This is the full transcript of our popular video “Structuring Your SMSF to Borrow and Invest in Property“.
Let’s talk about Self Managed Super Funds buying property for investment. So today we’re going to tackle the structure that’s used for a self managed super fund to invest in property, and there’s a few entities that are required. The first thing you need – and it’s in the name – is a SMSF, which is a Trust, albeit a special purpose Trust. Every Trust needs a Trustee. The trustee are the people or person or entity that is going to make decisions for the Trust. In this instance we recommend you use a corporate trustee which is a company and that company is going to have directors. Those directors are going to be the people making the calls. In the case of a self managed super fund there can be up to four people in charge. So your SMSF can have up to four members and what it’s going to look like is this.
Member one to member four, it could be one it could be three it doesn’t matter. The people who are going to be in charge of that self managed super fund by law must also be the people are who are going to benefit from the fund so they are going to be the members, the people who the money is going to flow to in the end. That’s your Self managed super fund.
Once we’ve done that we get an ABN, we get a tax file number from the tax office and that fund is ready to operate. The first thing we’re going to do with the fund is organise the rollover. The money that the members have accumulated in their own respective superannuation funds to date can be rolled over into the self managed super – all of it or some of it can be rolled over in to that SMSF. So for the sake of example let’s assume we’re rolling in $200k from the members existing superannuation fund.
For all intents and purposes, that is for all investments that do require the super fund to borrow money then this is the structure we’re going to use. So that fund is ready to buy property if there is enough money in the account, it’s ready to buy shares, it’s ready to buy precious metals, it’s ready to buy collectibles, it’s ready to buy whatever it is that the directors of the self managed super fund want to invest in as long as there’s not going to be a loan required to actually purchase those assets.
In the case of property more often than not trustees will want to leverage – and leveraging is borrowing money to buy that property. In order to do that we’re going to need that asset, the title, to sit outside of the self managed super fund. And the reason for that is the legislation.
The legislation will not allow a self managed super fund to own an asset which has a debt against it, and that’s to protect the self managed super fund against recourse from the banks. So if the debt on the property goes bad and the bank wants recourse on the property they cannot touch the other assets which are in the self managed super fund.
So what we do is create an additional holding structure and what that new trust with it’s own corporate trustee is going to do is one thing and one thing only and that is to hold the asset on behalf on the self managed super fund until the debt is paid off, that’s all it does. There’s no trading, no tax return, no audits it’s just a holding structure. And that’s how we can purchase a property using a loan for a self managed fund.