Self Managed Superannuation Fund (SMSF) Finance
You can now borrow in the name of your self managed superannuation fund to enable you to purchase real estate within the superannuation fund. This is becoming popular due to various taxation benefits which may include capital gains tax exemption on the property in the superannuation fund. It's important that you consult with your lawyer, accountant and financial planner to check your suitability as mistakes can be costly.
Here at Omega Finance, we've financed a number of commercial property purchases done this way. Sometimes, where a business owner has sizeable funds in superannuation but holds the business premises personally, they sell the property to the super fund which in turn borrows. The proceeds are then paid to the owner which extinguishes personal or business debt making their personal or business balance sheet more healthy. This situation is only possible with "Business Real Estate" that you own and not residential real estate. So, unlike residential SMSF lending, commercial property purchases can be for owner occupation as well as investment purposes. In each case, a formal lease needs to be provided to the lender with rental being set at market rates.
SMSF lending requires a few more things to be in place for a transaction to be structured. Firstly, the SMSF has to be established and your financial planner or accountant can help with this. It's normally wise to have a corporate trustee for the SMSF as it makes future changes to members of the fund easy. If you are switching from company super funds and setting up a new SMSF, allow your financial planner at least one month for this to take place. Secondly, you'll need to set up a holding trust called a "Bare Trust ". Essentially, it's a trust specially set up with another corporate trustee to hold the title to the property on behalf of the SMSF, until the loan is repaid. If you are paying a deposit, it has to come from the funds of the SMSF, so you need to plan early, and have one set up if one isn't in place already.
The loan is made to the super fund and the "Bare Trust" which holds the title, provides a guarantee to the lender. Any deposit must be paid from the super fund. The rental under the lease is paid to the super fund which is responsible for making the loan repayments out of the rental income and members contributions. Once the loan is fully repaid, the title is transferred into the super fund. As you can see the set up is a little more complicated than normal so the cost to establish these could be around $4-6,000. Take a look at the diagram below to see how this works:
Here at Omega Finance, we've financed a number of commercial property purchases done this way. Sometimes, where a business owner has sizeable funds in superannuation but holds the business premises personally, they sell the property to the super fund which in turn borrows. The proceeds are then paid to the owner which extinguishes personal or business debt making their personal or business balance sheet more healthy. This situation is only possible with "Business Real Estate" that you own and not residential real estate. So, unlike residential SMSF lending, commercial property purchases can be for owner occupation as well as investment purposes. In each case, a formal lease needs to be provided to the lender with rental being set at market rates.
SMSF lending requires a few more things to be in place for a transaction to be structured. Firstly, the SMSF has to be established and your financial planner or accountant can help with this. It's normally wise to have a corporate trustee for the SMSF as it makes future changes to members of the fund easy. If you are switching from company super funds and setting up a new SMSF, allow your financial planner at least one month for this to take place. Secondly, you'll need to set up a holding trust called a "Bare Trust ". Essentially, it's a trust specially set up with another corporate trustee to hold the title to the property on behalf of the SMSF, until the loan is repaid. If you are paying a deposit, it has to come from the funds of the SMSF, so you need to plan early, and have one set up if one isn't in place already.
The loan is made to the super fund and the "Bare Trust" which holds the title, provides a guarantee to the lender. Any deposit must be paid from the super fund. The rental under the lease is paid to the super fund which is responsible for making the loan repayments out of the rental income and members contributions. Once the loan is fully repaid, the title is transferred into the super fund. As you can see the set up is a little more complicated than normal so the cost to establish these could be around $4-6,000. Take a look at the diagram below to see how this works:
As a general guide, you need to have a minimum of $200,000 in your super fund to get started. We can source finance up to 75% for a purchase or refinance (simple debt swap - no increase), the norm however is 65% -70% where there are more lenders to choose from. If the property has vacant possession then you'll normally incur GST on the purchase plus you'll need to cover stamp duty. Click below to return to our calculators page and check out our Loan Repayment and Stamp Duty calculators and get an idea of what your repayments will be. Loans are normally structured for repayment over a 15-20 year term.
And, there are some restrictions on what you can do. If you purchase land or a property in your super fund with borrowing, then you can't borrow to build on that land/property. You can maintain, repair or restore but not improve the property. There can be no change to the nature of the property so usually construction projects are out of the question. If you start paying down your loan in your super fund, you cannot access the equity you have built up , other than by selling the property. This differs from normal property lending where you could get the property revalued and potentially re-lend /capital raise against it. You can sell the property as per normal. Additionally, you can't cross secure properties in your super fund for other loans, it's one property per loan only. It is crucial that you take professional advice from your advisors to ensure that this is an appropriate avenue to take for you.
We have expertise in this complex area and can work with your advisors to project manage this for you to put the necessary funding in place. We have close working relationships with financial planners, lawyers, SMSF set up agents and accountants who specialise in this rapidly growing area. We will be happy to introduce you to experts to assist you with this, if you don't have the necessary contacts. If you are considering this as your next move, then we'd like to chat with you at the earliest opportunity.
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We have expertise in this complex area and can work with your advisors to project manage this for you to put the necessary funding in place. We have close working relationships with financial planners, lawyers, SMSF set up agents and accountants who specialise in this rapidly growing area. We will be happy to introduce you to experts to assist you with this, if you don't have the necessary contacts. If you are considering this as your next move, then we'd like to chat with you at the earliest opportunity.
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