Are SMSF permitted to borrow?
Superannuation funds cannot borrow for any purpose. It is only permitted when it is specifically applied towards the purchase of a single acquirable asset, such as a real property on one title. The arrangement must be correctly structured.
What is the structure required to borrow for acquiring a property in a SMSF?
A seperate trust, normally a bare trust (also known as a holding trust), is set up to hold the single property. The trustee of the seperate trust is a new company that is set up for this purpose. The role of the bare trust is limited to holding the title of the property.
Is my SMSF trustee required to be a corporate trustee?
There is no requirement in law requiring the SMSF trustee to be a Company trustee. However, most lenders prefer for the SMSF trustee to be a Company trustee.
Does my SMSF trust deed need to be updated?
Where you current SMSF trust deed do not provide the requisite power to borrow or prohibits borrowing, the SMSF trust deed will need to be updated.The current provisions of the law were in place from mid-2010. Therefore, if your trust deed is or was last updated prior to that date, it may need to be updated.
Can a member loan money to the SMSF under a limited recourse borrowing arrangement?
Member/s may loan money to the SMSF under a limited recouse borrowing arrangement. However, there are strict Australian Taxation Office guidelines that must be followed. See related party borrowing arrangement.
Who should receive the income?
The income (e.g. rent income) should be received by the SMSF directly, and expenses (e.g. expenses associated with holding and maintaining the real property), principal and interest loan repayment are paid by the SMSF directly.
Does the bare trust lodge tax returns?
The bare trust's role is limited to holding the title of the property. The bare trust should not register for an ABN or tax file number, and does not lodge a tax return. They are accounted for within the SMSF's Annual return.
Can my SMSF purchase a property off the plan with borrowings?
The SMSF may purchase a property off the plan with borrowings. However, the deposit must not be borrowed. Borrowings may be applied to fund the completion amount or part of the completion amount on settlement.
Borrowing to construct house on land using borrowings?
If the SMSF has or will purchase a vacant block of land without borrowings, the SMSF cannot borrow to construct a house on that block. Similarly, if the vacant block of land is purchased with borrowings that satisfy the limited recouse borrowing arrangement, the SMSF cannot make additional borrowing to construct a house on that block.
When should the bare trust be set up?
The bare trust and the trustee company should be set up prior to entering into any agreement to purchase a property. This is important, as the legal owner of the property is the trustee of the bare trust, and not the trustee of the SMSF.
Can the SMSF lease the property to a member or related party?
The SMSF cannot lease a residential property to a member or related party.
A property (land and building) that is used wholly and exclusively in a business may be leased to a member or related party on arms-length basis and the agreement in writing - including the amount of rent and frequency of rent payment.
What about land tax?
In certain States or Territories, the SMSF and/or bare trust qualifies for the land tax threshold as it is categorised as a fixed trust. Legislations and thresholds varies by States and Territories. Accordingly, you should check with the relevant State Revenue office.
What happens if the borrowing arrangement is not correctly structured?
The arrangement will not comply with the requirements prescribed by law, and the ATO may impose penalties on the trustees, and direct the trustees to rectify the non-compliance.
