The critical thing to take note of – what is the sole purpose of the SMSF? It MUST have the purpose of providing benefits to member(s) in retirement. If the sole purpose cannot be established clearly in the context of property investment, then it will be in breach of ATO regulations.
Once the sole purpose is clearly complied with, there are opportunities for SMSF borrowings to buy investment properties.
There are a few key observations that trustees would do well to know:
- The trust deed must have the power to borrow.
- The SMSF investment strategy must allow the purchase of property.
- The property must be held in a separate entity (bare trust), until the debt on the property is fully paid off.
- The loans must have non-recourse arrangements. This would prevent the lender from laying their hands on the SMSF’s other assets should the debt turn bad.
- Proper and correct documentation/records must be maintained. For example, the loan agreement should be in the right party’s name (the bare trust and NOT the SMSF’s name). Careful adherence to stamping of trust deed in loan settlements is required.