SMSF Mortgage Finance – Explained!
Recent changes to ‘Super’ legislation means you may now be able to use your Self Managed Superannuation Fund (SMSF) to borrow to invest in property.
The unique tax advantages available to Self Managed Superannuation Funds provide an opportunity to increase returns and grow your retirement income.
Borrowing through your SMSF
In September 2007 the Federal Government approved changes to the Superannuation Industry (Supervision) Act 1993 (SISA) which has resulted in SMSF's becoming one of the most tax-effective asset ownership vehicles now available.
Section 67(4A) now provides SMSF’s with the ability to borrow funds to buy “business real property” & “eligible non member owned residential property”, if certain conditions are met.
These conditions include;
1. recourse of the lender against the SMSF is limited to the property itself;
2. the borrowing is to acquire an asset the SMSF would otherwise be permitted to buy;
3. the asset is held on trust for the SMSF;
4. the SMSF acquires a beneficial interest in the asset from the outset; and
5. the SMSF has the right to acquire legal title on making one or more payments.
How does it work?
Clearly, there is no one size fits all product offering from our panel of SMSF lenders, as with traditional finance, various SMSF products differ with security requirements, credit assessment as well as a diverse range of product features. Generally speaking though, the generic approach is as follows
SMSF mortgages are a unique lending facility that allows approved applicants to use their SMSF to borrow and invest in certain eligible real property assets including commercial offices, factories, shops, showrooms, warehouses and ‘approved’ residential properties.
The process simply requires you to have or to establish a compliant SMSF, identify an appropriate property to buy and apply for your SMSF mortgage loan.
Once your loan is approved the property you have identified is purchased by a trust with your SMSF having a beneficial entitlement to the property. The trust leases the property to either your own business, or another business (or an arms length residential tenant), earning an ongoing rental income. Rent is paid to a rent account established in the name of trust.
This income is used to repay the loan as well as pay any costs associated with the property. Your SMSF makes any top-up payments to the rent account required for any loan repayment shortfalls.
Once the loan is repaid, the trust may transfer ownership of the property to your SMSF.
Key benefits to borrowing through your SMSF?
SMSF mortgages are a tax-effective way to buy property.
Borrowing to invest in property provides the potential to utilise traditional negative gearing
strategies to generate tax-effective income for the SMSF.
Holding property in a SMSF also allows you to defer any capital gains until retirement, at which stage they become tax free.
Allowing your SMSF to own the property provides greater security and control for your business’ future needs. SMSF mortgages can release equity in property you already own.
If you already own your own premises either internally or externally from your SMSF,
restructuring using SMSF mortgage finance, could release up to 70% of the value of the property to be used for other investments.
SMSF mortgages let you diversify the assets in your SMSF. The ability to borrow to buy property provides the opportunity to diversify your overall SMSF portfolio by including property which previously has been difficult to access, without significant available equity.
In other words, more can be achieved with SMSF borrowing, in terms of leveraging into ‘larger’ real property assets. Further, as an investment in an SMSF borrowing arrangement, it is generally accounted for 'net of liabilities', thus providing advantages when considering existing superannuation contribution limits.
Who can borrow through an SMSF?
Assuming all the necessary conditions are met, SMSF mortgages are suitable for a variety of property investors, including;
- Small business owners who already own, or are looking to purchase, their own premises, including offices, factories, warehouses and shops;
- Residential property investors
- SMSF's looking to diversify their investment portfolio; and
- Investors looking for a tax-effective structure to invest in direct property and release equity.
On
The key issues are:
- Certain features of limited recourse borrowings from ‘related parties’ to a trustee may be non compliant
- The observance of commercial rates of loan interest
- The ‘capitalisation’ of interest
- Personal Guarantees secured beyond the limited 'charge' over the asset purchased
Should you wish to discuss the opportunity in greater detail, please feel free to call Richard Hicks on
1300 72 86 96
You can also click on the link on the left of this page i.e.
'ATO SMSF TA 2008/05'
for a more detailed overview of the ATO Taxpayers alert and how Assent Mortgage Finance addresses these issues compliantly.
The information set out here is current as at March 2008 and is general information only and does not take into
account your objectives, financial situation or needs. Before acting on this general information you should consider the appropriateness of this information having regard to your personal objectives, financial situation and needs. The taxation position described is a general statement and should only be used as a guide. We recommend that you seek appropriate professional advice. If you do not have an adviser, please contact