Buying an investment property through a self-managed super fund has become a popular way to transact, especially for those who aim to retire in the next decade or so. But seeking professional financial advice before committing to a purchase, plus exemplary attention to detail when it comes to the paperwork, are essential to avoid mistakes that could cost you thousands of dollars in taxes and land you in trouble with the tax office.
If your super-fund can’t stretch to covering the entire purchase price and on-costs, such as stamp duty, you can make up the shortfall with a mortgage. But there are a couple of curly challenges to this.
Firstly, a fund cannot hold a property that is subject to a loan. Instead, the title must move to a holding trust with a corporate trustee. Your accountant will be able to help you set up the necessary structure for this.
A second problem is when you try to pay back into your super fund the monies you’ve used for the purchase. Annual ceilings placed on contributions to super funds make it unlikely you’ll be able to replace the funds and stay within the contribution limits.
A way around this is to issue a loan to your super fund, which could then release the finance. However, there are several conditions attached to this strategy. In most cases, your loan agreement must meet “limited recourse” borrowing requirements, and state all the terms and conditions. Again, your accountant will be able to advise you on the best way to set this up for your personal circumstances and to make sure you stay on the right side of the regulation and it can be a legal and accounting challenge.
A common misconception is that borrowed funds can be used to improve a property bought through your super fund. This is not the case. So, don’t fool yourself that you can add additional accommodation, such as a granny flat, in this way.
You can return a property to its original state using borrowed funds, but if you want to improve it, then cash directly from the fund is required.
It can get tricky to separate the expenses that either restore or enhance a property. You’ll need your builder to issue two separate invoices to cover renovation and improvement. So it would be best to consult your accountant for clear advice before you go down the renovation path too.
There’s also a challenge relating to stamp duty when you’ve borrowed money to buy the property and, therefore, moved it to a holding trust. Once the debt is paid, you’ll have to move the title back to the superannuation fund and it may be subject to stamp duty.
There is a lot to think about, and a few challenges. But with the right professional advice and support it could be the best next step for you.
This information is general only and does not constitute professional advice. You should always seek professional advice concerning your particular circumstances before acting.
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