More Australians are turning to their Self-Managed Superannuation Funds as a financing option. According to statistics released by the Australian Taxation Office (ATO), lending through a Superfund has risen from $1.4 billion borrowed in June 2011 to over $21.8 billion by the same month in 2016. Is an SMSF loan a good choice for you?
What Is Limited Recourse Borrowing?
Most loans obtained through an SMSF are structured as Limited Recourse Borrowing Arrangements or LRBAs. Any investment bought with funds from the Super are held in trust so that the borrower may access it in the future.
The term “limited recourse” is used because, in the event that the loan goes into default, the lender can only seek compensation through the asset that the loan was used to purchase. They cannot go after any other assets currently held by the Superfund.
What Can I Buy with a Superfund Loan?
What can an LRBA be used to purchase? The general guideline is that it can be used to buy a single asset or a collection of similar assets. Each asset must hold the same market value. The beneficial interest earned from the investment goes to the SMSF trustees however legal ownership remains with the holding trust.
A majority of money borrowed through a Superfund is used to buy property, both non-residential and residential. This lending option allows the property to be purchased with a lower tax rate than you would get when buying on your own. If the Superfund goes into pension phase, then the property can be sold tax-free. If it is sold during the accumulation phase, then the property is eligible for a discounted capital gains tax.
One thing to remember when investing in residential property is that the trustee and/or any member of the trustee’s family cannot live in the property. There must not be a direct benefit for the trustee or any relatives.
SMSF Interest Rates
A 2016 report released by Canstar provided an overview of SMSF loan interest rate averages, which included:
- Variable – 5.65%
- 1 Year Fixed – 5.42%
- 2 Year Fixed – 5.32%
- 3 Year Fixed – 5.38%
- 5 Year Fixed – 5.62%
What if I Don’t Have Enough in My Super to Buy Property?
There is an option available for those who do not have enough in their SMSF to buy residential property. You can use a Tenants in Common, or TIC, arrangement. This permits you to borrow from both your Superfund and your home. For example, if you are interested in a property that costs $400,000, you could use the TIC to borrow $200,000 against your home and the remainder from the Superfund.
If you have questions about borrowing through your Super, contact Brian and the team at BIS Cosgrove to learn more about this investment opportunity.