Interest is definitely growing in buying geared property through SMSFs.
This can be a very good strategy but it is essential that it is set up correctly and run properly to avoid costly fines and tax penalties. I thought I would share with you some of the common problems being experienced with this strategy and tips to avoid mistakes.
1) Don’t Buy The Property Before The SMSF Exists
One of the most common mistakes being is buying a property before the SMSF is set up. A property purchase outside of an SMSF where borrowings are involved would typically take 6-8 weeks, so with the additional structural and legal requirements that need to be undertaken inside super, the process would typically require a 10–12 week timeframe.
The SMSF must be established before acquiring the property otherwise there could potentially be a breach of the super rules. The process often involves rolling over member benefits (so that the SMSF has cash) and then obtaining some sort of indicative finance approval.
2) Don’t Do It In The Wrong Order
Lenders will want evidence that the SMSF exists and that you have the funds ready for settlement well in advance. Prior to going through the process and expense of establishing the legal arrangements required to set up a bare trust (to own the property), obtaining indicative approval from an appropriate lender is a wise move to ensure the transaction stacks up and removes some of the potential for things to go wrong later on.
Most lenders will now only provide finance in scenarios where both the SMSF and the Bare Trust established for the property purchase have separate corporate trustee structures for each the SMSF, and the Bare Trust.
3) Make Sure The Contract Is In The Right Name
Where borrowings are involved, the Contract for sale needs to be issued and exchanged using the corporate trustee entity that has been established for the Bare Trust itself, and not in the name of SMSF, or the corporate trustee for the SMSF. This is because the Bare Trust is beneficially holding the property until such time as the debts against the property are paid out.
Also, many trustees and advisers believe that having a contract issued in the clients own name with the addition of “or nominee” is a workable solution where the correct legal structures are not yet established to purchase the property through the SMSF. Most banks and institutions will not accept this scenario and would expect that the contract, or any prior holding deposit is issued to the correct entity.
4) You May Need A Financial Advice Certificate
An increasing number of lenders in the SMSF space will expect that SMSF Trustees have sought the advice of a professional planner or accountant. Prior to settlement, many lenders will ask the SMSF trustees to arrange for their professional adviser to sign a Financial Advice Certificate. Even if a formal Statement of Advice (SoA) hasn’t been prepared by an adviser, as trustees of an SMSF it is worth considering at the early stages which trusted adviser you are going to have complete this document, and discuss it with them so you aren’t running around at the last minute making arrangements.
These aspects need to be considered where you are borrowing from a bank. If you are lending the money directly to your super fund some of the above issues may not apply.
