- Can Super Funds invest in residential and/or commercial property?
- Yes they are permitted to invest in property however; there are specific rules and regulations that they must follow before they make the investment to ensure that the fund is not in breach of any rules and regulations required by law.
- Can Super Funds borrow?
- Yes, as long as the right structure is in place.
On 24th September 2007, Sec 67 (4A) and other relevant sections were inserted in SIS Act – to allow SMSF trustees to borrow and invest in certain assets, including real estate, as long as the asset purchased is held in the right structure. On 7th July 2010 some modifications were made to the borrowing arrangements rules which simplified some of the confusion which existed, the new provisions are listed in Section 67A and 67B of SIS Act.
- What assets can be purchased by SMSF using borrowing strategy?
- A SMSF can purchase any asset including shares and real estate as long as the fund satisfies superannuation law and the asset is a permitted asset under the SMSF trust deed and the fund’s investment strategy. However from 7th July 2010 multiple assets cannot be purchased under one borrowing arrangement.
When a SMSF purchases an asset, the same in-house rules apply as prior to borrowing legislation, such as; you cannot sell residential property to your SMSF and no associates can live in a residential property owned by the SMSF etc.
- Who can lend to the SMSF?
- Borrowing in SMSF can be from two sources:
1.External Lender: like a bank or any unrelated party, or
2.Internal Lender: like the member of the fund or a company or trust where the member of the SMSF is also an interested party.
If the SMSF borrows from an internal lender, such as member(s) of the SMSF or other related entity. However, this type of lending is limited to the equity available to the members in assets outside of super. This may also mean, in some cases, related parties of the fund (e.g. members, trusts, companies etc), may have to mortgage their own assets, like their own home or investment properties and borrow from banks on properties not owned by the super fund and then on-lend to the SMSF
- How borrowing can help?
- Members can reduce their SMSF loan by making Concessional (deductible) contributions to their SMSF or via salary sacrifice. When these contributions are received by the SMSF they are taxed at only @ 15% up to the concessional cap (For 2018 /19 year $25,000) instead of members marginal tax rate. The above amount may not be enough for a member to retire comfortably. What this means is that although there is no limit on how much you can have in super – there is a limit on how much you can contribute in super. By borrowing, a member can leverage its contributions and purchase a larger growth asset for a more comfortable retirement. Note that borrowing has its own risk and do not suit everyone’s personal situation.
- What is a Property Custodian Trust (PCT) or Bare Trust?
- This property custodian trust is a bare trust where the beneficiary of this trust is the trustee of the super fund who is the “absolute owner” or “real owner” of the property. The trustee of the property custodian trust (PCT) simply holds the property in trust as “legal owner” or “apparent owner” for the trustee of the SMSF. The trustee of the SMSF acquires a beneficial interest in the underlying property held by trustee of PCT.
For SMSF to borrow to purchase an asset, the asset has to be held by another trust, a holding trust or a custodian, this is a trust other than SMSF. This other trust must hold the property, as a custodian for the SMSF till the borrowing is paid off. Changes in legislation on 10th April 2014 suggest that the property can be continued to be held by the custodian well after the loan is repaid by the super fund.
- How the borrowing in SMSF process works and how we can help?
- Find target property and get a loan approved by a 3rd party Bank.
- Speak to our SMSF lending experts at the start of your borrowing journey , we will help you to create the correct structure
- Create SMSF with corporate trustee;
- Create Corporate Trustee of the Property Custodian Trust;
- Roll over money from all existing Super Funds;
- Pay deposit from the SMSF as exchange contracts with vendor – the name of the trustee of the PCT must appear on the front page of the contract as the purchaser;
- Limited recourse loan documents signed by SMSF Trustee with the lender and trustee of the PCT offers the property as security (if lender is a related party – loan documents may have to be executed and installment repayment conditions – interest rate has to be at market rate);
- Lender will settle property from independent (can be related party in case of business property) vendor and put a mortgage over the property;
- The lender may insist on personal guarantee or may attach member’s home as supplementary security;
- The property is tenanted – tenant can be a related party in case of business real property – the rent is paid to the SMSF and claims depreciation and other expenses. The SMSF declares rent as income and claims interest paid to the lender and remits any GST collected to ATO;
- Tax returns are lodged by the SMSF. Note PCT trustee does not need a Tax File Number or need to lodge an Income tax return.
- Are my Personal debts assessed ?
- If your employer's contributions are sufficient to service the debt, personal financial position assessment may not be required.
However, if additional personal contributions are required to repay the loan, then we will need to complete a full assessment of your personal situation.
- Which income types do Lender consider for SMSF borrowing ?
Each Lender has its policy of accepting % of income and expenses for the serviceability of the loan. It can make a big difference to the maximum amount SMSF can borrow.
- Employer superannuation contributions.
- Additional voluntary contributions.
- Rent income on the new investment property.
- SMSF dividend income (conditions apply).
- SMSF interest income (conditions apply).
We are expert is maximizing SMSF borrowing for our clients and work out which lender can lend you the most to meet your objectives.
- Transactions you cant do with SMSF loans (LRBA) ?
- Buying a residential property in your SMSF that you intend to live in
- Selling a residential property to your SMSF, that you or a related party owns
- Refinance of existing SMSF fully paid loans
- Construction loans aren’t available for buying vacant land and building on that land.
- You cant use LRBA to improve the property, ie change the use of property significantly.