In September 2007 there were changes made to the Superannuation Industry (Supervision) Act 1993 (SIS Act) which allowed Self Managed Superannuation Funds (SMSF’s) to borrow to acquire property.

 However there are strict rules and limitations that apply which are outlined below.

For SMSF trustees who would like to include geared real estate in their super fund’s investment portfolio it is now possible to consider this option.

These changes were introduced mainly to allow funds to invest in installment warrants with the provisions broadly drafted to allow the fund to invest in an asset such as property including business and residential properties.

The basic features of this arrangement are as follows:

1. Money is borrowed to buy an investment asset (by an SMSF)
2. Asset must be held on trust for the SMSF (i.e. a security trust)
3. Rights of the lender against the SMSF for defaulting are limited to the asset.
4. Property is rented out and rents paid direct to the SMSF.
5. The SMSF makes loan repayments to the lender and otherwise pays all other payments in relation to the property.
6. When the mortgage is paid out, the property can be retained by the trust or transferred to the SMSF which may be CGT, GST Free and Stamp Duty free.
7. If the property is a residential property it can only be leased at arms length to non-related parties.

The SMSF must and should have sufficient cash flow in the future to fund for loan and/or interest payments (e.g. from contributions and/or investment income) in relation to the property.

It is further suggested that a maximum loan to value ratio (LVR) of 60% is recommended. In the example of (say) a property with a value of $600,000 it would require the SMSF to have cash reserves to inject $240,000 in respect to the purchase of the property.

Please note, it is strongly recommended that any proposal to utilise Installment warrants is discussed thoroughly and assessed as to whether it suits your individual requirements and purposes including seeking specialist legal advice.