As borrowing to purchasing property through Self Managed Super Funds (SMSFs) becomes more popular, I believe there are certain areas that need to be addressed. A particular area that I have been asked recently is can an SMSF borrow money to purchase a property or multiple properties within an SMSF then develop the properties? property-developer

In short, the answer is yes. However, there are a number of structures that must be put in place and factors to consider before undertaking this strategy.

Firstly, where there are borrowings against a property in an SMSF, improvements are not allowed. This means under a typical Limited Recourse Borrowing Arrangement (LBRA) when the lender lends money to the SMSF to purchase a property, property development would not be allowed.

For this strategy to work there a number of steps that must be taken:

  1. A non-geared unit trust (13.22c unit trust) must be established.
  2. The SMSF would then need to borrow money through a Limited Recourse Borrowing Arrangement (LBRA) to buy units in the unit trust. This means that a Bare (Holding) Trust must be established to hold the units on trust for the SMSF until borrowings are repaid.
  3. The unit trust then would acquire properties and undertake improvements to the property.

However, while this sounds simple enough I can assure you talking to a number of lenders it can be difficult to implement.  Under this type or arrangement the lender would only be allowed to take security over the units in the non-geared units trust, not the actual investments in the unit trust. The reason for this is borrowings in a unit trust are considered an in-house asset and the superannuation legalisation states that if an SMSF has in-house assets greater than 5%, the SMSF would be non-compliant. Most banks and financial institutions will not accept units in a unit trust as security for borrowing money in an SMSF.

The most common way for this strategy to work would be for the lender to be a related party e.g. a member of the fund. The member of the SMSF could lend available cash to the SMSF or borrow against the equity in their home and use this money to lend to the SMSF. Tax benefits may apply.

There are also a number of further considerations that must be considered before undertaking this strategy. For example who will be completing the home improvements, a related party or an arm’s length party? As this is a complicated strategy for an SMSF trustee to undertake, it is highly recommended that advice is sort from a qualified SMSF Adviser, such as myself or David Watkins.

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Thomas Jacks BCom (Acc), SMSF SpecialistTM, Adv. Dip F.S. (FP)
“I want to be able to assist clients with their investment and retirement planning by providing real strategy advice. It’s my aim to not only help my clients but to educate them by addressing the entire picture” Google Plus

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