SMSF 101: Investing and Borrowing Funds from a Self Managed Super Fund

Superannuation / 14.06.2022

SMSF 101: Investing and Borrowing Funds from a Self Managed Super Fund


Self managed super funds (SMSF) offer a number of different advantages including flexible investment strategies and the ability to borrow from your SMSF.

Self managed super funds allow you to borrow money however with your self-owned super fund, it’s important to be aware of the responsibilities you have as an SMSF owner.

However, it’s important to remember that as a member of a self-managed super fund (SMSF) also serve as trustees. This role comes with rules and regulations. As a member, you are responsible for following all applicable superannuation and tax laws. 

Before utilising your SMSF to purchase commercial or residential property, it is critical that you understand the rules and conditions. One of the most important rules to remember is that your SMSF must only be used for real estate investments. 

While you can use your super to buy a home and get financing, you should always consult with your trusted mortgage broker as well as an accountant or tax advisor before making this decision. 

Read on to discover more about SMSF and the true cost of borrowing funds to acquire a property.

INVESTMENT STRATEGY

Investing in Real Estate through Your SMSF Residential (Residential and Commercial Property)

To buy a property with your SMSF, you must follow the ATO’s rules including:

  1. The property must pass the “sole purpose test,” which states that it must be used solely for the purpose of providing retirement benefits to fund members. 
  2. A fund member’s family member cannot be the owner of the property. 
  3. A fund member or any of their relatives are not permitted to occupy or rent the property. 
  4. A fund member or a fund member’s related parties can lease commercial property for business purposes. It must, however, be leased on a market basis and meet certain criteria. 

In addition to the aforementioned rules, it is recommended that your investment property corresponds to your fund’s investment strategy and risk profile. If you need investment advice – especially self managed super fund investment advice which can get quite complex – it’s best to seek independent advice from a financial adviser who can help you make the right decisions for your financial situation.

SMSF Home Loans

Borrowing money through an SMSF is subject to strict guidelines and very strict rules.

SMSFs must make all home loans with limited recourse borrowing arrangements (LRBA). An LRBA “limits the recourse” of a lender by establishing a separate property trust and trustee outside of the SMSF structure. 

The super fund is responsible for all property income and expenses, as well as loan repayments. If your SMSF fails to comply, the lender will only have recourse against the separate trust property and will be unable to access any remaining super fund assets. 

This type of mortgage involves a slew of considerations and risks. 

Keep the following risks in mind when considering an SMSF home loan: 

  • SMSFs must value all assets using objective and verifiable data. 
  • SMSF loans could be more expensive than other types of property loans. 
  • SMSF loan repayments must be made from the SMSF’s bank account. As a result, you must make certain that your fund generates enough cash flow to meet repayments. 
  • An SMSF property arrangement is difficult to terminate. If the loan documents or contract are incorrect, you may be forced to sell the property, which could result in significant losses for your SMSF. 
  • SMSF property losses cannot be deducted from taxable income earned outside the fund. 
  • Anyone who invests in commercial property and earns more than $75,000 per year is required to register for GST. Thus, this may dramatically increase your property taxes.

Furthermore, if you decide to sell the property, you will be required to pay capital gains tax on the proceeds. While you may also make routine repairs and maintenance, any improvements or renovations are prohibited by LRBA rules. Note that maintenance and repairs alone will not transform the property into a new asset.

These risks highlight the importance of seeking professional advice before purchasing property with a self managed super fund.

If you have a self managed superannuation fund and would like personal financial advice on your investment options, taking out super fund loans and maximising your SMSF opportunities, talk to an SMSF Financial Planner today.

While there are numerous risks associated with using your SMSF to acquire a property, know that there could be benefits you could reap. The important thing to remember is that you must act with guidance and practicality in mind. With the right strategy and knowledge, you can acquire your dream property and make it all a reality and reap the benefits of your self managed super fund.

Through the expertise of a financial adviser in Lismore and Byron Bay, TNR Wealth Management can help you secure your financial freedom faster than you’d expect. Work with us today!

 

Disclaimer

Past performance is not a reliable indicator of future performance. The information and any advice in this publication does not take into account your personal objectives, financial situation or needs and so you should consider its appropriateness having regard to these factors before acting on it. This article may contain material provided directly by third parties and is given in good faith and has been derived from sources believed to be reliable but has not been independently verified. It is important that your personal circumstances are taken into account before making any financial decision and we recommend you seek detailed and specific advice from a suitably qualified adviser before acting on any information or advice in this publication. Any taxation position described in this publication is general and should only be used as a guide. It does not constitute tax advice and is based on current laws and our interpretation. You should consult a registered tax agent for specific tax advice on your circumstances.