February 23, 2013
Changes to superannuation legislation in September 2007 enabled self managed super funds (SMSF) to purchase investment property by borrowing the additional funds required using the purchase property as security under a ‘limited recourse loan’.
This means that in the event of a loan default the lender will only have access to the property purchased and cannot lay claim to other assets held in the SMSF.
So how does it work?
The property is held in trust for the SMSF, however the fund is entitled to the rental income received from the property and any capital growth. Once the loan has been repaid in full the legal ownership of the property is then transferred to the SMSF.
If you are looking for a simple gearing advantage, are curious about ways to increase your tax benefits and/or are planning your retirement strategy, then it’s worth considering purchasing property through a SMSF.
Your SMSF can gear to buy property that may have been out of reach to you or your family. Keep in mind a negatively geared property is bought with a loan when the combination of annual interest repayments plus the deductible expenses associated with the property’s maintenance is higher than the annual rent received from tenants of the property. Positive gearing is where the annual rental income received from the property covers or is higher than the annual loan repayments and costs.
Interest may also be claimed as a tax deduction and can reduce your SMSF’s tax liability. Another benefit is that individual SMSF contributions may be used to repay the loan, essentially meaning you are paying debt with tax free contributions.
Purchasing a property through your SMSF can lead the way to an advanced retirement strategy that may incorporate other benefits such as tax free allocated pensions to members and/or and help members avoid capital gains tax should the property/ies be sold after retirement.
If you are considering purchasing property through a SMSF then it is a good idea to consult a financial planner who can either help you set one up or can determine whether your existing fund’s trust deed allows it to borrow.
Keep in mind lenders often have their own requirements when structuring a loan in accordance with SMSF legislation, including their own assessment criteria to determine how much they will lend the fund as well as general terms and conditions.
For more information contact Richard Windeyer on 1800 01 LOAN or click here to "Book a Meeting"