He continued that additionally, before embarking on purchasing a property for an SMSF, it is also important to review investment and gearing strategies.

“There are a number of names used to describe a loan made to an SMSF, including holding trust deed, custodial deed and bare trust,” he said.

“The most common name used now is limited recourse borrowing arrangement or LRBA. This term describes the working of the loan because if the loan defaults, the lender's rights are limited to the asset held in the separate trust, meaning there is no recourse to the other assets held in the SMSF.”

Hallinan suggested that there are a number of steps that trustees should follow if they are considering entering into an LRBA and purchasing an investment property to minimise any difficulties in completing the transaction.

The first is to determine that borrowing would be an appropriate strategy to leverage investment. This is often with the help of the fund’s accountant or financial planner.

“The next step is to check the SMSF trust deed to ensure trustees have power to borrow, grant security and allow assets to be held by custodians/nominees for the trustee,” he said.

“If not, the trust deed must be amended. Following that it is important to check the SMSF investment strategy to ensure it allows for the acquisition of the investment asset and permits borrowing for that purpose. Again, if it doesn’t allow for this type of investment, the investment strategy needs to be amended.”

He continued that once the trust deed and investment strategy have been reviewed, the next step is to source the asset for purchase, negotiate the price and reach an agreement with the vendor.

“Following that, the trustee needs to finalise borrowing arrangements with the lender including in-principle loan approval and then determine who is to be the custodian. If it’s a new company, then it is important to purchase a new company,” Hallinan said.

“The custodian is then required to resolve in writing to act as custodian for the super fund trustee in the purchase of the asset, after which the SMSF trustee resolves in writing to purchase the asset and to appoint the custodian to act for the super fund trustee as bare trustee of the bare trust.”

If the fund is in Queensland, South Australia or the Northern Territory, the bare trust deed must be signed, and for all states the purchase contract must be signed by the custodian, not the SMSF trustee.

“Once this is completed, the SMSF trustee provides all the deposit money for the purchase, which should come directly from the super fund’s account,” he said.

“If the deposit initially comes from the pocket of the SMSF trustee, then this deposit amount should be paid into the SMSF as a superannuation contribution within several weeks and notation made to that effect in the SMSF’s records.”

In NSW, ACT, Victoria, Tasmania and WA, the custodian and SMSF trustee sign the bare trust deed.

“The SMSF trustee must then sign all loan documents with the lender and it should be noted that the SMSF trustee is the borrower,” he added.

“The purchase of the asset is completed using only money coming from the SMSF’s account or from the loan by the lender. Once this has been done the bare trust deed is submitted if in NSW, to the Office of State Revenue for payment of stamp duty.”

Hallinan added that when the loan is eventually repaid the asset can be transferred from the custodian to the super fund trustee for nominal stamp duty provided the bare trust deed has been stamped.

“This style of lending will be new to many trustees and caution should be taken to ensure the gearing of property inside a DIY fund is in the interests of all fund members,” he said.