A Step-By-Step Guide To Buying A Property In A SMSF
June 30, 2013
By Tamia Gallego
As you may already know, a Self Managed Super Fund is a small superannuation fund established by individual members to take control of their own superannuation. The members decide how the fund will operate and what investments the fund will invest in.
Personally, SMSF’s are rather fascinating as they have been around for more than 30 years but they have gained soaring popularity only over the last few years.
Individuals have now realised the key advantages of managing their own super such as having more control over their investments, greater investment flexibility, generally lower fees than retail funds, and better returns and tax benefits.
In addition, some of the banks have made borrowing within SMSF easier in order for us to borrow to invest in real estate where in the past it was not possible. Some banks lend up to 80 per cent loan to value ratio (LVR) for residential properties, and I am mentioning residential because this is what most people buy. Commercial properties are too complex to understand which is a topic for another day.
At the moment SMSF’s represent about 30 per cent of all superannuation funds. There was about $390 billion invested in SMSF’s out of approximately $1.2 trillion invested in Australian super as at 30 June 2010. SMSF’s are now the largest slice of the superannuation industry and really this is only the tip of the iceberg. As consumer confidence picks up, coupled with lower interest rates, there will be plenty more individuals setting up their own SMSF’s come the new financial year.
If you and or your partner have been working for more than 10 years and have built up a reasonable amount of super balance, approximately $150,000 to $200,000, you are sitting on a goldmine and can definitely use the funds to build your wealth through investing directly into property.
In early 2013, my husband and I created our SMSF with the purpose of purchasing an investment property that we will hold for the long term.
We set up a company as the trustee of our SMSF (referred to as a corporate trustee). The benefits of having a corporate trustee vs an individual trustee are summarised here at Cleardocs.
Below is a step-by-step guide in relation to our property acquisition that may be helpful:
- Provide set up information to accountant to enable SMSF entities (name of SMSF, name of company/corporate trustee) to be ordered.
SMSF name: WITB Superannuation Fund
Corporate Trustee for SMSF: WITB Property Pty Ltd
- Request roll over forms to be sent from your existing super funds.
- Accountant to order SMSF.
- Accountant to order Company (Corporate Trustee).
- Contact a lawyer and find out about “Limited Recourse Borrowing Arrangement”. You will need to set up a bare trust which is an arrangement where the custodian trustee (a company) is holding the property in a separate trust. This is done to satisfy the tax office that the asset is not at risk. The property is purchased in the name of the custodian trustee (company) which can be formed before or at the same time as the set up of the bare trust. Give the lawyer the heads up that you are looking for a property to purchase and will get in touch with the property details (location, Folio number etc) once a property is secured.
- We created a second company as the trustee of the bare trust as the trustee of the SMSF cannot be the trustee of the bare trust.
Corporate Trustee For The Bare Trust: WITB Security Custodian Pty Ltd
This custodian trustee entity is the purchaser of the property and will appear on the contract.
- Get accountant to order the corporate trustee for the bare trust.
- Provide the bank preliminary information for a loan approval.
- Accountant to apply for SMSF ABN/TFN. This will usually take 28 days.
- Accountant to apply for Company ABN.
- Complete roll over forms for existing funds and accompany with complying fund notice (part of SMSF docs).
- Leave a balance in your retail super funds to keep existing insurance policies. Some funds require you to leave a minimum balance to retain membership such as $1,500 or $5,000. Ensure that you keep your existing insurance policies as the rates are often competitive than if you were to arrange a completely new policy outside of Super.
- Open a SMSF bank account. Take a copy of the signed SMSF deed to your nominated financial institution and open a bank account for the fund.
- Organise 9 per cent SGC for members by employers to be banked into the new SMSF bank account. (This will increase to 9.25 per cent commencing 1 July 2013).
- Bank into new SMSF bank account the roll over cheques from existing super funds when received.
- Select a property.
- Have the offer accepted by the vendor.
- Send the front page of the contract to the bank so they can order a valuation.
- Be prepared to put down 30 per cent of your own funds towards the purchase, even if the bank would lend up to 80 per cent LVR in the event the valuation falls short. Bare in mind also some financial advisors advise against borrowing more than 70 per cent LVR to purchase the property in their investment strategy.
- At the same time, get a specialist SMSF lawyer such as Heffron to prepare the bare trust to document the borrowing arrangement within SMSF to purchase the property. The turnaround is usually 24 hours. The lawyer should be able to set up the correct borrowing structure linking the SMSF to the custodian trustee as to avoid double stamp duty.
- Obtain formal finance approval from the bank.
- Do not sign the purchase contract until the bare trust has been signed/dated/executed.
- Sign the contract for property acquisition. This will not be in the name of the SMSF but the corporate trustee of the bare trust.
- The bank will most likely to require a Certificate of Financial Advice signed off by a licenced financial advisor, to demonstrate that you have received financial advice about taking on this investment strategy.
- Set up a meeting with a financial advisor to organise the Certificate of Financial Advice as soon as you receive the formal offer from the bank, as this process can take two to three weeks for a financial advisor to organise and you have 42 days to settle (in NSW).
- Return all mortgage documents, SMSF and bare trust deeds and Certificate of Financial Advice to the bank for certification and settlement.
- Finalise the acquisition.
You should expect the entire process from setting up the SMSF to rolling over the funds to your SMSF to take about two months. Ensure this has been set up before searching for a property, as to avoid any delays with settlement once you find the ideal place.
In the interim do lots of reading on SMSF’s as there issues that need to be considered for a property purchase within SMSF. If you don’t comply there are penalties, which is why it’s important to liaise with a financial advisor who is knowledgeable about SMSF.
While all this may sound like hard work, with the right kind of guidance property is a great part of a long-term wealth building strategy. Good luck and happy hunting!
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