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Can I use my super to buy a farm

SMSF are beneficial for so many reasons including control, choice, flexibility and a concessional tax rate. There are many strategies available to SMSFs including buying residential and commercial property. However a lesser known strategy is that a SMSF can buy a farm and lease it back to your business.

The “farm” strategy is much like many doctors, dentists, lawyers and accountants who purchase an office in their SMSF and lease the property to a related business. This strategy is viable when the property being purchased or transferred into a SMSF satisfies the definition of Business Real Property.

What is Business Real Property (“BRP”) and does it include a farm?

BRP means land and buildings used exclusively for a business, even if there is a farmhouse or residential property on title – which must be less than two hectares. If the farm is already owned by the members, the transfer must occur at fair market value which can be determined by an independent valuer.

It is important to obtain advice to ensure the purchase/ transfer complies with Superannuation Law. 

SMSFR 2012/1

What do I need to do to purchase/ transfer a farm in a SMSF?

  1. If you want to buy or transfer a farm, you will need to establish an SMSF. Once established and funds are rolled over or contributed to the fund, the fund can acquire the farmland and then lease the farm back to the farmer or farming business. Importantly, if the farming business is related, then the transaction must occur at “arms length”. The following must occur:
  2. There must be a lease agreement in place detailing the parties to the lease i.e. SMSF/ Bare Trustee if loan in place
  3. The rent must be consistent with a market appraisal or independent valuation of the property. Best practice is to obtain two appraisals and choose a reasonable median for the lease
  4. The lease agreement should detail frequency of payments and the payments from the lessee must be paid to the SMSF in accordance with the lease agreement
  5. All agreements/ appraisals must be included on file to support “arms length”

SMSF loans and farms

Farms will generally be considered a commercial security and depending on the size and geographic location of the property, financing the purchase through a SMSF loan may be complex, due the fact that SMSF lenders are shrinking by the day and the fact that only non bank lenders offer commercial SMSF loans in the market.

As we know, a SMSF loan or limited recourse borrowing arrangements is where a lenders right to recover a outstanding mortgage debt is limited to the specific asset – in this case – the farm. The lender has no rights to your superannuation held in the SMSF, however will obtain a personal guarantee from the members.

Unfortunately as a result of the Royal Commission and the pending change of Federal Government where the Labor government has stated their intention to ban SMSF loans, we have been left with only a handful of non-bank lenders who will entertain SMSF Commercial Loans.

For example, La Trobe financial will offer a 70% LVR on SMSF commercial loans however the LVR is subject to servicing and also the location and size of the property. If the property is in a rural location and say 900 acres, you may see the lender not having the appetite for such a security and if they did, may limit the LVR on the property which may affect your funding for the property purchase/ transfer. Its important to seek specialist SMSF credit advice on the transaction before proceeding.

A key point to keep in mind with all SMSF purchases is that under a LRBA, the single acquirable asset principle applies, that is the loan is for one asset and the property must be on one title. Multiple titles will result in additional costs as a separate loan and bare trust applies for each title.

Legal advice/ review of the contract is imperative for all SMSF purchases to ensure the single title is confirmed prior to proceeding with an unconditional offer.

Can I use Related Party Loan to buy a farm? 

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 Now we are talking – I personally am a fan of related party loans and hold these myself. If a lender is not feasible for you – based on rate or product, you may consider a related party loan.This may be particularly beneficial for SMSF Commercial Property due to the excessive rates charged by SMSF lenders at the current time.

It is important to seek advice prior to entering into a related party loan agreement, however you have the ability to borrow against non-super assets or your personal home (i.e. equity) and on-lend to the SMSF. There is a standard released by the ATO detailing the requirements of the loan. 

For example, I plan to buy a property for $500,000. I plan to borrow 70% of the purchase price of the property. I choose to borrow off myself for the reason that either I do not satisfy the SMSF lenders criteria or a prefer to borrow off myself.

Prior to settlement, you will require a loan of $350,000 from either your own funds (i.e. cash on hand) or your equity in property. In addition to the deposit on the property being paid from the super fund, the loan will be made to the SMSF. The maximum LVR will be 70% or $350,000. The remainder of funds will be sourced from the current SMSF liquid assets. The following will need to apply:

  1. Loan agreement to be drafted detailing the loan to be signed and executed by all parties
  2. Interest rate of 5.85% Principle and Interest to apply to be paid monthly from the SMSF to the lender
  3. The interest rate can be fixed or variable
  4. The loan term should be a maximum of 15 years
  5. A Registered mortgage over the property is required

The above will apply to both residential and commercial property 

In this example, say you are paying a home loan off at 4% comparison rate, and the SMSF is paying you 5.85% P & I, the SMSF will pay interest from the SMSF to you or your offset account. This actually exceeds the payment you are making on your 4% comparison rate on your home loan.

This is a clear example of the benefits of a related party loan as opposed to a SMSF loan from a bank. There are no hefty application fee, no legal fees which is a saving in establishment fees of up to $5000. Further, many lenders charge a monthly fee – which adds up over the period of the loan.

For those uncertain about the future of SMSF loans, it may be prudent to consider your ability to use a related party loan, particularly in the event SMSF Loans are removed or banks stop offering SMSF loans altogether.

This will certainly, take the power away from the lenders (to an extent) and enable you to provide yourself with a plan B in the event you are unable to obtain a SMSF loan. In the meantime, we will watch closely with the federal election nearing as with a high probability of change of Government – time is running out for SMSF Loans.

What else do we need to consider?

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It is important that your SMSF Deed is up to date with current regulations and if you are borrowing, has the necessary powers to enable you to borrow to buy property.

Further, it is important to update your investment strategy for the purchase of commercial property and include consideration of borrowing and diversification of assets.

SMSFs can be used for many strategies for property investors, and buying a farm in a SMSF is definitely a favourite of ours. We have seen many SMSFs bringing the dream into reality by purchasing or transferring a farm to their SMSF, living in the farm house and being able to lease the land to a related business.

Ivan Filipovic is a leading SMSF Specialist Advisor with Redwood. Ivan is a Self Managed Superannuation Specialist with over 20 years provides a range of services across all sectors of Self Managed Superannuation, Property and Finance with an emphasis on long term wealth strategies. Ivan is a Chartered Accountant, Financial Planner,  ASIC registered auditor, Mortgage Broker, Tax Agent and Licensed Property Professional.  

 

 

Disclaimer – The content has been prepared by Redwood Wealth Pty Ltd & Redwood Advisory Pty Ltd without taking account of the objectives, financial situation or needs of a particular individual and does not constitute financial product advice. This article should not be considered personal financial advice as it is intended to provide factual information only. 
Ivan Filipovic is an authorised representative of First Mutual (AFSL 423710). Redwood Wealth is a Corporate Authorised Representative of First Mutual (1244359)

 

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AUTHOR

Ivan Filipovic

Ivan Filipovic is an experienced, independent Property, SMSF and Finance Expert and the founder of Redwood Advisory. Ivan has been educating and coaching investors for over 15 years and has built a successful property portfolio with a number of positive geared properties across Australia.  Ivan provides valuable and honest guidance by educating Australians on how to invest successfully protect yourself with knowledge, contact Ivan today for a complimentary consultation on 1300 790 110 or email ivan@redwoodadvisory.com.au

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