Buying a property with a SMSF home loan
Buying a property with a SMSF home loan
Erin Delahunty - 12 Nov, 2021
To the uninitiated, using a self-managed super fund (SMSF) to buy an investment property might seem all-too complex.
But while there’s strict rules to understand and follow, there’s several benefits to buying real estate through a SMSF, including a lower tax rate and the ability to pool funds with other members to increase purchasing power.
What is a SMSF home loan?
As the name suggests, a SMSF home loan is one taken out and controlled by members of a SMSF to buy an investment property.
All rental income or capital gains are funnelled back into the super fund to increase the savings paid out on members’ retirement – the whole point of any super fund, self-managed or not.
As a member of a SMSF, you can nominate properties and choose what to invest in and all running expenses are paid by the fund.
However, investments made under a SMSF home loan have to be made solely in the best interests of all fund members – called the “sole purpose test” – and must follow the legal conditions around SMSF borrowing.
Income from the investment property can’t be given as a pre-retirement benefit to a member or disposed of by a trustee.
The property can only be used for investment purposes that benefit the fund. This means members and their families can’t reside in the property.
How does a SMSF home loan work?
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 is for business purposes only.
Like any other property, the SMSFs nominated conveyancer will deal with any requirements before settlement, and the SMSF will pay the deposit, remaining balance on the property, legal costs, and stamp duty.
The SMSF is also responsible for the costs expected from a usual investment property, including council rates, water rates, property management costs, and insurance premiums.
When a SMSF purchases a property, it must nominate a “bare trustee” in whose name the property is bought through.
The bare trustee must be a separate corporate entity from the SMSF trustee and plays no role other than releasing the property to SMSF members once the home loan has been paid off.
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When is a SMSF allowed to borrow money?
A SMSF is allowed to borrow money for investments thanks to legislative changes a little more than 10 years ago, but only if the transaction is completed through what is known as a Limited Recourse Borrowing Arrangement (LRBA).
As the name suggests, an LRBA generally limits the recourse open to a lender in cases of default to just the asset involved in the transaction and not on the value of any other assets held by the fund.
As part of this, the property is held in the name of a separate trustee, the bare trustee, outside of the SMSF structure.
All the income and expenses of the investment are managed through the super fund’s bank account, including making loan repayments.
In most cases, lenders who will offer mortgages to a SMSF will have very strict conditions. As these, as well as the tax implications of a SMSF mortgage, can be complex, it’s advisable to seek help from a financial professional.
Benefits of a SMSF
Range of investment choices
As a member of a SMSF, trustees can access a range of investment options such as direct shares, term deposits, income investments, unlisted assets, and cash accounts.
Investment flexibility
SMSF assets are in the control of the trustees, meaning they’re responsible for all decisions relating to investment in properties.
There’s also greater flexibility around when to acquire and sell properties, which can be an advantage if market conditions suddenly change.
Lower tax
Tax on investment income for SMSFs is capped at 15% in Australia, one of the lowest tax rates on entities.
In the pension phase of properties, there’s 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.
Ability to pool your super
Most SMSFs allow members to pool their resources with up to three other fund members, such as family members or partners. The additional resources can allow for greater investment opportunities.
Investment transparency
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 to understand where money is being invested, with complete transparency over performance.
Disadvantages of a SMSF
Higher investment costs
The costs involved with SMSF mortgages are generally higher than for other types of property loans. These include extra costs for setting up an LRBA and for the bare trust. Selling the property before it’s fully repaid can sometimes mean extra penalties or charges.
Penalties for breaches and non-compliance
For members who breach the regulations of a SMSF, the ATO can remove the 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 any breaches are serious.
Big responsibilities
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 for following the governing rules of the fund.
Members are also responsible for ensuring the fund meets all requirements, regulations, and conditions on time, so keeping up with deadlines is crucial or penalties can be imposed.
Limited recourse
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 can become expensive and take a long time.
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.
What are the features of a SMSF?
When you set up a SMSF, you must manage it according to the rules set out in the trust deed.
As the purpose of a SMSF is to provide retirement benefits to members, the rules of the fund must reflect this. The following is a list of important facets of a SMSF:
- Manage the fund’s investments: all investments should be managed for the benefit of the fund members and personal financial affairs or interests should not be incorporated in any way. These must be kept separate. The ATO has strict rules concerning asset ownership with all assets required to be held in the full legal name of the SMSF.
- Contributions from fund members: these can be accepted, but there’s some restrictions in place, depending on the age of the member and their contribution caps. These caps change every year and there are penalties for over-contributing, so it’s best to carefully plan any extra contributions.
- Administration: if you’re the trustee of the super fund, you have to ensure you meet all reporting requirements and maintain records of the fund’s undertakings. An accountant can help with the annual income tax, reports, and audits.
- Access to the fund: members will be eligible to receive super funds once they reach the “preservation age”, retire or meet any other conditions of release. Generally, it’s very hard to touch super before reaching the required age unless there’s severe financial hardship.
- Tax: super income is generally taxed at a rate of 15%. However, higher rates can apply if “special income” from investments in entities is received or if there is a notice of non-compliance for breaching the super fund rules.
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Rules relating to SMSFs
Special rules govern how super funds must be run:
- The fund must always be run with the sole purpose of providing retirement benefits.
- A SMSF can’t be used to gain early and improper access to superannuation.
- The SMSF trustee can either be a company owned by all members or all members as individual trustees.
- A SMSF can have between one to four members.
- A SMSF must always maintain and follow its investment strategy.
- The trustee must ensure the SMSF complies with the ATO regulations.
Who is eligible for a SMSF home loan?
To be able to take out a mortgage as a SMSF, several conditions have to be met. These include the “sole purpose test”, where a fund is required to show an investmentF is being made for the sole purpose of providing retirement benefits to its members, or their dependants if a member dies before retirement.
The property can’t be bought from a related party of a member. The property also can’t be lived in by a fund member or any fund members’ related parties.
The property can’t be rented by a fund member or any fund members’ related parties. If a SMSF purchases a commercial premise, it can be leased to a fund member for their business. However, it must be leased at the market rate and follow specific rules.
Tips for managing a SMSF
Here are a few things to remember when starting a SMSF:
- Fulfil all administrative obligations, including record keeping and taxation.
- Enlist the services of an auditor, as required by the ATO.
- Prepare all financial statements and maintain good records.
- Know the law to ensure compliance with ATO and government regulations.
- Never enter into any commercial or financial arrangements that involve the SMSF without seeking professional advice.
- Don’t access the SMSF unless all conditions have been met. It’s illegal to prematurely access a super fund and there can be heavy penalties for the fund member and the fund.
Which lenders on the eChoice panel offer SMSF loans?
Here are the lenders on our panel we can apply with so you can purchase a property for your SMSF.
emoney (Discover SMSF)
Non-bank lender emoney, alongside business services partner I Love Accounting (ILA), launched their SMSF home loan product in December 2019.
The Discover SMSF loan offers an LVR ratio of up to 80% with maximum loan amounts of $1.5 million for residential properties and $3 million for commercial properties.
Higher amounts can also be borrowed, but subject to additional risk rates. Anything greater than the standard amounts are assessed by risk teams and can require lenders share rates across loan warehouses, which comes with additional costs.
Global Capital
Global Capital uses an artificial intelligence-driven scenario pricing engine which helps identify and select the optimal financial product for any SMSF 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.
Why use a mortgage broker?
The residential investment and commercial loans offered by the major banks are often not as competitive as those offered by smaller banks and building societies. Many lenders pulled out of the SMSF market entirely in 2018.
For a standard home loan, there’s only a small difference between different lenders. However, for a SMSF loan, there’s big differences in fees and interest rates.
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 of our expert mortgage brokers will help guide you on the process of getting a SMSF loan with a lender that suits your needs.
Speak to a professional finance advisor
To ensure you’re complying with all of the regulations, speak to a tax agent who can offer you specialist taxation and financial advice.
Ensure you read all information available and access the relevant resources so you’re fully informed. You’re responsible for your SMSF so it’s important you adhere to the ATO rules.
Getting the right advice means you will have the appropriate structure for your SMSF trust loan, minimising any legal issues.
Words by Erin Delahunty
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