SMSFs Buying Property – Key Considerations

Self-managed superannuation funds (SMSFs) have become increasingly popular in recent years due to the control they give people over their retirement savings. Often SMSFs will purchase property as an investment to generate income, but there are some key considerations that people need to be aware of prior to entering into such transactions.

What to be Aware of

Buying property through a SMSF can be complex and fraught with difficulty but if you have the correct advice, the process can be seamless. Common issues that can arise with these purchases include non-compliance with legislation, financing hurdles and inadvertent stamp duty consequences. It is important that purchasers are aware of the following considerations when buying property in their SMSF:

• Compliance – There are certain legislative requirements that must be met so that a property can be purchased through a SMSF. For instance, one legislative requirement is that the property must meet the “sole purpose test”, meaning the property must be used solely for providing retirement benefits to fund members. A failure to comply with legislative requirements can range from ATO fines to even criminal penalties.
• Finance – People are commonly not aware that a SMSF is generally prohibited from borrowing money, except in limited circumstances. A SMSF may borrow money through a “Limited Recourse Borrowing Arrangement”, but there are strict requirements that must be satisfied. One requirement may be the establishment of a bare trust or custodian trust, where another entity holds the property on behalf of the SMSF. It is imperative when seeking to use a Limited Recourse Borrowing Arrangement that Purchaser’s seek advice from an accountant or financial advisor prior to arranging finance.
• Stamp Duty – As noted above, a SMSF may need to set up a separate bare trust or custodian trust as part of a limited recourse borrowing arrangement. This can have adverse stamp duty implications if not undertaken carefully. For instance, a bare trust deed in NSW should be dated after the date of the contract for sale so that “double duty” is not payable on the contract and the bare trust deed. The description of the purchaser in the contract should also be carefully drafted as an incorrect description can have significant stamp duty consequences.

Take home lessons

It is imperative that anyone purchasing property through a SMSF seeks appropriate legal and financial advice prior to entering into such a transaction. A failure to comply with the relevant legislative provisions and consider the stamp duty implications of such transactions can have adverse consequences. Chamberlains Law Firm has acted for many SMSFs when purchasing property and can assist clients navigate these complexities with ease and due care.

*This article was prepared with the assistance of Jack Harman