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SMSF loan - Rural check on ideas

Discussion in 'Superannuation, SMSF & Personal Insurance' started by shrek, 10th Jul, 2010.

  1. shrek

    shrek Member

    Joined:
    21st Jun, 2009
    Posts:
    13
    Location:
    Brisbane
    Hi Team

    Just after a sanity check here on my plans to make sure all is cool

    We are looking to purchase a 600 ACRE Farm with our SMSF, the house on the Farm is new and built to lock up with some work to complete. This is a working farm and carrier 50-100 head of beef. Farm has 2 Hectare closed off for house as per SMSF rules for Rural buying

    Plan is to do the following

    1. Buy the farm via SMSF (WITH LENDING) but 30% from the SMSF (St George will do 72% LVR)
    2. Use $60K from SMSF to complete home (mostly Electrical and plumbing) as this is a remote property and needs to be self suffficent (solar power etc)
    3. Run the farm as a working business between the members of the SMSF (My wife and I) plus we still both work in other roles which provide the super contributions that cover the loan installments (warrents)
    4. We may have a caretaker in place as well when we are travelling for our normal jobs etc.

    I just need to check that the SMSF (as I know it can buy rural land including working farms) it can contribute to the maintaince of the business real assets? For example on point 2 the new dwelling needs $60k spent on it can that come from the SMSF. Also continued development on the farm such as fencing, improvments, can the SMSF balance be used to grow this?

    I know many of you will answer this and mention investment stratergy and we have others all ready but for this purchase it is a "lifestyle" choice with growth.

    thoughts?

    Simon
     
  2. MikeF

    MikeF Member

    Joined:
    1st Feb, 2008
    Posts:
    12
    Location:
    Sydney, NSW
    Hi Shrek

    SMSF loans using rural property as security are considered business/commercial in nature by the banks so LVR's are generally 50% or even less. St George's 72% is for residential zoned properties not rural. You mention that the property is remote, this may also be a big issue for any lender.
     
  3. Superman

    Superman Well-Known Member

    Joined:
    6th Nov, 2007
    Posts:
    343
    Location:
    Gold Coast, QLD
    Hi Simon,

    A few notes from me below in blue.

    You need to ensure that you have sufficient capital available to also cover purchase costs such as stamp duty and loan establishment fees. These amounts may eat into the $60k you have put aside for capital improves in your second point below.

    Capital improvements to a property are OK and can be funded from the SMSF.

    The operators of the business will need to lease the farm from the SMSF. This keeps the separation between the business (farm) and the SMSF asset (farm property).

    I am not sure with St George, however I know that with other SMSF loan providers (such as Westpac - who own St George) that when they look at the serviceability of the SMSF loan that if it is a rural property they DO NOT include other super contributions from the members (personal or employer). This means the rental income only must be able to support the loan (instalment) payments.

    One of the key factors they look at is interest coverage, which they basically work out via the following formula:

    Rental / lease income / (loan amount x 9%) = interest coverage

    The interest coverage must be AT LEAST 1.5 times.


    No problem with this from the SMSF perspective.

    The SMSF is allowed to fund capital improvements to the land - things that cannot be separated i.e. electrical / solar / buildings / fences, however it wouldn't be able to pay for other items that would be business assets of the farming business - such as machinery. Basically. if it improves or increases the value of the land (and hence the return to the super fund) then it should* be OK.

    Please note that I am taking that from my general knowledge and I haven't checked the SIS Legislation or rulings on the subject.



    In purchasing this farm what you are looking into is a huge decision - not just financially, but also from a lifestyle perspective.

    The safety of you current superannuation savings will be dependant on your ability to successfully operate a reasonable sized property - so part of the banks assessment will be based on a detailed projected profitability and projected cash flow from that business.

    I always like the idea of holding property in an SMSF - it is a superb tax saving and asset protection vehicle. However, in the situation you have given us to comment on I would seriously look at a comparison between the costs and benefits of buying in the SMSF now compared to buying in either your personal names or a trust and transferring it to the SMSF later.

    The second option doesn't utilise your superannuation savings - so it will be protected if the farming venture all goes to **** and you lose everything, however the major downside is that you will need to have additional capital available upfront.

    You have a lot of work to do to ensure what you propose is viable - so I imagine a pretty extensive due diligence is required.

    It is also essential you obtain appropriately qualified professional advice - not just on the SMSF borrowing aspects of the potential purchase, but also on the business aspects as well.

    I wish you the best of luck.
    SM
     
  4. shrek

    shrek Member

    Joined:
    21st Jun, 2009
    Posts:
    13
    Location:
    Brisbane
    thanks!!!

    Team

    thanks for the awesome replys, just the information I needed. I have a lot of work to do with this idea, research more and see how it stacks up

    Cheers to all!