3 steps to property gearing in SMSFs
Page 1 of 2
Peter Townsend is the principal of Townsends Business and Corporate Lawyers.
The previous article, 10 top traps to avoid in SMSF gearing, looked at the common mistakes trustees of self-managed superannuation funds (SMSFs) make when it comes to gearing and property. This article will explore three steps to managing your property gearing within your SMSF.
SMSFs acquire residential or commercial properties through a limited recourse borrowing arrangement (LRBA). During the life of an LRBA, a number of issues may require SMSF trustee review.
1. What rent is being charged on the property?
This is crucial for commercial property with a related party tenant. (In-house asset rules would be triggered if a related party tenant occupies or uses a residential property.) The SIS Act (s109) says that, when related parties deal with the fund, it must be at arm's length.
The rent should be no more favourable to the tenant than if the landlord was an unrelated party. An inflated rent above market value will also fail the arm's length test and could result in an assessment that deems contributions are being made to the fund.
2. Refinancing the existing loan
If the SMSF is looking to refinance the loan made to the fund trustee with another financial institution, then many banks require a certificate of compliance. This is a legal review of the transaction documents and a statement from the SMSF's superannuation lawyer that the transaction complies with the SIS Act.
Also, some lenders have a compulsory in-house holding trustee or custodian that an SMSF must use when establishing an LRBA.
If the SMSF's current lender has an in-house holding trustee as part of the LRBA and the SMSF is refinancing with a different lender, that SMSF will need to arrange for a new holding trustee to be established and appointed, since the original bank's in-house holding trustee will no longer be used after the refinance.