It is vital for those with a self- managed super fund (SMSF) to carry out the necessary checks before purchasing a property in their SMSF, especially where borrowing is involved.

Investment strategy

 The SMSF’s investment strategy must be considered. If the purchase of a property  will cause the fund’s other investments to be out of alignment, trustees should consider amending the investment strategy before purchasing a property.

Resources

 Trustees need to consider whether the fund will have the resources to purchase the property. For example, will the SMSF purchase the property using its available resources or would it be wiser to purchase a property of greater value using borrowed funds.

Structure

 Once trustees have decided on the property to be purchased, the next step is to consider the structure in which the property will be owned. For example, SMSF trustees can own the property or organise for their SMSF to own units in a unit trust that will own the property.

Borrowing

 After deciding on the structure in which the SMSF trustee will own the property, the next decision is often whether the fund will enter  into an SMSF limited recourse borrowing arrangement (LRBA). Trustees should determine whether the borrowing will be from a bank, another financial                     institution or a related party. If a related party is loaning the money, trustees must ensure the loan is on commercial terms.

Members purchasing property through debt have several restrictions on their investment under the limited recourse borrowing arrangement (LRBA). To establish a LRBA, a 20-35 per cent deposit is required and enough money to cover stamp duty and legal expenses within the SMSF, or ready to roll over from another super fund.

The fund will be assessed on its borrowing potential based on member’s superannuation contributions and the rental income from the property. Lenders will often require a personal guarantee from the SMSF trustees as the lender can repossess the property if an SMSF cannot meet its repayments.

Management

 Once the SMSF has purchased an asset like property, trustees need to consider what would happen in the event of the death of a member. For example, the property may need to be sold or transferred to beneficiaries. Or, if a surviving spouse is to be the recipient of the death benefits, then the funds could remain in the SMSF to provide a pension to the surviving spouse.

Liquidity

 As property is a large illiquid asset, the fund should have enough cash on hand to pay day-to-day expenses. If the property is the only asset in the SMSF and it is in pension phase, it may not be able to supply a sufficient retirement income to its members.

When determining what would happen in  the event of the death of a member, trustees should also consider other events, such as the disability of a member. Planning for this should take place at the time of purchase, as SMSF’s can incur significant financial difficulites if a member becomes disabled.