Self-managed super funds (SMSFs) are a type of superannuation fund established by up to four individuals called trustees. SMSFs offer greater control over how assets are invested, which leads to reduced fees and enables trustees to manage tax outcomes.
Of course, benefits like these come with certain requirements and responsibilities. For instance, trustees need time to run their super fund and ensure all activities are complying with the law. They should also be proficient in financial and legal matters. Likewise, setting up the SMSF should be done under strict rules, which are regulated by the Australian Taxation Office.
Before using your SMSF to invest in property, here are some things that you need to take into account:
LRBA – A SMSF can borrow funds in order to invest, through a limited recourse borrowing arrangement (LRBA). It was introduced in 2007 and since then, buying property with a super fund has become a popular investment strategy. With this arrangement, SMSFs can get investments that may not otherwise be possible due to lack of funds. To set up an LRBA, your SMSF should take out a loan with a bank and invest in a security trust, which is then used to purchase the asset.
Tax Implications – While SMSFs are subject to income tax, this income can get a concessional tax rate of 15% if these are complying funds in which assessable income can be interest, dividends, rent, net capital gains or assessable contributions. Alternatively, if the fund reaches pension phase, the earnings will be tax-free. A complying fund is also entitled to claim deductions for expenses.
Single Acquirable Asset – What assets can you acquire? SMSF can only utilise an LRBA to purchase a single acquirable asset. It can be a single property and land, shares of the same market value in a company, or units from a unit trust which have the same fixed rights and are of the same market value.
Borrowing Rules – A SMSF is allowed to borrow money or maintain a loan, provided that these conditions are met:
- The borrowed money is used to purchase a single asset or a collection of identical assets of the same market value (acquirable asset).
- The borrowed money is not used to “improve” an acquirable asset.
- The acquirable asset is set up on a holding trust. This way, the trustee will gain interest from the asset.
- The trustee can acquire legal ownership of the acquirable asset, provided that one or more payments are made after gaining interest.
- Any recourse raised against the trustee is limited to rights related to the acquirable asset.
- The acquirable asset is not subject to a charge other than what is provided in relation to what is borrowed by the trustee.
- The acquirable asset can be replaced by another acquirable asset as listed in the super law.
Gearing your SMSF into property can be a complex endeavour and there are a lot of other things that need to be considered. Due diligence must be taken to ensure that your investment strategy is in compliance with the rules. Seeking advice from a qualified mortgage broker will ensure that your strategy follows the borrowing rules for SMSFs.