SMSF Loans

For those looking to invest in property through their Self-Managed Super Fund (SMSF), SMSF lending can be a valuable tool. We’re here to give you an overview of what SMSF lending involves and how it can be utilised within your investment strategy.

What is SMSF Lending?

SMSF lending refers to the use of a loan from a financial institution to buy a property within your Self Managed Super Fund.

How Does SMSF Lending Work?

The process for SMSF lending typically involves the following steps:

• Establish an SMSF: If you haven’t already, you’ll need to set up an SMSF, which must comply with the rules and regulations set by the Australian Taxation Office (ATO) and other relevant legislation.
• Create a Bare Trust: Because the SMSF trustees cannot hold the property directly when borrowing, a separate ‘bare trust’ (or holding trust) is established to hold the property on behalf of the SMSF until the loan is repaid.
• Loan Application: You will apply for an SMSF loan with a lender who offers this type of lending, providing detailed information about your SMSF’s financial position.
• Purchase Property: Once the loan is approved, your SMSF can proceed with purchasing the investment property through the bare trust.
• Repayment and Ownership: The SMSF then makes loan repayments according to the loan agreement. Once the loan is repaid in full, the legal ownership of the property can be transferred from the bare trust to the SMSF.

Key Considerations for SMSF Lending

• Property Type: Typically, the property purchased must be a single acquirable asset, used solely for investment purposes, and not for the immediate benefit of fund members or related parties.
• Loan Structure: Loans for SMSFs are usually at a higher interest rate compared to standard property loans, and often require a larger deposit.
• SMSF Compliance: All investment decisions, including property purchase through an SMSF loan, must be in line with your SMSF’s investment strategy and comply with superannuation laws.
• Cash Flow: Your SMSF must have a strong and consistent cash flow to service the loan, as only funds within the SMSF can be used to make repayments.
• Risk: The investment strategy should consider the level of risk associated with borrowing to invest, ensuring it aligns with the long-term goals of the SMSF members.

SMSF Lending Benefits

• Investment Growth: Leveraging your SMSF to purchase property can potentially grow the fund’s asset base and increase future retirement savings through capital gains and rental income.
• Tax Efficiency: The SMSF structure can provide tax benefits, including lower tax rates on rental income and potential capital gains tax discounts.
• Asset Protection: Other assets within the SMSF are generally protected should the loan default.

Conclusion

SMSF lending can offer an opportunity to expand your investment portfolio by including property within your superannuation fund. It’s essential to understand the intricacies of SMSF loans and how they fit into your fund’s overall investment strategy.

For further information on SMSF lending or to discuss how this type of lending could fit into your superannuation plan, feel free to reach out. Our aim is to support you with the information you need to make informed decisions about your superannuation investments.