SMSF Explained

Why borrow in your super fund to buy property?

  • It can deliver up to 35% better after-tax returns over 20 years compared to traditional borrowing outside super.
  • It is an opportunity to diversify a super portfolio and therefore reduce the overall volatility and risk on the portfolio.
  • The ability to accumulate a higher level of funds in a super fund over and above legislated contributions limits through rental income from properties.
  • The potential to utilise traditional negative gearing strategies to generate tax-effective income.
  • It allows clients to defer any capital gains until retirement, at which stage they become tax free (subject to legislation).
  • Asset protection from commercial and Bankruptcy Acts subject of course to anti avoidance rules.

With SMSF (Self Managed Super Fund) you can:

  • Purchase business property through your SMSF which you can hold as an investment or occupy as an owner occupied business premises
  • Sell/Transfer commercial property already owned to the super fund and release cash that you would otherwise not have been able to access.
  • Purchase residential property from an arms length vendor.
  • Purchase the property you would like to retire to, lease it out now and sell it to yourself when you retire and retire richer.
  • You can buy off the plan and house / land package with super fund – the rules have changed from 7th July 2010. Generally the loans must settle on completion of the property and the deposit (usually 5% or 10%) needs to be via deposit bond.

With SMSF you cannot:

  • Have owner occupied residential property in your super fund.
  • Transfer residential property already owned by a related party into your SMSF.
  • Have redraw loan facilities in your super fund.

The ability to transfer commercial property which the members of related entities already own, allows you to unlock cash to:

  • Repay non-deductible debt
  • Invest in your business
  • Invest in other assets
  • Re-contribute to your SMSF (subject to individual contributions limits)

SMSF loans are different to standard home or investment loans.

This is because they are linked to superannuation legislation which normal loans are not subject to. There are also important tax implications if certain structures and processes are not adhered to. Superannuation legislation dictates certain characteristics that these loans must have and therefore the documentation for them is very different to normal loans. Some lenders have loan structures that we do not believe are fully compliant and therefore they are on our hold list until we are satisfied by the ATO that they are ok or the lenders change their structures.

How are SMSF Loans different?

  • The lenders right of recourse is limited to the property itself and no other assets of either the super fund or the members.
  • There are no personal guarantees required – whilst some lenders have these in their structures we will not use them due to what we believe are negative tax consequences.
  • You can borrow up to 70% of the value of a property.
  • Loans are generally from $200,000.
  • Loan terms are generally around 20 – 30 years.
  • Clients do not generally have to provide their personal and business financials. We obtain financials from the super fund or existing super balances that are to be transferred across to a Self Managed Super Fund.

Note:  Borrowing by superannuation fund to finance the deposit should be avoided.  There are too many issues and risks that could place such a borrowing in breach of s.67A.  Given that most such deposits are only 5% or 10% of the purchase price, borrowing to finance this relatively small proportion of the total may constitute a substantial risk.

Often Deposit Guarantee Bonds are used for deposits in off the plan or house/land packages in order to avoid the purchaser from tying up their capital over an extended period while awaiting completion of construction.

Self Managed Super Fund Structure

  • You need a Self Managed Super Fund (SMSF) to undertake this transaction.  The trustee of the SMSF is the borrower.
  • The property must be held in a trust which is generally called a warrant trust.  This trust may also be referred to as the purchasing trust, special trust or bare trust.  All of these terms just mean that this is the vehicle which holds the property on trust for your SMSF.
  • The trustee of the warrant trust is the entity which is the purchaser on the sale contract that you enter into.   The trustee of this trust must be different to the trustee of your SMSF. SMSF Finance Specialists can provide you with SMSF and Warrant Trust Deeds and Corporate Entities.
  • The beneficiary of the warrant trust is your SMSF.
    Subject to the wording of the trust deed which governs your warrant trust, you may be able to have more than one super fund as beneficiary of this trust.
  • The Mortgage is given to the lender by the trustee of the warrant trust to secure your SMSF loan.

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