In this video animation I have put together, I am going to go through a basic overview of how purchasing property in your self managed super fund works when you utilise a loan and instalment warrant structure.
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The reason I have decided to put this video together, is that there is a lot of information on the net, which is either a written description or a diagram of the process – and it simply doesn’t help the everyday property investor understand how they can use their current superannuation as a deposit for an investment property.
I will be honest – there are some diagrams out there which I have seen – and even I don’t understand them!
So hopefully this video will take some of the mystery out of the process of using your super to buy property.
As promised at the end of my video, you can find a copy of the transcript here.
Additional notes not included in the video:
- As the video was intended to be a brief overview of how the purchase of property utilising a limited recourse loan works, I didn’t go into detail about the instalment warrant documentation itself – which is generally included with the documentation / trust deed for the ‘property trust’. The instalment warrant is basically an agreement that enables the property trust to transfer ownership of the property to the SMSF directly (i.e. transfer the title) on repayment of the loan. This is very important as without this agreement a SMSF cannot borrow to purchase property.
- With the establishment of both the SMSF and the property trust, a trustee company needs to be used. For the reasons why this is essential, please refer to the recent podcast here or recent article 5 reasons why you need a company as trustee of your SMSF
- You can have up to 4 members within your SMSF. In the animation I only had a single person – however in many cases a couple or family can combine their superannuation savings into a single SMSF enabling them to have enough for a investment property deposit sooner
- It can take a couple of months to transfer existing superannuation accounts to a SMSF because a SMSF needs as ABN before it can request a rollover / transfer from an industry of retail fund – which can take the ATO up to 28 days. Subsequently upon receipt industry and retail super funds have another 28 days to process the transfer request. This means you need to get your SMSF set up well in advance of purchasing a property.
- Before transferring any monies out of your existing superannuation accounts you need to ensure that you are able to organise appropriate life and disability insurance cover within you new SMSF
- Another name for a property trust is a ‘bare trust’
- Your SMSF can purchase any type of property – residential, industrial, commercial, rural – however different loan-to-value ratios apply depending on the type of property and the postcode.
- A SMSF cannot acquire a residential property from the members / trustees of the SMSF – however it can acquire a commercial, industrial or rural property (or any property used 100% for business purposes such as a residential house converted into a office or place of business).
- I mentioned how steps 3 and 4 (finding an appropriate property, singing and contract and setting up the property trust) happen all the same time – this means that firstly, a new company (NOT the trustee company of the SMSF and NOT company that is used for any other purpose) is established, secondly that company’s name and that name only will be listed as the purchaser on the contract (e.g. Property Trustee Pty Ltd) and thirdly once the contract is signed the property trust deed will be created and date the day the contract comes into existence.
- When the loan is fully repaid in the future, the title of the property (legal ownership) can transferred to the SMSF. This transfer will be CGT and stamp duty free provided everything has been established correctly when the property was originally purchased.
- Most of the major banks offer the limited recourse or SMSF loans.
- There are some limitations on limited recourse loans. They can be refinanced, however they can’t be used for property development or construction purposes.
- Any equity that builds up in the property that is owned under this type of structure cannot be drawn down and used as the deposit for other properties. The property will need to be sold to realise the built up equity with the proceeds used for further SMSF property purchases.
- A lender doesn’t need to be a bank. You can lend to your SMSF from existing equity you may have. A family trust or investment company can also be the lender to the SMSF however the same rules and documentation is required – however most people would prefer to be paying interest to themselves rather than to one of the big banks.
I hope that you found this video and article informative.
If you have any questions about using your superannuation to utilise borrowings and invest in property please do not hesitate to contact me.
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