November 10, 2013
If you have a Self Managed Super Fund (SMSF) it can now borrow funds to purchase a property such as residential, retail, commercial or rural/residential via a SMSF Loan.
The changes to Legislation occurred in September 2007 when The Superannuation Industry Supervision Act (SIS ACT) was amended to allow self managed super funds to borrow money via a SMSF Loan provided an acceptable structure was utilised.
In essence a Security Trustee will purchase the property on behalf of the SMSF and become the legal owner of the property holding it in trust for the SMSF (as beneficial owner). The SMSF will provide an equity contribution from the Superannuation Funds assets and borrow the balance of the money with a SMSF loan.
SMSF Loans, the Basics:
- A SMSF Loan is a loan to a SMSF to assist in the acquisition of eligible income producing real property;the money borrowed (SMSF loan) is applied to the purchase of a single asset;
- the asset is held in trust by the Security Trustee and the SMSF acquires a beneficial interest in the asset;
- the SMSF has the right to acquire legal ownership by finalising payment;
- the SMSF loan is 'Limited Recourse Loan', meaning the SMSF lender cannot touch any other of the SMSF's assets other than the property held as security, in other words the rights of the SMSF lender against the SMSF in the event of the SMSF loan defaulting are limited to the security property.
SMSF Loan general features:
Interest only is available for all property types with varying loan terms available
There are also restrictions to SMSF Loans which any potential borrower must be aware of:
- No construction or refurbishment loans
- Member/s of the SMSF cannot reside in the residential property but can purchase a residential property with the intention of moving into it after retirement, this is subject to it being transferred out of the SMSF
- No vacant land
- No redraw facility is available
- All property purchases have to be on a 'stand alone' basis
- An existing property can be refinanced as long as it meets the requirements of the SIS Act.
- No leveraging of existing property is allowed however you can borrow to refinance existing SMSF loans plus costs.
Key SMSF benefits:
- Maximum of 15% tax on rental income;
- Any expenses such as interest, may be claimed as tax deductions by the SMSF
- Potentially there may be no capital gains tax on sale of property if sold in pension phase;
- A maximum 10% capital gains tax on sale of property if held for at least 1 year;
- Greater investment choices and control over your future;
- The SMSF can pay out or reduce the SMSF Loan at any time (subject to the terms of the relevant loan);
- Through gearing, the SMSF can acquire property for a greater value than that of the funds 'net worth'
- All other SMSF assets are safe and cannot be touched by any lender due to the limited recourse provisions in section 67 (4A) of the SIS (Superannuation Industry - Supervision) Act