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Are you going to purchase a property in your SMSF?

If so, there are some pitfalls to avoid. Of course, seek out professional advice and talk to as many people as possible including accountants, financial advisers and of course your property manager.

Firstly there is the question of how much debt the fund can afford and is it worth the interest payments against the capital growth of the property. According to the tax department, your self-managed super fund can only borrow money to purchase a property including all acquisition costs, along with the ongoing repairs and maintenance of the property. In addition the borrowed funds may be used to capitalize interest.

However, be aware you cannot use borrow funds to improve the property such as extensions, however cosmetic renovations are allowed such as painting.

Secondly be very careful if you are using your own external funds to help purchase the property as a non-concessional contribution. This would mean you cannot access these funds until retirement. Again, the correct course is to lend the funds to your SMSF which then allows its release if you refinance the property at a later date. Talk to your accountant about the correct loan agreement to apply, as many will require fixed repayments at the current market interest rates.

Thirdly, to work within the rules governing the use of borrowed money, it is incumbent on the trustee to keep accurate records of where borrowed money is spent. As said earlier, renovations are not approved, however you may restore rooms or surfaces to their original conditions. This means for example, a bathroom or kitchen can be refurbished and renewed to its previous state, but cannot be improved. Improved would include such things as new additions or increased room such as bench space. This of course can be remedied by separate invoices from the tradespeople using external funds for the improvements or the renovations.

Fourthly, a common mistake is made when the debt of the property is paid down and must be transferred back to the SMSF. Some states will charge stamp duty at the full rate. Again, your accountant can avoid this trap by additional documentation at the time of purchase.

Fifthly, as you most probably will know, the fund cannot purchase a residential property from a member or related member of the fund. However, it may purchase listed shares or commercial property off a member. Beware the capital gains and stamp duty consequences of such a move.

Lastly, a common mistake some funds make is to pay down debt upon a payout from life insurance benefit. Whilst it is true that premiums within the fund are tax deductible, there can be serious tax consequences if the original wording of the fund is not correct.

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