One of the common questions I get asked is can I purchase a property in my super fund. Usually we have to delve a little deeper than just saying yes. We go into depth of the reasons why the client wants to purchase the property in the super fund. After examination we sometimes agree the purchase of the property would be better outside the superannuation environment.
With the talk about negative gearing and the political issue that it is, we have worked in the past with property specialist that recommend our clients into positively geared property. We prefer these types of properties and feel these are better suited for a super fund.
Whilst these are important investment decisions, once the decision is made and the property is found, the other important decision is around borrowing in the SMSF.
As a guide I have put together some tips for the Limited Recourse Borrowing arrangements (LRBA).
My Tips
Tip 1: Educate yourself
LRBAs in your SMSF are incredibly detailed and complex processes, and a multitude of small and seemingly inconsequential mistakes can lead to disproportionate additional stamp duty and penalties further down the track.
Don’t ever fall into the trap of thinking that you know everything about LRBAs. Keep developing your knowledge over time and make sure you keep up to date with any potential developments in this complex area.
Tip 2: Get your structuring right
Understand the role of and relationship between your bare trust, corporate trustee, SMSF, and other legal structures (eg, unit trust) and the difference between legal and beneficial ownership.
Once the optimal structuring for your LRBA is in place, ensure the legal paperwork reflects the structures. Check that the property acquired and the LRBA loans are in the correct entity name.
If you invest in an additional leveraged property, ensure you establish a new bare trust. We can assist by working closely with our preferred legal specialist who will establish the structure. Getting someone who specialises in this area is vital.
Tip 3: Don’t over-extend yourself
As part of your investment strategy, determine a maximum amount that you are willing to borrow. We model this across higher levels of interest in the coming years to ensure this strategy can stand the test of time. Don’t over-extend yourself financially, even if the bank is willing to lend you more.
Tip 4: Fix your mistakes
We can all make mistakes at some time, some are small and some are large, so too within your SMSF LRBA.
As soon as you identify a problem, develop a strategy to remedy it. If it is a serious issue communicate with the ATO about the problem, your proposed solution and the change to your processes to ensure it won’t ever happen again.
Don’t be afraid of the ATO – believe it or not if you communicate openly with them they can be quite helpful.
Tip 5: Get professional advice
Well before you commit to acquiring a leveraged property in your SMSF, seek expert, trusted SMSF and property advice. Too often we have been approached by panicked SMSF property investors who tell us they need to close the financing arrangement for their LRBA by the end of the week and could we please give them advice as the bank lender requires it.
It is important to employ an SMSF expert who can co-ordinate and manages the LRBA process for you from start to finish. It is an incredibly complex process and small mistakes can lead to additional stamp duty and penalties. By appointing one expert champion to manage the process you minimise your risks.
Anthony Pears is an accredited SMSF Specialist Advisor™ (SSA™).
Originally published on LinkedIn on 01/08/2016