Key takeaways
- The order of steps matters: the structure must be in place before the contract is signed.
- Finance comes first, as fewer lenders offer SMSF loans and terms are tighter.
- The bare trust and holding entity must exist before you commit to buy.
- The contract must be signed in the correct name, then settlement and ongoing compliance follow.
Buying property in an SMSF with a limited recourse borrowing arrangement is very sequence-dependent. Each step has to happen in the right order, because doing them out of order, especially signing the contract before the structure exists, can break the arrangement and create extra duty or tax.
1. Strategy and advice
Start by confirming the purchase fits the fund's investment strategy and cash flow, including loan repayments and the fund's other liabilities. This is the step that decides whether to proceed at all.
2. Arrange finance
Fewer lenders offer SMSF loans than personal loans, and they typically require a larger deposit and tighter terms. Get finance pre-approval before house hunting, so you know your borrowing capacity and the lender's conditions. If borrowing from a related party instead, set the loan on arm's length terms.
3. Establish the structure
Set up the bare trust and its holding trustee before you commit to buy. This is the part that allows the borrowing to be limited recourse, and it must exist before the contract.
4. Sign the contract correctly
The purchase contract must be signed in the correct name, generally the holding trustee as trustee for the bare trust. Signing in the wrong name is one of the most common and costly mistakes, so confirm the exact wording with your adviser and the lawyer before signing.
5. Settlement
At settlement the loan is drawn down, the fund contributes its share, and the property is acquired and held in the bare trust. The lender registers its security over the property.
6. Ongoing compliance
After settlement, the fund receives the rent, makes the loan repayments, and meets the property's costs from the fund's account. The arrangement is reviewed each year as part of the fund's audit, and the property is valued at market value for the accounts. Because every step carries a compliance edge, this is an area to walk through with professionals rather than attempt alone.
Frequently asked questions
- Why does the order of steps matter so much?
- Because the structure must exist before you buy. If the bare trust is not set up, or the contract is signed in the wrong name, the limited recourse borrowing arrangement can fail, triggering extra stamp duty or tax.
- Is it harder to get a loan for an SMSF?
- Generally yes. Fewer lenders offer SMSF loans, and they usually require a larger deposit and apply tighter terms than a personal loan. That is why arranging finance early in the process is important.
- Whose name does the contract go in?
- Generally the holding (bare) trustee, as trustee for the bare trust, not the SMSF directly. The exact wording is critical, so confirm it with your adviser and conveyancer before signing anything.
