Residential investment is an attractive option for Australians of all walks of life. Whether you’re looking to get your foot on the first rung of the real estate ladder, or want an asset that can provide for a comfortable retirement, the property market can be a great option. If you’re in the latter camp, self managed super fund loans can be the solution. As a relatively recent addition to the home lending arsenal, you’ve probably got a few questions about how you can get in on the play.
1. How does an SMSF loan work?
If you have decided to set up an SMSF specifically to invest in residential property, but don’t have enough in the fund to purchase the house outright, you can make up the difference using an SMSF loan. However, there are strict laws governing how and when you can use your super fund to buy a home, as well as laws limiting the recourse a lender has to your fund in the event you cannot meet the required repayments. These make this type of borrowing very different to a run-of-the-mill mortgage
2. What can I buy?
You can buy any piece of residential real estate, but only if it complies with the following criteria:
• It must be consistent with the sole purpose test, meaning that it can only be bought with the intention of providing for members’ retirement.
• The property cannot be purchased from anyone related to the fund members, nor can it be lived in or rented to a connected party.
There is an exception to the last rule, in that the SMSF could purchase business premises from a party related to the fund. However, there are complex rules surrounding its use, leasing and purchase arrangements.
3. What do I need to think about?
Making an investment through your SMSF is typically a long-term commitment. It is therefore critical that the fund is able to meet its repayment and fee obligations, as well as have enough left over to service any other costs that might come up, such as legal, accountant and auditor charges. In the same vein, it pays to have contingency plans in place in the event that the rental is vacant for an extended period, or to cover maintenance and repairs.
Understanding the consequences for a non-compliant fund is crucial. Given that the investment complies with all regulations, the Australian Taxation Office provides for a concessional tax rate of 15 per cent on the income your SMSF makes from the property. If you diverge from any legal stipulations, your fund will be taxed at the highest marginal rate.
