Ms Wang used the example of Bob and Barbara, who had purchased an off-the-plan apartment that had dropped in value since signing their contract of sale, and wanted to complete the purchase using an LRBA through an SMSF as they could no longer secure enough finance through their bank to afford the purchase price.

“Before Bob and Barbara’s SMSF starts making investments, it must have an investment strategy,” she said.

“Bob and Barbara will need to ensure that the acquisition of the property through their SMSF is in line with the investment strategy of their SMSF and that it reflects the purpose and circumstances of their SMSF. The strategy needs to be reviewed regularly.”

Ms Wang added that Bob and Barbara would also need to set aside funds in addition to their LRBA to set up the self-managed fund.

“In order for Bob and Barbara to establish their SMSF, assets must be set aside for the benefit of members,” she said.

“A nominal contribution amount — for example, $10 — must be allocated to at least one member of the fund. Bob and Barbara, as directors of the corporate trustee, will also need to open a bank account in their SMSF’s name once the trust deed has been signed.”

Ms Wang said the newly established SMSF could also be in danger of breaching the sole purpose test, given it was being used to fund a personal property purchase for the couple, meaning the fund would need to carefully justify its reasons for such an investment.

“The [sole purpose] test requires that a fund only be used for members’ retirement. Getting a member out of a financial hole is not part of that purpose,” she said.

“So, the investment strategy is again crucial in documenting the likely retirement benefits for the members that would flow and the goal of maximising the efficacy of their retirement planning.”

Given the property in this example had already been purchased, Bob and Barbara would also need to rescind their previous contract of sale and execute a new one with the SMSF trustee as the purchaser of the property, Ms Wang said.

“The new contract should be signed after the trust deed has been signed, the fund’s bank account has been opened and the rescission documents have been prepared,” she said.

“As Bob and Barbara have already paid the deposit, they will also need to seek a refund from the vendor for the deposit, and the SMSF will then be required to pay the deposit from its bank account.

“This is because in order to apply for concessional stamp duty on the bare trust deed, the SMSF must be able to provide and satisfy the local duties office that the SMSF or its lender provided all the money to acquire the property, including the deposit and the balance of the property paid at settlement.”