Purchasing Assets with Family & Friends
Purchasing assets with family and friends using a Self-Managed Super Fund (SMSF) can be an effective strategy for diversifying investments and increasing your purchasing power. However, you must ensure that any investment is structured correctly to comply with all superannuation laws and regulations as mistakes can quickly cost you tens of thousands of dollars to correct.
Below we have outlined a few ways in which you can invest with family and friends. Feel free to also contact us if you wish to understand the laws and regulations further.
Tenants in Common
One way to purchase property with family and friends is through a Tenants in Common arrangement. This method allows multiple parties to own a specific share of a property, which can be unequal. Each party's share can be sold or transferred independently, providing flexibility to everyone.
This however means that all parties must also pay for their share of expenses and receive their share of income, which may be administratively difficult to do each and every time.
It may also be difficult to obtain financing from a bank which complies with the superannuation laws and regulations, and therefore this strategy is generally only used where no financing is required.
13.22C Unit Trusts or Companies with Family
Another option where family is involved is investing through an unlisted entity which complies with Regulation 13.22C of the SIS Regs.
This structure allows for each party to own an equal or unequal share of the unlisted entity and for that entity to then make investments. However, to comply with Regulation 13.22C, this entity would essentially only be allowed to invest in property and would be unable to borrow any money, therefore limiting its use cases.
Unlisted Unit Trusts or Companies with Friends
Under certain circumstances, where friends are involved who are not considered related parties, the limitations imposed on Regulation 13.22C entities will not apply. Therefore, unlike when investing with family, this entity would be able to borrow from a bank to purchase an asset.
As an example, you and two friends may each invest $100,000 into a newly incorporated unit trust. This trust is then able to borrow an additional $700,000 and purchases a property for $1,000,000.
Whilst these types of structures are common, it is important they still comply with the applicable superannuation laws and regulations, as mistakes made through these structures can costly.
Related Party LRBAs
Related Party LRBAs involve borrowing money from a related party to purchase an asset. This can be a viable option when traditional financing is unavailable or less favorable. However, the loan must be structured on commercial terms to avoid contravening superannuation laws. The interest rate, repayment terms, and security arrangements should reflect what would be expected in an arm's length transaction.
Considerations Regarding Related Parties
When dealing with related parties, it is essential to understand who qualifies as a related party under superannuation law. This includes family members, business partners, and entities controlled by fund members. Acquisitions from related parties are generally prohibited unless they involve listed securities or business real property. Ensuring compliance with these rules is critical to avoid severe penalties and ensure the integrity of the SMSF.
In conclusion, purchasing assets with family and friends using an SMSF can be a rewarding strategy, but it requires careful consideration of the legal and regulatory landscape. By understanding the options available and adhering to superannuation laws, investors can effectively leverage their SMSF to achieve their financial goals.
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