What are the rules for borrowing money through your SMSF?
Many Australians budget for their retirement using Self Managed Super Funds (SMSFs), because they want more control over how their superannuation is invested. Since 2007, you can borrow money through your SMSF to invest in assets, such as real estate, shares and managed funds, but only if you adhere to strict rules.
Benefits of borrowing money through your SMSF
Prior to 2007, if you wanted to purchase assets through your SMSF you could only do so if there was sufficient funds available. With the changes to the rules in 2007 and clarifications in 2010, 2011 and 2012, you can now borrow money for these purchases.
One of the benefits of these changes is diversification, because you don’t have to use a large portion of your funds to purchase a single asset. As an example, if you have $100,000 available in your SMSF, you can use a portion of these funds as a deposit on real estate and another portion as a deposit on shares, borrowing the balance from a financial lender.
Another substantial benefit are the tax advantages of investing in property via your SMSF, potentially saving you thousands of dollars. This means that if you hold the asset in your SMSF until you retire, your fund could potentially enjoy the benefits of zero capital gains tax on that asset.
Rules concerning SMSF borrowing for asset acquisition
When you borrow money for your SMSF to invest in assets, you can only do so if you borrow the money under strict limited recourse borrowing arrangements (LRBAs) and adhere to a number of rules. Here are some of the more notable rules:
Single acquirable asset: Your SMSF can only purchase what is called a ‘single acquirable asset’ using this borrowed money. Generally, this means that you can only purchase one property with the loan or one block of identical shares in the same company and purchased at the same time. For each property or block of shares, you have to take out separate loans through your SMSF.
No improvements: When you purchase a single acquirable asset using borrowed money through your SMSF, you cannot improve the asset until the loan has been repaid. You can repair and restore the property, but not renovate it to increase its resale value.
Held in a trust: The above mentioned asset must be held in a specific holding trust until the loan is repaid. Security for this borrowed money is the asset itself, which is secured using a LRBA. The LRBA protects all other assets in the SMSF, so for example if the loan defaults, the lender can only access the purchased asset for recompense, they cannot access any of the other assets held by the SMSF.
Other rules state that the property cannot be lived in, rented to or purchased from a fund member or any related parties. Your SMSF can however, purchase your business’s premises and then your business would pay rent to your SMSF.
Before borrowing money and investing in residential, commercial or industrial property via your SMSF, it is important to talk to a financial advisor. This is because you need to ensure that the asset purchase is consistent with the investment strategy and risk profile of your fund.
Another consideration is that the loan will be paid by your SMSF, so there must be sufficient funds available to meet these loan repayments. Don’t forget to have an exit strategy as well, which might include life insurances, in case something unexpected occurs.
Purchasing assets using LRBAs is a practical strategy to build wealth for your retirement, however you must be sure that you work within the rules and ask for advice if needed.
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.