CIB FINANCE – BORROWING THROUGH A SELF MANAGED SUPERANNUATION FUND

Updated November 12th 2013

Superannuation legislation allows superannuation funds, including Self Managed Superannuation Funds (SMSF s), to borrow and to invest, providing certain conditions are met. If you have a SMSF you may able to borrow money to buy a property through your fund.

HOW DOES IT WORK?

Your SMSF wants to buy a property but cannot fund the full purchase price. It does, however, have enough funds for a percentage of the purchase price. The SMSF can purchase the property under an instalment arrangement, subject to certain criteria. The SMSF provides the funds for a partial payment of the property, pays all relevant fees and borrows the remaining funds to pay the balance.

The property is owned by a separate Security Trust with your SMSF having a beneficial entitlement to it. The Security Trust may then lease the property to tenants on commercial terms. The Security Trust receives lease payments from the lessee and additional instalments from your SMSF. These are used to pay expenses and loan repayments relating to the premises.

A mortgage over the property will be the security for the loan under a limited recourse loan. In the event of default, the lender only has recourse to the property, and any security provided by a guarantor, and cannot claim on any other assets within the SMSF. After the loan is repaid, the SMSF then has the right, but not the obligation, to acquire legal ownership of the property.

THE BENEFITS OF THIS STRATEGY (SUBJECT TO YOU SEEKING SPECIFIC FINANCIAL AND LEGAL ADVICE)

  • Your other SMSF assets are secure, as the lender only has recourse to the asset purchased through the home loan and held by the Security Trust, plus any security provided by a guarantor.
  • Rental income from the property and superannuation contributions are used by the trust to help pay off the loan.
  • The trust is able to offset loan interest and expenses against rental income. Your SMSF is entitled to any net income of the trust.
  • Once the SMSF acquires the premises, income after expenses and any capital gain on disposal of the premises would be taxed at concessional tax rates.

SOME THINGS YOU SHOULD CONSIDER

  • Your SMSF trust deed must allow borrowing under an instalment arrangement.
  • Investment in property should be consistent with your SMSF’s investment strategy.
  • The instalment arrangement must meet certain requirements to ensure that the SMSF remains compliant.
  • Your SMSF requires sufficient cash flow to service loan repayments over the term of the loan. Cash flow may be sourced from investment earnings or member contributions.
  • Arrangements must be at arm’s length and transacted at market rates.
  • You should weigh the benefits of the strategy against the costs of setting up and maintaining the instalment arrangement.
  • You should ensure that you obtain appropriate financial and legal advice on your specific situation to ensure the benefits outlined above will be available to you before undertaking this strategy.