Purchasing Property Through Your Smsf
Royale Capital specializes in helping our Private Wealth members use their SMSF to leverage the purchase of property.
On September 24, 2007 amendments were made to the Superannuation Industry Act which made it possible for Self Managed Superannuation Funds (SMSFs) to borrow money for the purchase of an asset in your SMSF fund in this case, the purchase of real estate. The borrowing is undertaken through an Installment Warrant.
Property can be residential, commercial or retail and your SMSF can even develop that property.
The benefits of using SMSF to purchase real estate are many. Your SMSF can acquire property worth more than its available funds through the benefits of what is known as gearing.
Gearing, also known as Gearing Ratio and Net Gearing Ratio is a general term describing a financial ratio that compares some form of owner's equity (or capital) to borrowed funds. Gearing is a measure of financial leverage, demonstrating the degree to which a firm's activities are funded by owner's funds versus creditor's funds.
One of the things that makes purchasing property through your SMSF so attractive is that your SMSF assets are secure as the lender does not have access to your SMSF's other assets in the event of default; your SMSF receives all income and capital growth even if the property has not been paid off; your SMSF can use income from the property to help pay off the loan; and all interest expense may be claimed as tax deductions by the SMSF and potentially reduce your SMSF's tax liability.
When considering purchasing there are a number of requirements you must be aware of. As with all SMSF issues, Royale Capital team of trusted professional consultants can help guide you through the muddy waters of this transaction.
It is important to understand the SMSF can only purchase property from an unrelated party. In other words, purchases of property must be at arms-length. The SMSF cannot purchase property owned by one of its members or related parties.
Related parties include all members and associates of a fund, employers and their associates. The definition of associates includes: all relatives of each member; business partners of each member; and any spouse or child of business partners; and any company or trust controlled by a member or associate. When in doubt, consult with your Royale Capital advisor.
Any investment in property must be consistent with your SMSF investment strategy; the property is held in trust for the SMSF which is entitles to its income; and your SMSF makes the loan repayments. After the loan is repaid the legal ownership of the property is transferred to the SMSF.
This of course is merely a general overview of the benefits of purchasing property through your SMSF. Professional advice is recommended and this is where the wealth building experts at Royale Capital can help.
by: Jason Burrows