There has been widespread media coverage about Self Managed Super Funds borrowing money to acquire property or shares. There is also a growing list of lenders willing to provide debt to allow your SMSF to purchase these assets.

In terms of gearing, some lenders will lend up to 80% of the purchase price for residential property and 70% for commercial property.

However prior to embarking on this route, we recommend that you discuss this solution with your accountant or planner. If you are a high income earner, there are alternative options such as having a unit trust purchase the property with your SMSF (or yourself as an individual) contributing the equity needed.

With unit trusts, your SMSF can purchase some of the units in the unit trust (the extent to which is likely to largely depend on your proximity to retirement). As an individual owning the balance of the units in the trust, you can then still enjoy the benefits of a negatively geared property to the extent of your tax bracket (as opposed to the 15% rate that the SMSF would attract).

It is also cheaper to borrow money through a unit trust structure than it is via a SMSF structure, albeit the SMSF lending space is becoming more competitive.

One of the other main advantages of borrowing outside of your SMSF was the ability to improve the investment property. However recent draft legislation is seeking to allow SMSF's to improve assets as long as the improvements do not fundamentally change the asset.

Establishing your fund correctly from the start is vital to ensure that it runs smoothly. This includes:

• Establishing the Trust Deed;
• Appointing the trustees and agreeing how the assets of the Fund will be held and managed;
• Registering your fund with the ATO, as well as an Australian Business Number if it is a Corporate Trust;
• Establishing a cash account, in the name of your Self-Managed Super Fund to accept your super contributions and to pay the running expenses of your fund.

There are instances where two super funds can combine together to purchase a property. Again, discussing this strategy with your accountant is vital.

If your SMSF borrows money then the loan must meet the following conditions:

• The loan is for the purchase of one asset on one title, this does not include expenses to develop the property (This may be easing with the introduction of the new draft legislation);
• The asset is held on trust so that your SMSF acquires a beneficial interest in the property and your SMSF acquires legal ownership after repayment of the loan; and
• If a SMSF defaults on the loan then the lender can only sell the asset that was bought with the loan, the other assets in the SMSF are protected

Recent examples of property purchases through SMSF are:

• 3 Macquarie Street, Sydney (Bennelong apartments): A 1 bedroom unit. Sale Price $1.45 million;
• Three bedroom home in Chatswood: Sale Price $2.75 million;
• One bedroom unit, Mosman (off the plan purchase): Sale Price $745,000

We would be happy to discuss the above structures with you. Please call Dean Perlman at our office on 02 9363 2747.

The material contained in this article does not constitute specific financial advice. The article does not intend to create a professional services relationship between Charter Finance Institute Pty Ltd and the reader.