October 01, 2015
Legislation changes in September 2007 to the Superannuation Industry Supervision Act (SIS ACT) now allow superannuation funds to borrow, in order to invest in direct property or shares, subject to certain strict conditions. Before making SMSF investments it is important you understand the particular risks associated with superannuation fund gearing transactions of this nature.
- Investing in property must be consistent with your SMSFinvestment strategy.
- The property is held in trust for the SMSF by the property trustee.
- In the event of a loan default, the mortgage lender only has recourse to the security property. It cannot make claim to any other SMSF assets.
- The SMSF is entitled to the rental income from the property.
- The SMSF makes the loan repayments. After the home loan is repaid, legal ownership of the property is transferred to the SMSF.
- The SMSF can purchase any kind of property (including residential, commercial or rural).
- The SMSF can pay out or reduce the mortgage loan at any time (subject to the terms and conditions of the home loan or mortgage).
- All rent is paid directly to the SMSF. Loan repayments are made in the usual way from the SMSF to the mortgage lender.
- Ability to own your business premises (but not operating assets) in the SMSF.
- Maximum 10% capital gains tax is payable on any capital gain if the property is sold after a minimum of 12 months and no capital gains tax is payable if sold during pension phase.
- Maximum 15% income tax on rental income. Income from the property can help pay off the mortgage loan.
- Your assets are secure as the mortgage lender does not have recourse to your SMSF’s other assets in the event of default.
- Interest expenses may be claimed as tax deductions by the SMSF which can potentially reduce your SMSF’s tax liability.
- The SMSF must purchase residential property from an unrelated party - arms length (you can buy “business real property” – property used “wholly and exclusively for business purposes” from a related party on an arms length basis for full market value).
- If you borrow to buy property through your super and you’re negatively geared, the tax offset only applies to other income earned within the fund – not your regular income.
- You can’t live in the property and neither can any friends or family members (however, you may lease “business real property” to a related party – provided the lease is on an arms length basis for full value).
- You can’t use borrowed money to renovate or make capital improvements to a property purchased through a SMSF while it is still under a loan (SMSFR2011/D1).
- There are significant set-up costs and there are sometimes higher fees involved in getting a loan through your SMSF.
- Running a SMSF is complicated and penalties for getting things wrong are high. However, you can pay a professional to run it for you.
Your Mortgage Choice Broker can assist you in finding the best loan for your superannuation fund borrowing needs. Phone our office today on (03) 9748 7999.
Note: It is imperative that you obtain independent legal, taxation and financial advice regarding your superannuation intentions.