Self-Managed Super Fund Loans

Self-Managed Super Funds are often used by investors as a means to take control over their superannuation for the purpose of investing in property of their own choosing. However, Self-Managed Super Funds – particularly when used for investing – is a complex subject that requires the guidance of a suitably qualified professional.

A Self-Managed Super Fund requires that you set up a special type of trust that manages your super funds. Just like any kind of super fund, and if you’re not self-employed, your employer will pay into your own fund rather than somebody else’s. However, unlike a managed fund, you will have full control over what assets or investments your fund will make.

In consultation with a qualified professional they’ll introduce you to the various nuances of the loan, although the following points, copied from the Government’s MoneySmart website, provide an early introduction into the general limitations of the fund (in terms of borrowing).

The asset is an asset the SMSF could otherwise legally acquire (if it had the funds).
The asset is held on trust for the SMSF using a security trust (known as a security custodian).
The SMSF acquires a beneficial interest in the asset from the outset.
The SMSF has the right to acquire legal title from the security trustee upon making all loan repayments.
The lender must only have limited recourse against one particular asset. This means that in the event of a loan default, the lender must not be able to claim any other assets of the fund.
Each borrowing arrangement can only be for a “single acquirable asset”. In the case of strata title or subdivisions, each title is considered a separate asset.

Do Banks Lend to SMSF?

SMSF loans are complex, and as detailed above, their security is limited to the primary asset rather than the assets of the fund itself. The fact that only limited banks will lend to Self-Managed Super Funds (since they’re higher risk with lower profit) is less important than the fact that there are some lenders that have excellent products available for this ‘niche’ market.

Banks will take longer to process the SMSF loan so it’s important that you make the application around two or four weeks prior to your property search. The complexity of the lending often inherits a delay.

A SMSF Is Expensive

With proper guidance you will be able to determine if the relatively high costs of maintaining your won SMSF is offset by the gains from the managed funds. Various yearly fees, Government fees, and accountancy fees will continue to apply. A limited example of fees is listed below.

upfront fees.
legal fees.
advice fees.
stamp duty.
ongoing property management fees.
bank fees.

You can expect the fund to cost you about $5000 per year in administration fees.

Only an accredited professional may set up, maintain, or manage your SMSF on your behalf.

SMSF Rules

The type of property you may purchase through a SMSF is limited. The property must:

meet the ‘sole purpose test’ of solely providing retirement benefits to fund members.
not be acquired from a related party of a member.
not be lived in by a fund member or any fund members’ related parties.
not be rented by a fund member or any fund members’ related parties.

If your SMSF purchases a commercial premises, it can be leased to a fund member for their business. However, it must be leased at the market rate and follow specific rules. We’re specialists in the medical field and often help medical professional purchase their practice through a SMSF.

Self-Managed Super Fund Borrowing

Borrowing or gearing your super into property involves very strict borrowing conditions, called ‘limited recourse borrowing arrangement’, and you may only purchase a single asset with a limited recourse borrowing arrangement. For example, a residential or commercial property.

Taking a broad view, as outlined by MoneySmart, they make the following claims of geared SMSF borrowing.

Higher costs – SMSF property loans tend to be more costly than other property loans.
Cash flow – Loan repayments must come from your SMSF. Your fund must always have sufficient liquidity or cash flow to meet the loan repayments.
Difficult to cancel – If your SMSF property loan documents and contract aren’t set up correctly, you can’t unwind the arrangement. You may have to sell the property, potentially causing substantial losses to the SMSF.
Possible tax losses – You can’t offset tax losses from the property against your taxable income outside the fund.
No alterations to the property – You can’t make alterations that change the character of the property until you pay off the SMSF property loan.

These risks are very general in nature and don’t necessarily apply to your specific set of circumstances. For example, the borrowing doesn’t necessarily cost more than traditional borrowing (although in most cases it will since a higher-risk investment by the lender).

The loan is made out to the trustee of the SMSF in its capacity as a trustee with the security custodian as mortgagor. Some lenders require a personal guarantees from the members of the superannuation fund in cases where the loan cannot be serviced, particularly if you’re borrowing more than 60% of the total purchase. In essence they’re applying appropriate diligence to ensure that your fund is able to service the loan (as if it were an individual).

For new trusts, many lenders will look at the current income of the trust beneficiaries, the previous super contributions they have been making, and their new proposed super contributions.

Can my SMSF buy Your Own Home?

Your SMSF can buy a commercial property that you already own; however, your fund cannot buy a residential property that is owned by you or a related party. Penalties apply if you make errors, and serious penalties apply if you attempt to circumvent this requirement.

A 20% Deposit is Usually Required

You will need up to a 25% deposit to cover costs, fees, and duties. Since your super likely already has a high balance it’s these funds that typically contribute towards this requirement.

Setting up a SMSF

Setting up a fund is less relevant than deciding on whether it is actually worthwhile, or whether your investment strategy requires it. In consultation with an appropriate professional you can register the fund quite easily. You choose a name and set up the trustee and trust structure, establish an investment strategy, apply for the trust to be regulated (applying for a TFN and ARBN), create the necessary bank account, and then roll over your existing funds into your newly created fund.

General SMSF Rules

The management of a SMSF is made in accordance with very strict and legislated guidelines. The following rules are very general and broad, but they’re a good starting point.

The fund must always be run with the sole purpose of providing retirement benefits.
You cannot use an SMSF to gain early and improper access to superannuation.
SMSFs can now borrow as long as certain requirements have been met.
The SMSF trustee can either be a company owned by all members or all members as individual trustees.
An SMSF can have between one to six members (previously four members).
The SMSF must always maintain and follow its prescribed and well-documented investment strategy.
The trustee must ensure that the SMSF complies with the Australian Taxation Office (ATO) regulations and guidelines.

Additional information is made available via our ‘Additional Resources’ section below.

SMSF Risks

Sourced from MoneySmart, risks associated with SMSF include the following:

You are personally liable for all the fund’s decisions — even if you get help from a professional, or if another member made the decision.
Your investments may not bring the returns you expect.
You are responsible for managing the fund even if your circumstances change — for example, if you lose your job.
There may be a negative impact on your SMSF if there is a relationship breakdown between members, or if a member dies or becomes ill.
If you lose money through theft or fraud, you won’t have access to any special compensation schemes or to the Australian Financial Complaints Authority (AFCA).
You could lose insurance if you’re moving from an industry or retail super fund to an SMSF. See consolidating super funds.

A qualified professional will introduce risks specific to your circumstances.

More Information

You should review the ATO website and other Government resources for a more through understanding. Contact us and we’ll refer you to one of our qualified professionals.

Data.gov.au – Historical SMSF Performance Data.
ASIC Disclosure of costs (Advice on self-managed superannuation funds, ASIC).
ASIC Disclosure of risks (Advice on self-managed superannuation funds, ASIC).
Treasury.gov.au – Self Managed Superannuation Funds (SMSF)
Superannuation Industry (Supervision) Act , 1993 (SIS Act) – Refer Section 67A detailing ” limited borrowing ability”.
Superannuation (Self Managed Superannuation Funds) Taxation Act, 1987