Borrowing to invest within your SMSF

Self Managed Superannuation Funds (SMSFs) open up a whole new world of investment opportunities for your retirement savings, including direct property. But what if you simply don’t have enough money in super to buy an asset outright?

Traditionally, you may have had to consider borrowing the balance yourself and then becoming joint owner of the investment with your super fund. Perhaps this would have been set up through a trust structure to give you flexibility later on.

However, nowadays SMSFs can borrow money directly to help purchase investments such as direct property and shares. As with any SMSF investment, for this to be allowed, strict criteria must first be met.

Compliance is essential

The burgeoning growth in SMSFs combined with low interest rates has encouraged more SMSF owners to invest in property. It is imperative Super Funds comply with the borrowing rules, specifically:

  • Only commercial property or residential property used for investment purposes can be purchased and these transactions need to be made at “arm’s length” on a strictly commercial basis.
  • Any property must be purchased as a single asset.
  • Loans used for purchasing property need to be made on a non-recourse basis.
  • The property title must be held in the name of the trustee of a Bare Trust, not the trustee of the SMSF or any member of the SMSF.

How it might work

We will use a case study to demonstrate how this might work for small business owners.

Owners of CSJ Architects, Craig and Sarah James, currently lease their business premises. They want to buy the premises but with their current home mortgage, they don’t have the available money to do so.

Craig and Sarah’s SMSF has a balance of $430,000. They are interested in how they can use some of these savings to purchase the premises (valued at $500,000) and build up a sound asset in their Fund.

Can their SMSF borrow?

In this example, one of the benefits of investing through their SMSF is that the couple can use a portion of their existing superannuation balance as a deposit on the purchase of the business premises.

On these types of loans, banks are not likely to lend up to 80% or 90% of the property value as with normal investment loans, it is likely to be no more that 65%.

Here, the SMSF has borrowed $200,000 from the bank to make up the difference between the James’ deposit of $300,000 (60%) from their super fund and the purchase price of the premises. Over time, the SMSF will use rental income, plus super contributions received from Craig and Sarah, to repay the debt to the bank.

The remainder of their SMSF balance is invested across other asset classes to meet their Fund’s investment strategy.

Other Important Factors

While there are several benefits of holding business premises in your SMSF, there are also other important factors to consider.

For the James’, there’s the preservation (or “restricted access”) of super fund monies to consider. Rent that is paid to the SMSF might not be accessible until Craig and Sarah retire and each reaches their preservation age.

Loan repayments must be made from their SMSF which means their fund must always have sufficient liquidity or cash flow to meet the loan repayments.

Importantly, Craig and Sarah need to put in place contingency planning which considers what the Fund would do in the event of unforeseen personal circumstances, or potential risks that could result in making the loan repayments difficult to meet.  A change in circumstances may necessitate the forced sale of assets which may, depending on the prevailing market conditions, result in a loss of superannuation assets.

Like Craig and Sarah, the decision you make depends on your financial circumstances and arrangements. Don’t get caught up in all the marketing hype. Always consult a qualified SMSF adviser to ensure your fund has the most appropriate structure and investments for your retirement

Related Post:

What’s involved in running a Self Managed Super Fund (SMSF)?

Related Video:

Superannuation Advice: What are the benefits? from Prime Financial Group on Vimeo.

Disclaimer: This information has been prepared by Primestock Securities Limited ABN 67 089 676 068, AFSL 239180 (“Prime”). Prime accepts no obligation to correct or update the information or opinions in it. This information does not take into account your objectives, financial situation or needs. Before acting on this information, you should consider whether it is appropriate to your situation. It is recommended that you obtain financial, legal and taxation advice before making any financial investment decision. Prime is bound by the Australian Privacy Principles for the handling of personal information.


A unique and personal service approach and support for all your business advisory and personal wealth management needs

Request a consultation

A unique and personal service approach to support all your business advisory and personal wealth management needs.

Request a consultation