Is using a superannuation fund to
invest in real estate a good strategy for you?
In 1986 it was compulsory for an employer
to contribute to an employees' superannuation funds. Self Managed Superannuation Funds
(SMSFs) since then have become a popular choice for individuals wanting to take
control of their financial situation at their retirement
The Superannuation Industry
(Supervision) Act 1993 (SIS Act)
under Section 67 sets out the conditions surrounding SMSFs borrowing to invest.
http://www.austlii.edu.au/au/legis/cth/consol_act/sia1993473/. The act states that the borrower's
funds are to be used to purchase an asset, and in this case that we are talking
is property. The asset to be held in trust for the SMSF is by another entity; and
in this case the property trustee.
The SMSF must have the right to
acquire legal ownership of the asset by making payment and any recourse by the
lender of the funds used to purchase the asset against the SMSF must be limited
to the asset (or property) in question. This statement means that if any
default on the loan occurs, the lender can only take possession of the actual
property on which the default occurred; the other funds and assets held by the
SMSF are protected.
The superannuation fund will be the
beneficial owner of the property and is able to purchase a variety of real
estate types such as: residential, commercial or even holiday units, provided
you purchase it as an investment, and not for you to live in. However you can transfer the piece of real
estate from the fund to your own name after you retire and at that time move in
and make it this property your primary residence.
How is the property purchased? Well in the usual way where the investor
selects the desired property and then their SMSF must satisfy the loan
requirements as specified by the super-leveraged loan provider.
The SMSF pays the deposit, balance
of purchase price, associated legal costs and stamp duty, as such for the case
in a normal investment property purchase. Likewise the SMSF appoints the lawyer
(or conveyance) and these bodies complete all the necessary legal work as
usual.
Costs associated with the property
are also paid through the SMSF. Costs such as: land tax, council rates, maintenance,
mortgage fees and repayments, and repairs on the property and the property
management fees.
Since the SMSF beneficially own the
property, outside of the legal ownership of the property trustee, it also
receives all rental income or other income and you can improve or renovate the
property like any other investor who has not purchase a property under a SMSF.
The SMSF can also pay extra repayments
into the mortgage or pay it out entirely, but these will be subjected to the
lender's terms and conditions. Once the mortgage has been paid off, the
property’s title can then be transferred to the SMSF or the property trustee
can continue as registered proprietor.
Before you go off buying properties
in a SMSF seek professional advice such as from your accountant to see if this
strategy is ideal for you!
