A SMSF can purchase property as an investment. If the property purchased is residential, it can not be lived in by the members or any relative of the members of the fund. If the property purchased is commercial, it can be rented to business owned by the members, so long as the commercial property is used by the business as its premises.

A SMSF can only purchase property outright, as a SMSF is unable to borrow, except under a limited recourse borrowing arrangement.

A limited recourse borrowing arrangement involves setting up a separate legal trust entity known as a bare trust, which will have its own separate corporate trustee. The property is purchased in the name of the bare trust. The bare trust holds the property in trust for the SMSF until the loan is fully repaid.

Main points of a Limited recourse borrowing arrangement:

  • A bare trust must be setup in order to borrow and purchase the property
  • The bare trust only holds the title of the property and is not to be used for any other purpose.
  • The asset purchased must be a single acquirable asset or a collection of identical assets that have the same market value (such as a parcel of shares in the same company).
  • The bank will most likely as for a personal guarantee over the property, this is due to the limited recourse nature of the loan, the bank only has recourse over the property owned in the bare trust, but none of the other assets of the fund itself.
  • If purchasing more than one property through borrowing, an additional bare trust will need to be created. A bare trust can only own one property.
  • Generally the banks will only offer a maximum Loan to Valuation Ratio of 80% for residential property and 70% for commercial property.
  • You may be able to avoid providing a guarantee from the trustees if the LVR is lower.
  • All transactions are paid for by the SMSF, the bare trust and its corporate trustee are only legal entities for holding the asset (property).
  • The compliance costs for such an arrangement usually involve a one off fee to setup the required structure. The compliance may also be higher going forward as property held in the SMSF will require periodic title searches and valuations to be conducted.
  • The trustee of the SMSF is able to loan money to the fund for this arrangement, however it will be required to be at arm’s length to avoid falling foul of the in-house asset rules.
  • The SMSF Trust deed will need to allow for this structure.

The arrangement comes to an end once the loan is paid off. Once the loan is completely paid off the property title is transferred from the bare trust into the SMSF. This does not incur any stamp duty as there is no change to the beneficial owner of the property.

More from the ATO regarding Limited Recourse Borrowing Arrangements.