Setting Up A Property Investment In A SMSF
The mechanism used to set up a SMSF property investment is sometimes referred to as an ‘Instalment Warrant Structure’. It governs the activities of a super fund borrowing and purchasing an asset that is held in trust. The SMSF will have beneficial ownership* of the asset while the trust has legal ownership. Legal ownership can be transferred to the SMSF as soon as the asset is fully paid.
The diagram below gives a visual presentation of the structure of a SMSF property investment. It would perhaps be a good idea to refer back to it as we go ahead and explain the different steps of setting up your strategy.
The first thing to do before you can proceed with property investment is to amend your SMSF’s internal rules and trust deed (if already in existence) to allow borrowing. It may also be a good idea to clearly define the kinds of investments that will potentially be entered into and check that they conform with SISA.
After finding a suitable property (see The Property warehouse), arrangements should be made to purchase the property on an ‘arms length basis’. You will have to make arrangements for the setting up of a trust (known as the Security Custodian Trust) that will hold the legal title of the property. It should be noted that the security trustee cannot be a trustee of the SMSF as you cannot hold something in trust for yourself. It is however, possible to set up a separate company to act as trustee. It is highly recommended that you get competent legal advice (see The Property Warehouse Strategic Partners) to help you design the best trustee system.
Once all the architecture is in place you can then proceed to approach lenders for finance (see The Property Warehouse Strategic Partners). The SMSF can enter into direct talks with the lender and will also borrow directly from the lender on a Limited Recourse basis (this means the lender will only have a claim against the fund for the property purchased). Finance documents will clearly spell out who are the legal and beneficial owners of the property.
Once the property has been purchased, all financial dealings will be directly with the SMSF. This means that the fund will be responsible loan repayments and expenses. It will also receive rent as if the property was directly owned by the fund. The SMSF’s accounts will also show the property as an asset (not as a trust investment). This means that there will be very little activity in the security trust.
When the mortgage is fully paid, the legal ownership of the property may be transferred to the SMSF.
*As beneficial owner the SMSF will be credited with all income and capital growth even if the property has not been paid off. The SMSF will, on the other hand, also be responsible for all mortgage payments and costs.