All Topics / Legal & Accounting / SMSF Investment in development and minimum?

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  • Profile photo of JHACJHAC
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    @jhac
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    Might get laughed at and maybe a similar question has been asked before but new to the site so here goes! 

    Any thoughts on investing $50k from a SMSF via, I am guessing, a unit trust into a syndicate or similar for the purposes of obtaining a small percentage in a small-medium development. Is this legal/possible?

    I understand there are fees to setup and compliance for the structures ongoing and not viable longer term but I am hoping the fees over a 2-3 year period may be significantly outweighed by the return over the same period.

    It’s only a small amount so I am more than happy to take a calculated risk on an opportunity that may yield a higher return and also provide valued exposure to the inner workings of the development process and network/contacts for possible future investments outside of super.

    Profile photo of TheFinanceShopTheFinanceShop
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    Hi Mate,

    Lots of things to note so I will do it in bullet format:

    1. You can invest via SMSF in property with $50k

    2. You need at least 20% plus government charges as a deposit so with a deposit of $50k you will be looking at a purchase of $210,000.

    3. You will need to set aside around $2k-3k in set up fees for the SMSF entities

    4. You will be up for around $2k in set up fees for the loan itself

    5. The security must be accpetable for the lender – in other words forget about buying in the middle of nowhere or a fire damaged house.

    6. You cannot borrow funds to renovate but you can use your own funds.

    7. No you cannot do a syndicate as you have mentioned above.

    There are about another 100 points but its is hopefully a good kick start. 

    SMSF is not overly complex but if you are going to take it seriously engage professionals. I consistently deal with accountants that stuff up the set up of the entities. 

    Regards

    Shahin

    TheFinanceShop | Elite Property Finance
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    Profile photo of JHACJHAC
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    @jhac
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    thanks Shahin and yes good kickstart,

    i wasnt planning on buying something in SMSF myself unless that is my only option.  i was hoping that i can find a "developer" and invest with them via an appropriate structure. 

    if i could borrow great but was thinking of just throwing the cash in a small project somehow, preferably in SEQ, as i would rather have some fun with it then leave it in main stream managed funds/shares/REITs.

    looking for suggestions to do something with this money in a "speculative" calculated way? 

    Profile photo of TerrywTerryw
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    @terryw
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    It could be possible.

    Reg 13.22C SIS regs

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of Richard TaylorRichard Taylor
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    Look hate to ever correct anyone who has responded to a post but just to clarify Yes you can invest in a Unit Trust or syndicate that in turns invests in a development etc.

    Has to be done correctly but can be done.

    Also in regards to the annual compliance cost of running a SMSF this needs to be outweighed by the Annual management costs of your Retail fund as well as the increased annual return you can expect to receive.

    Cheers

    Yours in Finance

    Richard Taylor | Mortgage Broker helping investors build their wealth thru property
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    Profile photo of Jacqui MiddletonJacqui Middleton
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    To clarify, your SMSF cannot borrow to renovate…. from anywhere.  A SMSF can renovate if it has enough spare money in the SMSF bank account to do the renovation without borrowing.  Alternatively you could donate your own money into the SMSF to do the reno but then you cannot take it back out because that would be a loan, and a SMSF is not permitted to do a reno with borrowed monies.

    Jacqui Middleton | Middleton Buyers Advocates
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    VIC Buyers' Agents for investors, home buyers & SMSFs.

    Profile photo of JHACJHAC
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    @jhac
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    thank you for your replies, very interesting.

    So apart from most likely paying for some advice (sounds like i need a new accountant) i have to find find an opportunity that i believe will outweigh the difference between setup and compliance costs and that of my retail fund.

    Any suggestions for local reputable developers in SEQ ( i am on the Gold Coast) that may be consider such a deal and require some cash to get a project over the line??

    Profile photo of grimnargrimnar
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    Not to hijack this post, but if you wanted to do a development under your own name or some other structure for which you are the director or beneficiary, can your smsf invest in that trust or even just lend money to it or yourself at a particular rate of interest?

    i guess what I am looking at here would be if you wanted to secure a deal outside of your super fund but use its capital to fund deposits or whatever… and return it a profit to the super fund too.

    Profile photo of TerrywTerryw
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    Your SMSF cannot lend to a member or an associate of a member. s71 SIS Act.

    However, there is a new product on the market which allows a person or an associate to indirectly borrow money from a managed fund which comprises super money. This fund lends the money out and takes a second mortgage behind a 1st mortgage of 80% with a total borrowing up to 95%. No LMI involved. They wouldn't do a development loan though.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of JHACJHAC
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    @jhac
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    Richard – Already registered for the prop know how club so should catch up with nigel at some point. Cheers. 

    hijack away grimnar … Good question also.

    terryw – might have to chase you for more info on that new product but ideally I am trying to figure out how I can be involved in a development with a SMSF in some form.  

    Have another question to add to the scenario –  

    Can I invest along side my SMSF personally (or even via another entity) in a unit trust or company "investing" in a development which I, in total own less than 50%? And no other related parties or family are involved?

    Profile photo of TerrywTerryw
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    Your smsf can own units in a unit trust or shares in a company. see SIS reg 13.22C. But any property owned by the trustee of that trust cannot be mortgaged or charged in anyway.

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of wilko1wilko1
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    I know i posted this on another post but as this is also similar i thought i would pose the question on here as well to see the responses

    How do the ato treat SMSF buying a property outright in cash and subdividing. ie (corner block). No borrowings at all.

    Is this allowed?

    Or for example

    making a one off contribution of 150,000 (non cons limit 2012/2013), the contribution would come from a LOC against another asset not owned by smsf. total funds in cash then used to buy and subdivide a property whilst renting existing house

    Or

    Taking a LOC (approximately 150k) against another asset not owned by smsf and creating a ungeared unit trust.

    Then making concessional contributions each year to slowly purchase those units off the individual thus repaying the LOC but after tax of 15 % concession.

    and i guess finally do you have any advice on is it possible to get a limited recourse loan on a property that has been owned outright in a Superfund. Or can this only be done at the time of purchase.

    Profile photo of Jacqui MiddletonJacqui Middleton
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    Terryw wrote:
    It could be possible.

    Reg 13.22C SIS regs

    Oh wow very nice. Thanks for sharing Terry – I will take a peek at it! :-)

    Jacqui Middleton | Middleton Buyers Advocates
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    Profile photo of TerrywTerryw
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    Wilko, a trustee of a SMSF cannot borrow money, s67. But s67A allows a trustee to borrow money (wtf?) by introducing an exception. This is to acquire a single acquireable asset.

    (incidently you know when legislation has been amended when the numbering jumps out of sync and letters have been inserted such as s67 then s67A s67B etc?

    So with your LOC how are you going to get than into the SMSF? Loan or contribution?

    If there was no loan then sub-division would be possible I think.

    Another possibility is a JV with a SMSF. Buying Tenants in Common 50/50 with a SMSF

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of wilko1wilko1
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    Well I was thinking it would have to be a contribution not a loan. Because the loan even from myself would mean that any property with a loan in smsf has to be a single asset etc.  As after the contribution the smsf could purchase subdivide entirely with cash. 

    Profile photo of wilko1wilko1
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    Is there A reason why you suggested 50:50 as the ratio of TIC or was it just a example. 

    Profile photo of TerrywTerryw
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    @terryw
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    50/50 was just an example. Could be other amounts.

    It may also be possible to lend the SMSF money unsecured.

    or Have a unit trust set up and then you own some units and SMSF own the other. You could lend money to a bare trust of the SMSF and a charge could be taken over the units.Very

    complexx and you will need to spend a fair but on advice

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
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    Profile photo of Anthony KAnthony K
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    @anthony-k
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    Hi again All

    Sorry I have been away and not contributing. Just busy. here are some ideas and comments for your forum from Anthony K.

    Response to Property Investors

    Problem = Property Development under SMSF.

    Response 1. JHAC with $50K in SMSF – Thinking of Syndicate for the development.

    Here are my suggestions and comments.

    Suggestion 1. Think about getting 3 SMSF partners with $50K or more for a single SMSF syndicate with a Corporate Trustee. With 4 Directors and shareholders correctly arranged.

    Response 4.

    Jacqui, a SMSF cant borrow to renovate but use own cash

    Yes but the correct term is: “can repair or pay expenses of acquiring the asset but not to “improve” the Acquirable Asset (AA)

    S67A deals with a single AA,

    S67B deals with more than one AA’s which are identical like a tranches of shares of the same class in the same company.

    S67B cannot apply to a number of properties which are SIMILAR such as units in the same block unless they are on one title when they come under S67A.

    If you want to buy a number of units whether in a single block or more than one, then each is a single acquirable asset under S67A with a separate loan and Bare trust documentation.

    Response 5. Terry’s cryptic “It could be possible”13.22C”

    Note there are 4 sub-sections in SIS Regulation 13.3A which apply, and they are:

    13.22A Definitions

    13.22B, only applies to events prior to 7:30 12th May 1998

    13.22C  which applies only to events after 28th June 2000

    and 13.22D.sets out the various events which cause a SMSF breach.

    10 Terry W SMSF cant lend to associate or member  S71 SISA

    SMSF lending to members or related persons or similar other access is prohibited under S65 of SISA.

    There are 2 sections in SISA are numbered S71.

    S71 of Sub-division C of SISA, –  In House Assets and

    S71 of Sub-division D of SISA,  – the Transitional  Provisions (Grandfathering) which applied to a SMSF + Unit Trust established before 7:30 12th May 1998 and ended on 30th June 2009.

    However we still use 1997 SMSF + Unit Trusts where there use and circumstances can be appropriate.

    Response 12 Terry W

    Your smsf can own units in a unit trust or shares in a company. see SIS reg 13.22C.

    But any property owned by the trustee of that trust cannot be mortgaged or charged in anyway. –

    You would need to study S71 of Sub-division C of SISA, –  In House Assets, and the anti-avoidance provisions in that section, also

    SISR 13.3A, SISR 13.22C and D

    SISA Sections

    S52, S62, S65, S70, S109 and

    SISA S173, Special Income and

    ITAA 1936 S102 Public Trading Trust

    Response 14. Wilko, a trustee of a SMSF cannot borrow money, s67.

    But s67A allows a trustee to borrow money (wtf?) by introducing an exception. This is to acquire a single acquireable asset.

    (incidently you know when legislation has been amended when the numbering jumps out of sync and letters have been inserted such as s67 then s67A s67B etc?

    Wilko – There are actually 8 major subsections in S67 of SISA.

    S67(1) Prohibits Borrowing

    S67(2),(3) are old exceptions from 1993

    S67(4A) was introduced in Sept 2007 as the new SMSF Borrowing section and was amended in June/July 2010 when it became S67A for a single asset and S67B for multiple identical assets.

    Also Terry:

    A JV is a Joint Venture but a JV is neither the same as a Partnership or Tenants In Common, they are each separate and distinct in establishment, operation and in nature and liabilities.

    Most importantly only “Tenants In Common” is mentioned and sanctioned in SISA.

    Anthony K @ A4Companies

    Profile photo of Anthony KAnthony K
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    @anthony-k
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    Hi All

    Just noticed a small typo when I checked  my previous notes on 3/03/2013 reproduced below:.

    You would need to study S71 of Sub-division C of SISA, –  In House Assets, and the anti-avoidance provisions in that section, also

    SISR 13.3A, SISR 13.22C and D

    SISA Sections

    S52, S62, S65, S70, S109 and

    IT IS HERE

    SISA S173, Special Income and

    ITAA 1936 S102 Public Trading Trust

    AND SHOULD BE AS BELOW

    ITAA 1936 S173, Special Income and

    ITAA 1936 S102 Public Trading Trust

    Will try to better in future

    Regards to All

    Anthony K

    Profile photo of TerrywTerryw
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    @terryw
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    Anthony K wrote:
    Hi All

    Just noticed a small typo when I checked  my previous notes on 3/03/2013 reproduced below:.

    You would need to study S71 of Sub-division C of SISA, –  In House Assets, and the anti-avoidance provisions in that section, also

    SISR 13.3A, SISR 13.22C and D

    SISA Sections

    S52, S62, S65, S70, S109 and

    IT IS HERE

    SISA S173, Special Income and

    ITAA 1936 S102 Public Trading Trust

    AND SHOULD BE AS BELOW

    ITAA 1936 S173, Special Income and

    ITAA 1936 S102 Public Trading Trust

    Will try to better in future

    Regards to All

    Anthony K

    Hi ANthony,

    I am just now looking at the legislation you have cited about. Are you sure you have the ITAA sections correct?
    s102 related to revocable trusts
    http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s102.html
    and s 173 seems to be irrelevant to this discussion
    http://www.austlii.edu.au/au/legis/cth/consol_act/itaa1936240/s173.html

    Thanks

    Terryw | Structuring Lawyers Pty Ltd / Loan Structuring Pty Ltd
    https://terryw.com.au/
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