Superannuation legislation allows Self Managed Superannuation Funds (SMSF) to borrow money to invest in property and because superannuation is one of the most effective tax investments available, investing in property through an Self Managed Superannuation Fund can save you money in the long run.
Borrowing through your Self Managed Superannuation Fund is complex and certain product and regulatory restrictions apply. It is important that you seek independent financial planning, legal and taxation advice.
There are many benefits to having a SMSF Loan. Previously customers had little choice with regards to their Super Fund with the alternatives being Warrant Trust structures which were cumbersome and complicated and required large upfront fees along with hefty ongoing fees.
Most funders have now brought out Self Managed Superannuation Fund products which are uncomplicated and easy to understand. The lending rates have now become competitive as more funders are looking to enter this market.
Benefits to a SMSF Loan are:
- Subject to the funders criteria any kind of property can be chosen from Residential to Commercial;
- Commercial property can be purchased for business purposes;
- The Loan is ‘Limited Recourse’ to any other assets of the Self Managed Superannuation Fund;
- The beneficial owner of the property will be the Self Managed Superannuation Fund;
- The property can be managed as any other investment property;
- All rents are paid for the benefit of the SMSF
Investing through your Super Fund is also one of the most tax effective investments available therefore investing through your SMSF can save money in the long run.
Key Features are as follows:
- Super income is taxed at 15%;
- Any expenses such as interest, may be claimed as tax deductions by the SMSF;
- Potentially there may be no capital gains tax on the sale of the property if sold in pension phase;
- A maximum 10% capital gains tax on sale of the property if held for at least 1 year;
- The Self Managed Superannuation Fund can pay out or reduce the SMSF loan at any time (subject to the terms of the relevant loan);
- Through gearing, the Super Fund can acquire for a greater value than that of the funds ‘net worth’;
- Greater investment choices and control over your future.
Amendments in September 2007 to the Superannuation Industry Supervision Act 1993 allowed Super Funds to borrow and charge their assets as long as a special structure was used and there was no recourse for the borrowing against the Super Fund.
For the Super Fund to borrow for an investment property it will be necessary to have a special legal structure in place. When an asset is being purchased, a requirement of the SIS act is that the asset ‘is held on trust’ and that the Super Fund is the beneficial owner of the asset at all times.
New sections added to the SIS act, 67A & 67B allow the Super Fund to borrow provided:
- It is a Loan to the Self Managed Superannuation Fund to assist in the acquisition of eligible income producing security;
- Can only borrow for a single acquirable asset;
- The Self Managed Superannuation Fund acquires beneficial interest in the asset;
- Upon making all repayments the Self Managed Superannuation Fund has the right to acquire legal title from the Trustee;
- The loan is ‘Limited Recourse’. This means that in the event of default the lender cannot touch any other asset other then the asset held as security.
- When purchasing a property the purchase must be an ‘arms length transaction’
Within the legal structure, the Trust Deed is an important component of the legal structure and it is important to ensure there is no adverse GST, taxation or stamp duty consequences. It is important that you seek independent financial planning, legal and taxation advice.