Section 67 of the SIS Act was amended on 24 September 2007 in Taxation Laws Amendment (2007) Measures No 4) Act 2007. The amendment to Sec 67 insert the following exceptionthat a trustee of a regulated superannuation fund is not prohibited from borrowing money, or maintaining a borrowing of money, under an arrangement under which:
(a) the money is or has been applied for the acquisition of an asset other than one the trustee is prohibited by this Act or any other law from acquiring; and
The trustee is not prohibited in buying residential or commercial property, public listed shares,managed funds, bonds or fixed interest.However, the trustee of a SMSF cannot purchase residential property from a beneficiary or a related party as specified in Sec 66. Acquiring assets from a related party is in breach of the inhouse asset rules or investment rules of the fund. There are exceptions to the related party rule as found in Sec 66(2) where the trustee of a SMSF can purchase a commercial propertyfrom a member. For instance, the proprietors of a business which owns the premises it occupies may wish to have the business sell the premises to their superannuation fund and lease them back to the business, thereby releasing working capital for the business and providing an income earning and (hopefully) appreciating investment for the superannuation fund.
Other exceptions to Sec 66 are the in specie contribution of a parcel of shares to a SMSF. A member may wish to make contributions to the fund on his or her own behalf by transferringpersonal assets to the fund rather than by making contributions in money form. The assets maywell be things which are within the range of authorised investments and could be considered to be good investments for the fund, such as a life insurance policy or a parcel of shares. These are sometimes called ‘in specie contributions’.
(b) The asset must be held on trust so that the trustee acquires a beneficial interest in the asset; and
(c) The trustee has a right to acquire legal ownership of the asset by making one or more payments after acquiring the beneficial interest;
The asset, or in this case residential, or commercial property, must be held on trust to which the trustee of the SMSF must have a beneficial interest in the ownership of the said property.The trustee of the SMSF has a legal right to acquire the property after making the final payment to the lender. The trustee acquires a beneficial interest by providing a deposit on the purchase of the property to which after the final payment is made on the loan to the lender the property or asset will rollover to the SMSF.
(d) the rights of the lender against the trustee for default on the borrowings, or on the sum of the borrowing and charges related to the borrowings, are limited torights relating to the asset.
The lender rights to recover debt from the SMSF are limited to the asset to which a mortgageor security has been taken. The lender cannot recover any part of the loan or interests charges against other assets of the SMSF. The trustee of the SMSF can only provide security to a lender on a restrictive basis in respect to the asset being purchased.
To set up a SMSF you require a trust deed that complies with the SIS Act. A SMSF can less that 5 members to which each member is a trustee and beneficiary of the fund. Once the fund is set up it requires a tax file number and Australian Business Number. Other registration requirements such as goods and services tax, pay as you go withholding tax depend on the activity of the fund. The SMSF requires it own bank account to which the normal process is to set up a cash management fund so that the SMSF is earning income from superannuation contributions.
The next step is the investment choice. A SMSF must comply with the SIS Act regulations in forming an investment strategy going forward in the fund. The investment strategy can consist of public list shares, bonds, fixed interest, managed funds and direct property (residential or commercial) or property trusts.
To purchase a residential, or commercial investment property with a SMSF, the structure required for this type of transaction is a Bare Trust. A Bare Trust is used as the trustee only holds the property on-trust for the SMSF. The Trustee performs no other task. A corporate trustee is required as the trustee of the SMSF must not be the same person as the trustee of The Bare Trust.
All the transactions occur at the SMSF level where the net rent from the property forms part of the income of the fund. The SMSF repays the principle and interest loan to the lender. On the last payment of the loan the property is rolled over into the SMSF to which no stamp duty or capital gains tax is applicable.
