Medical professionals have been using their super to invest in property for years
by Steven Enticott
When most people think about acquiring property in their super fund, they assume that the only way to do it is via limited recourse borrowing arrangements (LRBAs), a brittle and unyielding arrangement that self-managed super funds have been using to acquire property since 2007.
They are wrong.
Investors who wish to purchase property actually have other options available to them apart from LRBAs through structures known as geared and ungeared unit trusts, which have been especially popular among medical professionals for many years now.
Like all strategies for SMSFs that have a degree of complexity, there are conditions that must be met but these hurdles can be surmounted with some professional advice.
For a geared unit trust, it involves SMSF parties purchasing units in a unit trust that has borrowed to purchase a property. The big condition, however, is that the purchasing SMSFs are only permitted to buy and hold those units when one SMSF does not have control over the entire unit trust.
In other words, as long as you or a family member, associate or business partner owns 50 per cent or less of the units then you do not meet the definition of having control – investing in the geared unit trust by your SMSF is permitted.
The big benefits start with unit trust loans and structures often being much more straightforward than your average LRBA. Simpler means cheaper. These types of loans also save you the hassle (and potential cost) on the transfer of the title back to your super fund when an LRBA is repaid. It is also easier to transfer units in a unit trust than it is to transfer titles if someone wants to buy in or sell out – often with stamp duty savings – especially with minor shifts in the ownership.
Let's look at a basic example of how a geared unit trust might work.
Peter, Andrew and Judy are all great friends. They are not in business with each other in any way, nor are they related or associated to each other in any way other than their friendship, similar careers and investment horizons.
They all have their own SMSFs and have found an investment property they would like to buy using their separate funds. The value of the property is $500,000, including all buying costs.
They have set up a unit trust to purchase this property with a loan from a bank to the unit trust of $290,000 and the other $210,000 to fund the purchase is raised from issuing 210,000 $1 units and their SMSFs contribute the $70,000 each to purchase those issued units.
Keeping it even simpler, if gearing is not required then the total capital for the purchase can be raised through the issuance of units to Peter, Andrew and Judy's SMSFs.
However, if some parties require gearing and some don't, those that do can individually use an LRBA arrangement to buy units in the trust while the others can purchase them outright in their SMSF or in any other entity or individual's name outside of an SMSF.
Let's extend this example to a group of doctors looking to buy their practice premises. They buy a building valued at $2 million, including all costs, using a unit trust. The senior partner has a substantial superannuation balance and uses $1.2 million to take 60 per cent of the units on offer. As this is a non-geared unit trust purchased with cash, having control of the trust is not an issue.
The senior partner was also interested in retaining key staff and offered his colleagues the remaining 40 per cent of the units. They all sought independent advice on the proposal. The junior partner took 20 per cent of the units while two younger medical professionals took 10 per cent each.
The junior partner bought $400,000 worth of units with her SMSF fund balance in the same way the senior partner did, as she had significant savings. However, the two younger members of the practice did not have the $200,000 in their SMSFs.
One decided to borrow $200,000 to buy their units outside of superannuation in a family trust. While the other wanted to keep 10 per cent in their SMSF and used $100,000 of cash in their SMSF to purchase their units, they took out a third-party LRBA loan (using equity in their home) to fund the other $100,000 worth of units, equating to a 50 per cent loan to value ratio.
The 50 per cent was within the safe-harbour provisions set for LRBA arrangements from third parties in the Tax Office guidelines so they did so safely.
Of course, it's critical that before any lending arrangement is considered an SMSF must get solid advice from someone who can evaluate the proposal and consider all the options, as there are always other ways.