SMSF Borrowing and Loans

Since changes in legislation that permits lending within self-managed superannuation funds, Trustees have an opportunity to borrow money and put it together with some of the money in the fund to acquire large asset like real property. You are able borrow to invest in residential property or you can borrow to invest in commercial property. There are certain rules to doing this but essentially what the rules require are that the fund undertake a particular kind of borrowing strategy called a limited recourse borrowing arrangement for SMSF loans. Essentially this arrangement allows you to use that money to acquire an asset and then the asset is held in a separate trust from the superannuation fund, so this separate trust which can also be controlled by the self managed superfund trustee is held in legal title to the asset.

The self-managed superannuation fund essentially has all of the beneficial ownership of that asset so you are able to receive rental income from that property and are also able to claim all of the expenses in relation to that property including the interest expense for the land they are paying off.

The fund borrows money from an approving lender, acquires the asset under the fund’s separate bare trust and then pays it off over time by what we call installments, then once the asset is paid off and the loan is repaid, they are able to move the legal ownership of that asset from the trust back into the fund.

The reason it must operate in this structure is the limited recourse nature of the loan, so whoever loans the money to self-managed superannuation fund only has certain rights in relation to that loan. If there is a default on the loan and self-managed fund or any superannuation fund is not able to pay the money back, then the lender only has rate course to that underlying asset that sits in the separate trust, so they can claim that asset and sell it in order to reimburse themselves. The lender cannot access any of the other assets of the self-managed superannuation fund that it holds separately or that may be under other LRBA’s.

So this is what is particularly unique about borrowing within superannuation. The reason that it tends to happen within self managed superannuation funds is because they are able to make the clients investment decisions that might enable them to directly buy a property.

Whereas any other kind of superannuation fund, like a retail or industry super fund would not normally give you that kind of investment flexibility.

What is particularly useful about being able to do this, is that we can acquire assets within superannuation and get some real capital growth on that asset and ultimately sell it tax free.

 The reason we can do that is that SMSF’s have particular rules about selling assets in pension phase when people are drawing down income in retirement, the assets that they sell or any income that they own while we are in pension phase isn’t subject to tax.

This is a very unique opportunity to actually build wealth but really minimize the tax on that wealth you have built, it’s quite an unusual opportunity and quite unique to Australia.

A few particular advantages, you don’t have are things like margin calls if the asset value drops, it’s a long term investment, obviously, our money is preserved within superannuation, so its created for a long haul.

We can diversify because we’ve only used a portion of the super money we borrowed at the rest, we can use other parts of that superannuation money to diversify into other kinds of investments, so that nice and it helps reduce risk.

Finally there is estate planning or asset protection advantages as well, when we accumulate asset within superannuation you are actually protected from creditors, so there is an advantage for people that are in business to move their business property into superannuation. Now not only are they paying rent to themselves and increasing the value of their super fund and controlling that asset but they are also getting an increased level of asset protection. There are quite a number of advantages associated with borrowing through SMSF to buy a property.

Speak to a licensed SMSF professional today about whether or not investment property and borrowing funds would be suitable for your retirement planning. Download a FREE eBook today for more information on > Property Investment in SMSF