Your superannuation is one of the most important, not to mention tax efficient, ways to save for the most rewarding stage of your life – retirement. Unfortunately, almost half of Australians aged between 45 and 64 do not feel confident they have adequate funds to do what they want in retirement. Having the right plans in place to manage and grow your super can make a significant difference to your retirement goals.
For some, this includes managing your own super independently through a self managed superannuation fund (SMSF). A SMSF is your own personal super fund that gives you control to make the important decisions around how your super is invested. Managing your own super through an SMSF can be extremely rewarding, but they aren’t for everyone because they require close attention and dedication, particularly prior to setup.
Most of us are accustomed to borrowing to purchase a home or an investment property. However we have found there can still be some confusion about how you can borrow to purchase property within your SMSF.
Borrowing or gearing your super into property must be done under very strict borrowing conditions called a ‘limited recourse borrowing arrangement’. A limited recourse borrowing arrangement can only be used to purchase a single asset, for example a residential or commercial property.
You can use an SMSF property loan to:
- purchase or refinance a residential investment property, or
- purchase or refinance a commercial property for your own business use or as part of your overall investment strategy.
You can protect your fund’s other assets
Should the loan fall into default, rights of retrieval are restricted to the secured property (and any additional security provided by the guarantors).
Potential gearing advantages
It may be possible to claim interest and expenses paid on the loan as deductions against rental income for tax purposes.
You can pay down the loan via:
- rental income,
- SMSF investments, or
- super contributions.
Income from rent, other SMSF investments and super contributions can all be used to illustrate serviceability and reimburse the loan.
What are the risks of gearing in SMSFs?
- Higher costs – SMSF property loans tend to be more costly than other property loans. This must be factored into your investment decision.
- Cash flow – Loan repayments must be made from your SMSF.
This means your fund must always have sufficient liquidity or cash flow to meet the loan repayments.
- Hard to cancel – If your SMSF property loan documentation and contract is not set up correctly, unwinding the arrangement may not be allowed and you may be required to sell the property, potentially causing substantial losses
to the SMSF. Most lenders have preferred structures so it is important to establish this prior to entering the loan. We will help you with this.
- Possible tax losses – Any tax losses from the property cannot be offset against your taxable income outside the fund.
- Cannot borrow to improve the property – Borrowed funds can be used to maintain a property but cannot be used to improve a property.
Borrowers should seek independent financial and legal advice to ensure it is appropriate for their SMSF to borrow funds to buy an investment property.
Important to know…
It is important to be aware that the loan is a limited recourse loan. In the case of a default, the lender has recourse to the security and any additional assets supplied by the guarantor(s) outside of the SMSF.
The lender won’t have recourse to any other assets held in the borrower’s SMSF. This is a good thing as the balance of your super fund is protected.
Once the loan is repaid the legal ownership of the property can be transferred to the borrower’s SMSF.
There are a range of SMSF property loans available and we’re constantly on the hunt for the most competitive finance products available. You can also borrow for other purposes within your SMSF.
Think twice about investing in property markets you are not familiar with, AND always do your own research first.
Investing within your SMSF IS NOT for everyone. We encourage you to chat with us first BEFORE taking any action.
*Disclaimer: This article is generic in nature. All investment decisions should be considered wisely and based on your personal and financial circumstances. Seek proper advice before committing to any course of investment action. This is not deemed as advice.