Over a decade ago now the rules of borrowing in self-managed superannuation funds (SMSFs) were relaxed, meaning that SMSFs can borrow to invest in some circumstances.
The relaxation meant that instead of just being able to borrow for investing in shares SMSFs can now use funds for property asset purchases. Further to this, legislative changes in 2020 also made it possible for SMSFs to acquire property with limited recourse borrowing arrangements (LRBA) using a holding trust.
Obviously, there’s more to the story, but with that snapshot behind us let’s dive a little deeper …
Using your SMSF to invest in property can be a great strategy for tax purposes; help diversify your investment portfolio; and it can put the cash in your fund to good use. With the introduction of the LRBA, this investment strategy has grown in popularity over recent years, but this is one area you really do need to make sure you know what you’re getting into.
The rules imposed by the ATO and the Superannuation IndustrySupervision Act (SISA) can be super complex so we recommend you speak to our qualified team at Attune before jumping into anything, but let’s look at the overview…
• The property must not be purchased from a related party or SMSF member
• The property can be a residential property, but it must not be lived in or rented by a fund member or any related party
• For a commercial property, it can be rented to a related party, but it must be used solely for their business, and it must be rented at market value
• As always when it comes to your SMSF, it must meet the ‘sole purpose test’ of solely providing retirement benefits for its members
Obtaining finance can sometimes be hard as the borrowing criteria can be stricter, and the banks usually demand a higher loan to value(LVR) ratio when compared to borrowing outside of super.
The bank will also make sure the fund will be able to service the loan over the years to come, and they will factor in the estimated rental returns plus how much the fund will receive in super contributions, based on what you’ve contributed over recent years. It’s important to remember that loan repayments must be made from your SMSF, and as the ATO can sometimes limit your ability to put money into super, this cashflow needs to be carefully considered.
The tax benefits can be a massive pro to this strategy if you can get it to work. SMSFs are generally a low tax environment compared to entities outside of super and can even end up tax-free based on your age and retirement status.
The SMSF generally pays 15% tax on any rental income it receives from the property. If the property is held for more than 12 months, the fund receives a one-third discount on any capital gain it may make upon sale. This brings the capital gains tax liability down to 10%.
Maintaining a SMSF and staying on top of your annual compliance requirements can be a big job, and as trustee of the SMSF you are responsible for this.
However with help from your trusted Attune advisor we can help you make the right decisions when it comes to your SMSF and if embarking on a LRBA is the right path for you and your investment needs.
If you’d like to discuss options for investing using yourSMSF, get in touch with the team today on 1300 866 113 or send us an email to start the conversation.