will receive income from the tenants in the form of rental income for lease of the property.
B. Over time if fortunate the property will increase with capital gain.
Trustees also need to consider that both commercial and residential property require time to manage effectively, they may elect to outsource the management of the property. Super funds that have current updated deeds in most cases allow for investment in either commercial or residential property.
Industry sources report that about 12% of all SMSF assets are invested in property. Recently there has been a slight increase of funds choosing residential property over commercial to invest in.
When seeking advice on property and the use of Limited Recourse Borrowing Arrangement ( LRBA ) do not rely on unlicensed individuals seek out professional who experience within the industry. Thee LRBA is a financing arrangement which is a loan that also costs money to set up ( these charges can be quite large).
Another key thing to keep in mind when it comes to residential property is that your relatives or yourself cannot live in it. It is not a good place to put your adult children. If you did so, you run the risk of making the fund non complying. On the other hand a commercial property can be leased back to yourself or relatives and the fund will still retain the complying status. Commercial property under superannuation law meets the definition of business real property.
When we audit your SMSF that has property (an has an LRBA) we pay close attention to see that it has been established correctly with the right documentation e.g. Property Custodian Trust deed, Corporate Trustees, signed loan agreements, Purchase Contracts, Certificate of Title and lease.
DISCLAIMER: The above is general advice only, you should not act on this advice without consulting a professional adviser to discuss your personal circumstances.