In 2007, The Government amended legislation to allow Self-Managed Super Funds (SMSFs) to borrow for property investment, with the caveat they met certain compliance regulations. Prior to this SMSFs were not allowed to borrow money due to the sole purpose test, a requirement set out by the ATO to ensure all activities of super funds are for the sole purpose of providing retirement benefits.
This change resulted in a significant increase in property investments funded by superannuation in the following decade.
The amendment to the legislation, allowed SMSFs to take out loans if they met specific criteria:
- The property was required to be held in a separate trust from other SMSF assets
- The loan must be a limited recourse borrowing arrangement (LRBA). This means in the event the loan cannot be repaid, the lender can only sell the property to recover the outstanding balance of the loan. This again was to protect other SMSF assets in the event of shortfall.
SMSF loans dropped in popularity between 2017 and 2018 when the big banks stopped offering SMSF loans. This was due to stricter superannuation regulations being introduced. While the big banks withdrew their SMSF loan products, some other lenders still offer SMSF lending options.
It is important to note that SMSF loans will be subject to higher interest rates when compared to normal residential or investment property loans.
Why do people invest in property using a SMSF?
When you are investing in property, the goal is to generate above average capital growth over an extended period. If you hold a property for 20-30 years, historical data shows you will generally experience a significant increase in value and thus a significant capital gain. A benefit to investing in property through a SMSF is to reduce the amount of Capital Gains Tax paid, due to the tax benefits that superannuation provides as well as asset protection for business owners.
Borrowing to invest your superannuation in property is highly sensitive to changes in laws and available lending products. The government regularly changes superannuation regulations. For this reason, it’s essential to ensure you have enough flexibility to adapt to potential changes without being overly sensitive to them. Due to the complex nature of SMSF loans, it is essential you have the correct advice. You should consult with a tax advisor who specialises in SMSF. You should also consider consulting with a broker who can assist you with securing the loan and ensuring you meet all of the compliance requirements.
Our SMSF accountants in Perth can help you ensure your fund remains compliant.