SMSF Loan: How do they work

November 30, 2020

Instead of leaving superannuation funds in the hands of others, many Australians are becoming proactive and are aiming for a retirement investment plan with more control over their finances by establishing an Self-Managed Super Fund. A Self-Managed Super Fund (SMSF) loan helps you to buy property with your retirement savings through your SMSF.

With a SMSF loan you also have the choice and flexibility to –

Fund your retirement on your own terms
Choose an investment to suit your lifestyle and investment goals

One of the best aspects of getting an SMSF is that you will be able to borrow money to purchase property under a set of conditions known as ‘limited recourse borrowing arrangement’.

Although an SMSF home loan allows you to borrow money for the purchase of a property, there are laws, regulations and conditions that you must meet to ensure that the purchase is legitimate.

What is a SMSF?

Superannuation is the money that’s put aside and saved while you’re working, so you can enjoy a regular income later in life when you retire. A self-managed super fund (SMSF) is a private super fund you oversee yourself. SMSFs are separate from industry and retail super funds. The difference between an SMSF and other types of funds is that the members of an SMSF are usually also the trustees. As a trustee, you manage your fund using guidelines from the Australian Taxation Office (ATO). The SMSF Home Loan is a mortgage owned by members of the Super Fund, which is used to purchase investment property. All rental profits or capital gains are returned to super fund and cannot be offered as a pre-retirement bonus to a member or disposed of by a trustee.

What are the Advantages of Having a SMSF?

Easy investment

SMSF assets are under the control of the trustees, which ensures that they are responsible for all decisions relating to investment in properties. There is also greater flexibility in purchasing and selling properties, which can be beneficial if market conditions unexpectedly change.

Low tax bracket

What many people don’t know about the SMSF is that there may be significant tax savings. Investment income tax for SMSF’s is set at 15% in Australia, one of the lowest tax rates for entities. There is no tax due (including capital gains tax) in the pension phase of the property. This tax rate can be further lowered by offsetting other tax credits. Strategically handling SMSF properties will help raise your super savings and minimise tax payments.

Combine your super

Many SMSFs allow members to invest their resources with up to three other members of the Fund, such as family members or partners. Additional resources may allow for greater investment opportunities that may not otherwise be available.

All decisions taken within the framework of the SMSF rest with the members. This means that the trustees are responsible for the management of the fund, its investment performance, any taxes and the laws regulating the fund. Members are also responsible for ensuring that the fund meets all requirements, regulations and conditions on time or penalties can be imposed.

SMSF Loans

One of the best aspects of getting an SMSF is that you will be able to borrow money to purchase property under a set of conditions known as ‘limited recourse borrowing arrangement. SMSF loans can help you invest in residential or commercial property if you don’t have the funds in your SMSF to purchase your investment property. Self-Managed Super Fund (SMSF) home loans are more complicated than traditional home loans, as any property acquired must be for the sole benefit of the SMSF, not the individual trustees.

Property must also have a return on the market that can be used to support the members of the Super Fund when they reach the retirement age of 65. Although you can borrow and loan money from the SMSF for the purchasing of property, there are several restrictions, laws and conditions that you must comply with to ensure that the purchase is legal.

If the purchase is not legal under the Australian Taxation Office (ATO) regulations, you can risk losing half of the assets in your SMSF and face a fine of thousands of dollars.

Banks or lenders are also looking for specific requirements when lending to an SMSF –

The deposit is projected to be at least 30% of the value of the investment property
Rental income from the property is factored in the capacity of the borrower to make repayments
How often can the fund members make contribution to the fund, since this amount would be used to cover the repayments of the loan
The structure of the SMSF must comply with the ATO and ASIC rules

All SMSFs are regulated by the ATO. For more information, the self-managed super funds section of the ATO website is a great resource. Because everyone’s situation is different, it’s always best to get financial advice before you make a decision or any investments.

What Can We Do to Help?

Self-managed superannuation funds can provide you with flexibility to invest in various types of properties. We, at OneCorp Australia, can help you find the right type of property for your SMSF. If you don’t have a SMSF our network of trusted advisors can help setup and manage your SMSF to benefit in property investment.

Schedule an appointment and we will dig deep into your circumstances to determine exactly what you should do right now to take back control of your financial situation. This is a no-fluff, straight to the point, value-packed session with our property investment specialists. Our friendly team are waiting to help you on your property journey. Contact us.

Rather than investing superannuation funds in the hands of others, many Australians look for a retirement investment strategy with more control over their finances. Does this sound like you? You might want to consider setting up a self-managed super fund (SMSF) to invest your money in the direction you want.