LOANS TO SELF MANAGED SUPER FUNDS (SMSFs)

Since September 2007, SMSFs are legally entitled to borrow money to acquire residential or commercial investment property.

NOTE : the following information is basic, general information ONLY. It is not intended to be a detailed explanation of all the relevant points which individuals will need to consider before establishing their own SMSF and investment property acquisition strategy. Individuals should FIRST obtain their own independent legal, financial planning and taxation advice.

There are several important ELIGIBILITY CONDITIONS/REQUIREMENTS:

• the SMSF must be correctly structured both from a legal and borrowing viewpoint
• independent legal, financial and taxation advice must be obtained before investing in property through a SMSF
• the property must be held in trust by a Property Trustee for the SMSF
• the SMSF must be permitted to borrow for the purposes of acquiring investment property
• the purchased property cannot be used as a residence for a Fund member or their family. It can, however, be used as a commercial business premises for a Fund member or their family
• the property purchase must be a permitted investment strategy for the Fund
• there must be no recourse by the lender against any other assets of the SMSF
• all members of the Fund should be in the accumulation phase (making contributions to the Fund) rather than being in the pension phase (receiving a pension from the Fund)
• after the loan is repaid and the mortgage discharged, the SMSF has the right to acquire legal ownership of the asset from the Property Trustee

ADVANTAGES of acquiring investment property through a SMSF:

• purchase of property using monies not usually available to pre-retirees
• wider diversification of assets may now be considered and held by the SMSF
• greater purchasing power by using only some of the funds in your SMSF as a 20% (minimum) deposit to acquire residential property or a 30% (minimum) deposit for commercial property
• accelerated wealth accumulation by taking advantage of tax rate concessions:
  • 15% tax rate on rental income for eligible Funds, and
  • NIL capital gains on sale of property if members have commenced drawing a pension from the Fund

What is the basic PROCESS of purchasing an investment property on behalf of a SMSF?

• a SMSF is set up with appropriate power to purchase investment property and to borrow funds
• a simple Property Trust can be established to acquire an investment property. The Property Trustee purchases the property on behalf of the SMSF
• a qualified Financial Planner must provide a written certificate that independent financial advice has been given on the appropriateness of your SMSF borrowing money to purchase the investment property
• the SMSF applies for a “limited recourse” investment loan. All appropriate documentation is held by the lender.
• the lender confirms that the SMSF has sufficient income, (including rental income, contributions to the Fund by
• members and earned income from the Fund balance), to service the monthly loan repayments.
• SMSF Trustee signs Loan Contract. Property Trustee signs mortgage documents
• other security documents, including Trust Deeds, Guarantees and Certificates confirming receipt of appropriate independent advice, must all be held by the lender
• the SMSF completes the purchase of the investment property
• after loan settlement, the property is rented out by the SMSF Trustee on normal commercial terms
• the SMSF has an ownership interest in the property that entitles it to rental income and capital gains from the property
• once the loan is repaid and the mortgage discharged, the property may be transferred from the Property Trust into into the name of the SMSF

EXAMPLE

$300,000 purchase price for a residential investment unit
$ 60,000 deposit (minimum of 20%) paid by SMSF plus $15,000 for stamp duties. A total of $75,000 is required

$240,000 loan arranged for SMSF to complete the property purchase

• loan term up to 30 years on “principal & interest” repayment basis
• adequate loan servicing verified by lender prior to official approval
• variable interest rate is usually similar to a lender’s current normal Home Loan variable rate
• clean credit history required for individual Fund members
• normal loan guarantees, when required by lender, provided by all adult Fund members and associated trusts

Loans to SMSFs are NOT AVAILABLE for the following types of securities:

• owner occupied residential property
• vacant land
• specialised security e.g. retirement village unit
• specialised title e.g. stratum title, company share
• property to be developed
• non residential or commercial properties
• cash deposits
• “off the plan” properties
• properties to be constructed
• properties located in isolated or unacceptable postcode areas

Contact Melbourne Mortgage Finance to discuss individual scenarios which may be referred to a lender for consideration and feedback prior to purchase