In this article, we look at owning property in superannuation.
Property can be attractive as it provides investment diversity, allows a business to acquire the premises they operate from, and of course is a tangible asset that we can see and touch.
At GNS, we regularly get interest from clients about how they can invest in property using their self managed super fund. The answer is never straightforward. There is a range of personal circumstances involved, and these start to take over the conversation regarding the type of property, contribution levels, personal tax levels, capital growth and so on.
There are several ways in which you can consider using your self-managed super fund to acquire (or have an interest) in direct property, whether it be residential or commercial.
There are four ways you can acquire property. Each has advantages and disadvantages.
- Buy it straight out
This is the simplest way. The fund pays cash and receives title to the property. The asset is held in the name of the fund trustee(s) in trust for the SMSF. At GNS, we like companies to act as the trustee, so the title would be held in the name of the company (without reference to the underlying trust structure (i.e. the SMSF)).
Outright purchase requires a significant commitment of capital to acquire the asset. Also, if your fund is paying a pension, you need to be conscious of ongoing cash requirements of the members.
- Tenants in Common
The fund buys the property with another investor – an individual, trust, another SMSF, etc. This could be a related party of the fund, or an unrelated party. The important thing to note here is that the property must be ‘unencumbered’, that is, no charge can be placed over the asset as security for any borrowings that another investor may require.
This arrangement allows the fund to acquire an interest in property even when it doesn’t have the full amount needed. Of course, the other investors will have an interest as well.
There may still be a need for the fund to require significant capital to acquire its interest.
- Unit Trust
This is a more typical structure for an SMSF to co-invest with another investor. The SMSF, and the other investor(s), subscribe for units in the unit trust.
Using a unit trust allows for other investors to participate when SMSF does not have sufficient capital; a possible saving of stamp duty if the fund were to increase its investment, and the ability for the fund to sell down units to other interested parties for liquidity purposes (i.e. you can sell a brick at a time!!)
Note the unit trust will need to have financial statements and a tax return prepared.
The various rules around superannuation funds and unit trusts would take more space than we have room for. Suffice to say, a unit trust provides an opportunity for a super fund to acquire property, but the rules, as usual, are complex and can trip you up. Please call us if you are considering a property acquisition via a unit trust.
- Borrowing
The introduction of borrowing sparked serious interest for super funds to borrow to buy property.
The ability to borrow (using an ‘instalment warrant’ arrangement) allows SMSFs to invest in ‘bricks and mortar’ without having to find the whole price.
The fund can borrow from an unrelated lender (such as a bank), or related party – such as the fund members. Most unrelated lenders will lend between 60% and 75% of the price of the property, depending on whether it is commercial or residential property.
The rental income and contributions can be used to pay down the loan.
With the ‘instalment’ type of borrowing, the loan only allows the lender access to the asset acquired if there is a default on the loan.
Borrowing allows a fund to acquire the property in its own right, with no other owners, and not placing other fund assets at risk if there is a default. Of course, the loan repayments must be met.
A word of caution – if you want to borrow to buy property, there is stuff you should know. Please call us if you are thinking of borrowing in your fund.
As you can see, there are a number of ways to buy a property in your fund. They all have some complexity, and we recommend you speak to us before proceeding.
For more information please call Philip Ruth at GNS Group 03 9499 7444.
