Today we’re going to look at the structure that’s required for a SMSF fund to invest in property. We’ll look at the entities required – including the SMSF itself. More often than not, if you’re setting up an SMSF to invest in property, you’ll want to leverage – that is you’ll want to borrow money to support the investment. Find out just how your fund needs to be structured in this instance and how a bare trust allows you to secure the limited recourse borrowing arrangements (or SMSF loans) necessary to meet legal requirements.
Watch The Video To Understand LRBA SMSF Structure
Setting Up SMSF To Invest In Property
Let’s talk about Self Managed Superannuation 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 trustees 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:
Buying Investment Property With SMSF
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 SMSF by law must also be the people 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 into 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 SMSF 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 an SMSF to own an asset which has a debt against it. This is to protect the SMSF 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 SMSF.
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 hold the asset on behalf of 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.
