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Self Managed Superannuation Funds purchasing property using a Limited Recourse Borrowing Arrangement

One of the major misconceptions with purchasing a property in a self managed superannuation fund (“SMSF”) with borrowings is that the process and requirements are similar to those when an individual purchases a property. However, nothing could be further from the truth.

The Superannuation Industry (Supervision) Act 1993 (“SIS Act”) allows SMSF to borrow money to purchase a property under a limited recourse borrowing arrangement. Under this arrangement the security provided by the SMSF to the lender in respect of the loan is limited to the property which was purchased with the borrowed funds. If the SMSF defaults on the loan and there is a shortfall after selling the property, the lender will not have recourse to any other assets of the SMSF.

Requirements to establishing a limited recourse borrowing arrangement:

SMSF Trust deed

The trust deed that governs the SMSF must permit the Trustee of the SMSF to enter into a limited recourse borrowing arrangement. Therefore the SMSF Trustee should have power to borrow funds, acquire and mortgage the property.

It may be necessary to amend the trust deed of the SMSF to allow the Trustee to borrow and acquire the property.

Bare Trust

A Bare Trust must be established. Lawyers will prepare a trust deed for the Bare Trust. A Company will also be incorporated to act as the Trustee of the Bare Trust. Please note, the Trustee for the Bare Trust cannot be the same as the Trustee of the SMSF.

Acquisition of the Property

The Trustee of the SMSF approaches the lender to obtain a limited recourse loan. Therefore the Trustee of the SMSF is the borrower, signatory on the loan and mortgage documents with the lender.

The Trustee of the SMSF may obtain the loan from a financial institution or a related party of the SMSF.

If the loan is obtained from a related party, the terms of the loan documents must comply with the arm’s length rules contacted in the SIS Act. The ATO also provides a guideline (Practical Compliance Guideline PCG2016/5) which sets out the loan terms that can be used for related party loans. It is important that these rules are followed as failure to do so may result in tax and compliance  issues.

The purchaser on the contract for the property is the Trustee of the Bare Trust. The Trustee of the Bare Trust acquires the legal title to the property while the SMSF Trustee acquires a beneficial interest in the property.

Clewett Lawyers can assist preparing, reviewing or amending:

  • SMSF Trust deed;
  • Bare Trust deed;
  • Incorporation of a Corporate Trustee;
  • Loan or security documents;
  • Purchase contracts;
  • Advice in relation to compliance with the SIS Act.

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