It is vital for those with a self-managed super fund (SMSF) to carry out all the necessary checks before purchasing a property in their SMSF, especially when 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 to 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. The amount available for purchase under the borrowing also needs to be determined.
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
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 SMSFs can incur significant financial difficulties if a member becomes disabled.
