How would this work in an SMSF?

Assume that I have almost nil knowledge of how SMSFs work. I am not looking for free detailed advice, but just a general indication of which way this could be pursued, or indeed if it can be made to work.

• Person A has about $100k in a regular super fund and perhaps $15k in cash (bank).
  
• They would like to convert that an SMSF and buy some land (e.g. for $450k value) with a view to building on it in perhaps 2 years time (secure the land before it rises too much). The property would then be rented out.
  
• They expect to work for another 10 years, and their current salary is about $90k.
• They have been an Australian citizen for 17 years, and owns two properties (one by themselves, one jointly with a sibling) in Argentina. The RE market there is pretty crap apparently, and even if they were able to be sold, getting the money out of the country is virtually impossible, as I understand it, with the current government.

• People B & C are a couple (B is the daughter of A, if it matters).
  
• They have a combined income of around $200k (something like 120+80)
• They have a house with a personal mortgage
• They have previously purchased a property with their Super (so I assume until confirmed that they must already have an SMSF). That property would have cost well more than their Super fund had, so they must have borrowed against the equity in their home.
• For the moment I assume that their SMSF owned property has no mortgage (because it can't - is that right?)

• Person D will inherit a property likely in the next 2-3 years (their remaining parent is going on 97). This property could be worth $500k, possibly a bit more by then.
  
• Assuming they use the proceeds of the sale of the inherited property to pay off their own personal mortgage (say $250k) they will have about $200k to invest in a couple of years time. When this becomes available it could be used towards the construction on the land purchase above, which would mean they would have to be added to the title.
• Alternatively they may well decide to sell and downsize their current home ( small acreage - now too much work for them) and keep the inherited property as a rental property, against which they could borrow construction funds.
  
• The balance of the construction funds might be borrowed against an existing property, unless a construction loan was possible against house land package owned by the new SMSF.
• It is unlikely that Person D would still be working (currently self-employed, but looking to retire).
• Their home would likely be unencumbered by this point so it could be borrowed against (but they would need some combination of A,B,C to be guarantors to be able to borrow)

Would this be a job for a Unit Trust?
Can it even be made to work?
Can another person (D) be added to the Trust at a later date?

 

How will a smsf buy land and develop this with $115K.? It cannot borrow for this purpose. It would be prohibited. When a smsf borrows to buy property the property cannot be improved, changed or developed using borrowed funds. A SMSF that buys vacant land for future development and without any other major assets would likely have a investment strategy and cashflow issue. Doesnt make sense. Even if held in a unit trust the anual costs will add to this nd its unsure if and who will buy further units to allow progress....

B & C - Who knows ? It could be a limited recourse loan or a ungeared unit trust or even acquired with cash.

A unit trust can issue units to others...Should they or would they want to ?
Not sure how D can borrow with no income.

Its quite vague.

 

Add to this:
Should they even attempt this?

 

Thanks for your reply. So does this part mean that a SMSF can borrow funds to buy a property, but that the property cannot be changed in any way? In other words, it could buy an established dwelling?

If the above is the case, and it is the SMSF that actually borrows the funds, then apart from rental income, how does it meet the repayments? Through contributions from the SMSF owner's salary?

 

The same as with any other borrower - thru its other income. If that is not enough the lenders will not lend.

 

A proprty acquired through a limited course borrowing facility cannot have the "acquirable asset" changed ....it cant be subdivided (then its not same asset etc). You can use cash to renovate, improve etc.. BUT it cant alter the asset aquired. Its a complex area and worthy of you seeking advice in advance. A smsf cant borrow to buy land and also construct on it. The asset is not the same as its now land + dwelling.

What are the SMSF borrowing rules?

A`terry says if a smsf loan isnt self servicing then it wont get approaval. Servicing may conside net rent as well as other smsf income and contributions that can be demonstrated. And a neg gearing loss ist a great idea as it often indicates cashflow burn. Lenders assessments are conservative due to the limited recourse nature and will also consider the effect of cashflow. The SMSF cant later raise funds other than in very limited ways.

 

Ok, thank you both for your replies. I need to do some reading and pass on my research, and the people concerned will need advice from their accountants.

 

Hi Paul,

so provided the funds are coming from excess available from smsf and not from borrowed funds, can renovate if will improve rental returns? How about building a granny flat to also do same as will not change the nature of the property, rather increase the rental appraisal and power of property to generate cashflow?

any links to support would be great

thanks

 

A SMSF can change the asset in some ways and may be limited in other ways if the property was subject to a borrowing. eg adding a GF may or may not be OK. A vacant block of land subject to borrowing with a new dwelling is a good example. It may fail. However adding a GF to a existing house and land may be OK. But efforts to subdivide etc may be a problem as could changes to a property. Even if the house burned down you cant then rebuild a duplex.

Renovation using cash is often OK but shouldnt be assumed However be wary of extensive renovations esp where additional dwellings etc may be added. . Its definately one for sound adviser guidance as the penalties are exceptionally brutal and unforgiving.

Limited recourse borrowing arrangements - questions and answers