4 Jun, 2020
Self Managed Super Funds (SMSF) can be quite complex when taking out a home loan for a property – the property must work to the benefit of the SMSF and provide a return so that it will be used to benefit all fund members, usually after the age of 55 for some retirees. Whilst an SMSF home loan allows you to borrow money for the purpose of purchasing a property, there are rules, regulations and conditions that you must follow to ensure that the purchase is legal.
Instead, it can be used to increase retirement savings that will be paid out upon retirement. Furthermore, regulations exist so that the property can only be used for investment purposes that benefit the superfund. This means members and their family cannot reside in the property acquired by SMSF.
As a member of an SMSF, you have the ability to nominate properties and choose what to invest in and all running expenses are paid by the fund. However, investments made under an SMSF home loan have to be made in the best interests of all fund members and in accordance with the legal conditions around SMSF borrowing.
Because all SMSF properties work in a way to benefit members upon retirement, the SMSF chooses each property they wish to invest in. Residential property is purchased from an agent or vendor (without influencing one another), and non-residential property can also be purchased from related parties as long as the property for business purposes only. Like any other property, the SMSFs nominated conveyancer will deal with any requirements prior to settlement, and the SMSF will pay the deposit, remaining balance on the property, legal costs and stamp duty. The SMSF is also responsible to pay the costs that are expected from a usual investment property, including council rates, water rates, property management costs and insurance premiums.
Each SMSF will have a bare trustee who is nominated by the beneficiaries. The bare trustee must be a separate corporate entity from the SMSF trustee. Bare trustees play no active duties other than releasing the property to SMSF members once the home loan has been completely paid off. When making a property purchase however, it must be in the name of the bare trustee, and on completion, the bare trustee mortgages the property to the lender.
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These are the rules a trust must follow in order to borrow money:
SMSF assets are in the control of the trustees, meaning they are responsible for all decisions relating to investment in properties. There is also greater flexibility on when to acquire and sell properties, which can be advantageous if market conditions suddenly change.
Tax on investment income for SMSFs are capped at 15% in Australia, one of the lowest tax rates on entities. In the pension phase of properties, there is no tax payable (including capital gains tax). This tax rate can be reduced even further by offsetting other tax credits. Strategically managing SMSF properties can help grow super savings and reduce tax payments.
Most SMSFs allows members to pool their resources with up to three other fund members, such as family members or partners. The additional resources may allow for greater investment opportunities that may not be available otherwise.
Trustees can use SMSFs to align their personal goals with investment decisions, whether it be about property, shares, ethical investing or sustainable practices. SMSFs provide members with a platform that allows members to understand where money is being invested, with complete transparency over performance.
For members that breach the regulations of a SMSF, the tax office holds the power to remove any fund’s complying status. The market value of a non-complying fund is then taxed at the highest marginal rate, which could heavily affect the retirement savings of all fund members. Trustees can also face civil and criminal charges if the breaches are serious.
All decisions made within the SMSF rests with the members. This means trustees are responsible for the operation of the fund, its investment performance, any taxes and the governing rules of the fund. Members are also responsible for making sure the fund meets all requirements, regulations and conditions on time, so keeping up with deadlines is crucial or penalties will occur.
Members of SMSFs are not able to bring their complaints to the Superannuation Complaints Tribunal. Instead, they will need to go through the court, which may become expensive and become delayed. Compensation arrangements are also inaccessible for trustees as members are responsible for all operations of the SMSF, including investment decisions on properties. This can severely limit the avenues of compensation available to members.
There are special rules governing how super funds must be run:
The conditions in which a trust must satisfy in order to borrow money for a SMSF home loan includes:
Lenders also look for particular requirements when lending to an SMSF:
Here are a few things to remember when starting an SMSF:
lenders on our panel that we can apply with so you can purchase a residential or commercial property for your self managed super fund.
Non-bank lender emoney, alongside business services partner, I Love Accounting (ILA), launched their SMSF home loan product in December of 2019. The Discover SMSF loan offers a LVR ratio of up to 80% with maximum loan amounts of $1.5 million for residential properties and $3 million for commercial properties. ILA chief executive Michael Jeffriess mentioned higher amounts can also be borrowed, subject to additional risk rates. Anything greater than the standard amounts are assessed by risk teams and may require lenders share rates across loan warehouses, which comes with additional costs.
Global Capital uses an artificial intelligence (AI) driven scenario pricing engine which helps identify and select the optimal financial product for any SMSFs borrower’s requirements.
Apart from residential and commercial properties, SMSFs can also take out rural property loans, which can be approved for up to 65% LVR of up to 20 years. SMSFs can buy any rural property from a related party at market value, even if they live on the property. Once the SMSF has acquired the property, it can then be leased to a related party of the fund at market rates without breaching any guidelines.Finance interest only loans are also available for all facility types, with varying terms.
The residential investment and commercial loans offered by the major banks are not as competitive as those offered by smaller banks and building societies. Many lenders pulled out of the SMSF market entirely in 2018.
In particular, many major banks process loans for SMSFs via their commercial or business banking department. These parts of the banks have much higher costs than the normal home loan department, and as a result they charge more for their loans.
Our home loan consultants are here to guide you in which lenders on our panel can provide you with a SMSF home loan. Please call us on 1300 302 914 (dial 1) or fill in out our web form and one our expert mortgage brokers will help guide you on the process of getting an SMSF loan with a lender that suits your needs.
To ensure that you are complying with all of the regulations, speak to a tax agent who can offer you specialist taxation and financial advice. Make sure you read all information available and access the relevant resources so that you are fully informed. You are responsible for your SMSF so it is important that you adhere to the ATO rules.
Getting the right advice means that you will have the appropriate structure for your SMSF trust loan, minimising any legal issues.
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Words by Joanne Ly
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