SMSF Rent to Buy

Hi SMSF Experts

My husband and I are looking to purchase property inside our SMSF before the window potentially closes pending the election result.

Our Broker tells us that due to the fact we are both self-employed and haven't made a contribution in the last 2 years we won't qualify so we looked at a rent to buy option thru a family friend who has an established house they want to sell.

I have had it independently valued and it stacks up and my Solicitor has read thru the Rent to Buy document and tells us there is nothing out of the ordinary in there.

Certainly will still have a nice SMSF cash buffer post-settlement and we are starting to make contributions so this with the rental income easily services the repayments.

Just wanted to know if there is anything in the SMSF legislation stopping us entering into such an arrangement?

Thanks for your help.

Di

 

Setting aside the legislation, will your SMSF have enough to complete the "Buy" part of the transaction if it can't get a loan?

 

Hi Jacqui

Thanks for your reply.

The rental payments are used to reduce the principal and interest is only charged at a nominal rate so with a 20-year term the loan will be repaid in full same as a standard SMSF loan.

Di

 

This is a question for your lawyer or super specialist lawyer. I can't think of anything off the top of my head that would prevent it.

 

@Diana84 - do you intend on living in the house?

@Terry_w - is a "super specialist lawyer" one who is really focused on the profession or one who is a specialist in the field of super?

 

Hi Scott

No intention of living in it whatsoever.

Ok thanks, Terry just trying to find one for a Yes / No answer is appearing difficult.

My Accountant can't see any reason why I can't enter into such an agreement but wanted to check. The SMSF Deed has been changed to allow for such.

Di

 

As a strategy, I am not a big fan of buying property (especially residential) in a SMSF, for a whole stack of reasons.

I know legally one can do it, we did it once but never again. It took time, effort and money for us to extract yourselves.

@Diana84, make sure you are fully aware of all the restrictions before you go ahead.

 

Di

I deal with "many" SMSF properties and have only heard of this in a smsf once or twice. Yep, you are not allowed to live in a smsf property that is Resi - you cannot deal with a related party. For this "rent to buy" agreement, it will need to be SMSF compliant. If not, you are taking an unnecessary risk.

Again, I am no expert on this type of scheme, however, my understanding is that you donot have legal title of the property until the final payment. This could be a breach of SIS as the fund cannot prove legal ownership of the asset. Further, what if after 5 years you miss a payment? does this result in termination of the contract?

For this reason, and the costs of a compliant legal agreement I personally would not touch it.

Otherwise you can simply wait 6 months and make contributions before 30 June and as long your business is making a profit, there will be a possibility for a smsf loan.

This is not legal or financial advice,. I encourage you to seek specialist advice in regards to the above.

Cheers Ivan

 

Even if ALP comes into power, it may be a while before LRBAs are gone for good. Start contributing straight away. SMSFs can get nasty when things go wrong so keep it simple. You can always ask for SMSF specific advice but do it with the help of your lawyer/accountant - Request for SMSF specific advice

 

The person selling may not meet the definition of a Part 8 "associate" but that doesn't mean that the sole purpose test isnt compromised. The sole purpose test is one which the auditor is required to report and it has no threshold tests.

There is also the potential that when the law changes (if it does) that it would apply at a point in time and may preclude earlier agreements such as the rent to buy. It could happen quickly if the ALP act on making a package of prompt changes. eg 30 June 2019. It could even be done immediately by way of a post-election announced policy change with laws that follow. It also possible that even if it didnt change in 12 months there is no certainty a SMSF can fulfil a sale contract and access finance if the rent to buy contract doesnt comply. I dont think it may because the trustee for the bare trust isnt that same party !!! That trustee may not even lawfully exist today.

There is also a loan settlement risk. In the past year more and more lenders have quit this market. This settlement failure could be fatal later if finance isnt available or permitted. I doubt any lender will allow the former rent to buy contract to meet the bare trust requirements.

A recent review of buy to rent didnt look good. Victoria are looking to ban the practice as it doesnt favour buyers in a VERY high proportion of cases. Its often a scam to take disadvantaged peoples money and mislead them.
Ban on vendor term and rent-to-buy transactions to make buying a home fairer for all Victorians - Consumer Action Law Centre

If the SMSF rents a property I question what an investment strategy would be for this proposed acquisition and without legal title at this point. Paying rent produces what result ?? For you to occupy ? Thats a fail. Vacant - Thats a fail. s52 covenant fail v's the financials.

Changing the trust deed wont make it permitted. Who suggested that ? Hmmm maybe thats your out. Sue the lawyer / accountant later. Its like the decision in the APRA v Holloway Decision on SMSFs
Australian Prudential Regulation Authority v Holloway [2000] FCA 579