The value of the Australian superannuation assets is $3.85 trillion as at March 2024. $932 billion of these assets are held within Self Managed Super Funds (SMSF’s). The value of the assets held within SMSF’s has consistently grown over the years as more Australians’s choose to take control over how their retirement savings are invested.
The savings within SMSF’s can be invested in direct shares, property, collectible items, cash, Term Deposits, managed funds, diversified portfolios, etc. In 2007, the Australian government introduced changes to the Superannuation Act, which allowed superannuation funds to borrow to purchase property and shares using a Limited Recourse Borrowing Arrangements. In simple terms, an SMSF can take an investment loan from a bank to fund the purchase of a residential or commercial property.
What is a self-managed superannuation loan?
A self-managed superannuation loan that a Super Fund can borrow from a lender to use to purchase a residential or commercial property.
The regulations for self-managed superannuation loans are much stricter than those for regular personal or property loans. The loans are provided via a Limited Recourse Borrowing arrangement. In the event of a default the lenders recourse is limited to the property that has been offered as security.
Who can apply for a self-managed superannuation loan?
Any eligible complying SMSF with six or fewer registered trustees can theoretically apply for a self-managed superannuation loan. There are a number of criteria that need to be met including ensuring the trustees have sought financial advice, have the relevant legal structures in place, have sufficient assets within the fund to pay the deposit and have sufficient cash flow within the fund from contributions and other income to ensure loan repayments can be met.
How does a self-managed superannuation loan work?
In order for the SMSF to meet the eligibility criteria, they must create a separate trust called a “holding trust”, also known as a “bare trust” or “property trust”. This trust will be the legal owner of the property and will hold it in trust for the SMSF for the duration of the loan.
At this point, the SMSF does not not legally own the property; the SMSF receives any profits the property produces, but the property is held by the holding trust . Legal ownership of the property does not fully transfer over to the SMSF until the loan is fully paid off from the SMSF.
The point of the separation is to ensure that, even if the loan defaults, the lender cannot get their hands on the funds in the SMSF itself.
What are the risks associated with self-managed superannuation loans?
Self-managed superannuation loans are complex compared to traditional property loans. The set up costs are higher and the interest rate is generally higher compared to a traditional investment property loan. We highly recommend advice from qualified experienced professionals before you enter into a Self Managed Super Fund home loan.
What are the eligibility criteria for a self-managed superannuation loan?
The 4 main criteria that make an SMSF a good candidate for a loan are:
- Complying SMSF – Your funds need to be registered with the the ATO and have a registered complying fund status. This provides the lender with the piece of mind that you have a fund that has been set up in compliance with the rules and regulations.
- LRBA documentation – Your SMSF is required to have the Trust Structure and accompanying relevant Limited Recourse Borrowing documents to ensure that you meet the lenders requirements.
- Borrowing capacity – Your SMSF needs to have sufficient income from contributions and other investment income to ensure that loan repayments can be met. The lender will also take into account the proposed rental income.
- Investment strategy – Your SMSF investment strategy must ensure that buying a property using an SMSF loan fits your long term goals and objectives.
How can you set up a self-managed superannuation fund for a loan?
SMSF is a complex structure that requires expert advice and guidance to ensure you remain compliant. To prepare for borrowing you need to ensure that you have sought advice about the proposed borrowing arrangement and ensure that it is in your best interest to proceed.
Once you are sure that it is the right strategy you will need to have the Holding Trust Structure set up.
We recommend working with a self-managed superannuation fund professional to set up a SMSF, and all other relevant steps to prepare for being able to borrow to acquire a property. To read more about how we can work together to set up an SMSF for you, head over to our page on cost of setting up an SMSF.
If you are determined to do it yourself, you can give it a shot at the Australian Taxation Office’s SMSF portal.
What are the tax implications of a self-managed superannuation loan?
The property bought with self-managed superannuation loans is subject to a lot of tax breaks. The main ones are:
- Rental income for the property will only be taxed at 15% Interest payments for the loans are tax-deductible to the SMSF
- Costs for renovations or depreciation on the land are tax-deductable to the SMSF
- Capital gains tax is charged at 15% with ⅓ discount if the investment is held for over 12 months.
Can you use a self-managed superannuation loan to purchase property?
An eligible SMSF can purchase a whole range of properties ranging from land to residential property to commercial and industrial property. There are some properties that may be deemed not acceptable by the banks to be used as security, so it is important to seek advice before you embark on setting up an SMSF structure.
Remember that a self-managed superannuation loan can only be used to purchase property that will serve as an income source – for example, a property you will rent out. Buying a property that will serve as a residence for the SMSF is not allowed.
What happens if the self-managed superannuation fund defaults on the loan?
Because the property bought with funds from a self-managed superannuation loan is kept in a separate “holding trust”, the lender cannot access the SMSF’s other assets in the case of a loan default. However, almost all lenders will ask the SMSF trustees to secure the loan by providing a personal guarantee.
How do the interest rates for self-managed superannuation loans compare to traditional home loans?
Self-managed superannuation loan interest rates are usually higher when compared to a traditional investment loan. The rate will vary depending on the type of property, residential or commercial and also the amount you borrow against the purchase price. The lower the loan to value ratio the lower the interest rate.
That’s because self-managed superannuation loans are viewed as riskier for lenders due to the limited recourse borrowing arrangement.
For advice on self-managed super funds, contact us to schedule your free, no-hassle consultation.