Additionally, along with the above rules it is recommended that your investment property is consistent with the investment strategy and risk profile of your fund.
Self Managed Super Fund Home Loans
Obtaining a home loan using a SMSF to buy property involves very strict borrowing conditions. All SMSF home loans must be taken using a limited recourse borrowing arrangement (LRBA). To “limit the recourse” of a lender, an LRBA involves establishing a separate property trust and trustee on behalf of the super fund, outside of the SMSF structure. All the income and expenses of the property go through the super fund’s bank account and the super fund must meet all loan repayments. If the super fund fails to do this, the lender only has the property held in the separate trust as recourse, and therefore cannot access any remaining assets of the super fund.
When borrowing from your SMSF there are many considerations and risks associated with this type of home loan.
The key risks that you should be aware of when considering a SMSF home loan are:
Compliance costs: SMSFs need to value all of their assets at market value, and the valuation needs to be based on objective and verifiable data.
Higher costs: Loans using SMSF can be more costly than other property loans.
Cash flow: When buying property using SMSF, your loan repayments must come from your SMSF’s bank account. Therefore you will need to ensure your fund always has sufficient cash flow to meet repayments.
Difficult to cancel: You are unable to unwind the arrangement for a SMSF property. If there is an issue with your loan documents and contract, you may have to sell the property, this can potentially cause substantial losses to your SMSF.
Possible tax losses: You are unable to offset tax losses from the SMSF property with taxable income outside your fund.
Commercial property tax considerations: If you’re investing in a commercial property and your earnings are in excess of $75k you are required to register for GST.
Capital gains tax considerations: If you choose to sell the property you will need to ensure the appropriate capital gains tax is paid. It is of course recommended that you speak with your qualified accountant or tax agent to discuss all possible tax implications before buying property with an SMSF.
No alterations to the property: You may undertake normal repairs and maintenance to the property, however, under the LRBA rules, improvements and renovations are not allowed. Any maintenance or repairs made cannot result in the property becoming a new asset.
These risks further outline the significance of seeking specialist advice before buying property with an SMSF.