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Property loans can be tricky
Since September 2007, a do-it-yourself
super fund has been able to borrow to invest in real estate.
An eligible property for a DIY fund to buy with or without, a loan could be
one from which a business is being run.
It could be a shop, a factory, an office or a warehouse. Such a property can
be bought from a business owned by either a fund member or someone related
to a member.
This contrasts with a residential rental property investment.
While a fund can buy such an investment with or without a loan, the super
rules prohibit a related-party transaction.
Your super fund can't buy a residential investment property from a member or
a relative.
But even where a fund can buy a business property from a member, there are
other restrictions that apply to purchases using borrowed money.
These are highlighted by a reader who thinks they are too complicated.
The restriction he focuses on is the requirement to establish a separate
trust in which the property is held while it is being paid off. This
requirement separates the geared property from other super assets.
A
separate trust is an added
expense that can cost several thousand dollars. As well as the cost of the
trust, it needs a trustee that can't be the same as the trustee of the super
fund.
Yet the fund still does everything in relation to the property. It collects
the rent and where there is a loan it pays the interest.
While he understands there needs to be a formal loan agreement because of
security requirements if a fund borrows money from a bank to buy a property,
the reader asks whether it couldn't be simplified if the members instead
lent the fund the money. He and his wife have a business property they'd
like to transfer into their DIY fund.
An extra attraction is the scope to transfer the property tax free under the small business capital gains tax concessions. This would allow each of them
to contribute $450,000 under the rule that allows you to bring forward three
years of non-concessional or after-tax contributions.
But they would still need about $400,000 in the way of the loan to complete
the transfer.
He and his wife are in a position to finance the loan. Furthermore, they
would do it on commercial
terms with the fund paying a
commercial interest rate to them.
They could easily set up a formal loan agreement. Could this be a way to
avoid having to set up the complex
structure of a separate trust? In addition, after three years they could
clear the loan with further non-concessional contributions. |
Specialist superannuation lawyer Daniel Butler of DBA Lawyers says while the
alternative of using a friendly party borrower is possible, the arrangement
still needs to be structured and documented to comply
with borrowing rules.
Aspects of the borrowing rules, like having a separate trust, are a strict
requirement under the super rules. If a friendly party loan is involved,
there must be clear evidence the arrangement is at arm's length. There are
other rules, such as the property being a
single asset as far as its title is concerned. If there is more than one
title the rules require there is to be more than one loan.
Butler says when buying a commercial property from a member you need to
carefully check the business property test is satisfied when it comes to
items of plant and equipment that are separate from the property, such as an
air-conditioning system.
Only that part of a property that is wholly and exclusively used in a
business can be acquired by a DIY fund without breaching the law.
Butler says you can't avoid the strict
rules that apply to DIY fund borrowing and suggests the costs of setting up
a friendly party loan may not differ materially from that offered by a bank
when the full cost of the exercise is taken into account. He also questions the reader's strategy of
contributing a part interest in the property (the $900,000) in kind and the
fund then purchasing the balance by way of a borrowing arrangement.
This gives rise to a number of practical issues, he says. It may not
be easy
to obtain an arm's length estimate of the loan cost as a bank will generally
be reluctant to provide finance on securing part of a title only.
Further, the Australian Taxation
Office may take the view that this is a breach of the borrowing rules as the
$400,000 loan may expose the fund's $900,000 share of the property, which it
owns debt-free.
An alternative is the members borrowing $900,000 to make the necessary
contribution to the super fund and then have the fund buy the property from
the members and borrow the balance.
This is simpler as it involves one
transfer and one borrowing arrangement that allows the loan security to be
placed over the entire asset.
John Wasiliev - The Weekend Australian Financial Review - 26-27 February
2011
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