Borrowing by Self Managed Superannuation Funds

Posted on December 1st, 2013

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by Robert Lindsay

Robert Lindsay is a Director at Mullane & Lindsay in Newcastle and leads our Commercial & Property Law team.

For several years, self managed superannuation funds have been permitted to borrow money to assist with the purchase of Real Estate. However if a Self Managed Superannuation Fund (SMSF) proposes borrowing then the trustee of the SMSF must be careful.

The property purchased by the SMSF must be held by a bare trustee which holds the property as trustee for the SMSF (which is the beneficial owner of the property). The documentation relating to the purchase of the property by the bare trustee must be in place before the property is purchased. The security for the loan is the property and the mortgage is a special type of mortgage referred to as “limited recourse”. This means that if the SMSF defaults with its repayments then the lender can only sell the property to recover the loan. Naturally, the margin between the loan and the value of the property being purchased is usually greater when a property is purchased by a SMSF.

Apart from the loan, the payment of all costs of purchase including the Deposit, Stamp Duty, Legal Fees and Disbursements must be paid by the SMSF. The Office of State Revenue requires evidence that the superannuation fund has made these payments before it will stamp the bare trust deed. If it is not satisfied then it will not stamp the bare trust deed and the deed then cannot be relied upon and the structure fails.

If a self managed superannuation fund proposes buying a property and borrowing money to do so then careful planning must take place and the correct documentation prepared prior to the purchase proceeding. It is wise to consult a Solicitor before signing the contract. The consequences of not “getting it right” can be expensive.

Robert Lindsay is a Director at Mullane & Lindsay, and practises extensively in Commercial Law, Property Law and Wills & Estate Planning. If you require any assistance in this area please contact Robert Lindsay to arrange a consultation or contact our Newcastle office.

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