You can borrow within your SMSF…but is it a good idea?
Australians’ love affair with debt has made its way into the superannuation sector with members being able to borrow funds to invest. This article discusses whether borrowing through a self managed super fund would be a good fit for your wealth accumulation objectives.
Investing in property seems part of every Australians’ DNA. No matter where you buy, prices appear to be on a permanent skyward march with none of the unnerving fluctuations seen in other investments, such as the share market.
Ask anyone over the age of fifty what their best ever investment was, and inevitably they will answer, ‘buying their own home’. Their biggest regret? Not buying the house next door at the same time.
So where better to invest your precious retirement savings but in property?
For many, it’s the perfect set and forget strategy. Borrow funds to buy a property, rent it out to tenants, and let the rental income repay the loan. Then in 20 years’ time, you have your own home-grown nest egg.
It sounds like a great strategy to help build your retirement savings, particularly if you can use your superannuation to make it happen. Yet as foolproof as this might seem, you need to be aware of a number of traps.
Firstly, the only way to buy a particular house or apartment using your superannuation savings is via a self managed superannuation fund – a so-called DIY fund.
As the fund’s trustee, you will need to fully understand your responsibilities in running the fund and be able to demonstrate to the Australian Tax Office that you have thought through your decision to set up the fund.
Secondly, self managed super funds can be expensive to establish. You will need to pay for an accountant to lodge a tax return for the fund each year and ensure all appropriate compliance and regulatory paperwork is up to date.
Finally, there are also strict diversification rules in place for all superannuation funds. A substantial balance within your fund will be required to allow the purchase of a single property outright with some cash still being held within the fund.
Alternatively, you can arrange to borrow within your self managed super fund to acquire a property, but again there are many traps for the unwary if you do decide to go down this path.
Loans used within self managed super funds to finance a property acquisition are a very particular type of loan and are referred to as limited recourse borrowing arrangements.
Reflecting the complexities of these loans, borrowing within a self managed super fund is much more expensive in terms of the interest rate charged. Also the amount able to be borrowed is usually restricted to 60% of the property’s purchase price.
There is also a raft of other regulations governing buying property using superannuation savings. There is the need to establish a bare trust, for example, to hold the investment, or you cannot, under any circumstance, rent the property to yourself or a family member.
When buying an investment property, the usual challenges should also be considered in terms of finding the right property, a good quality tenant and ensuring the property itself is maintained and kept in a suitable condition.
None of these issues are insurmountable. They simply mean that for those looking to use their retirement savings to invest in property, good advice is critical to ensure it is done correctly.
This includes having a good accountant to make certain your superannuation fund is run appropriately, a great mortgage broker to find you the best limited recourse loan, and of course an astute real estate agent to find and manage the property. Read here on how to manage CGT in a self managed super fund.
Once you tick these boxes, you can step back and be confident that you have made a well-informed and unrushed decision. Hopefully, as time passes, your property will not only be paying itself off but will be slowly increasing in value.
Let’s be ACCOUNTable together!
Regards,
Rukmal (Rocky) Wijesooriya
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02 9499 5697
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Disclaimer: This article provides general information only and has been prepared without taking into account your objectives, financial situation or needs. We recommend that you consider whether it is appropriate for your circumstances. Your full financial situation will need to be reviewed prior to acceptance of any offer or product. It does not constitute legal, tax or financial advice and you should always seek professional advice in relation to your individual circumstances.
