Recent changes to borrowing legislation over the past few years have enabled people to invest in property through self managed super fund loans. But this investment strategy may not work for everyone. Here are a few general benefits and disadvantages to using a fund for this purpose.
Pros
It can be tax-effective
If your SMSF complies with the legislative requirements, it receives a lesser tax treatment than traditional worker rates. The earnings within your fund are taxed at 15 per cent, which is nearly half that of the marginal tax rate that the majority of workers pay. Furthermore, once the super fund enters the pension phase income and capital gains are tax free – but if your super fund doesn’t comply you risk a tax rate of 46.5 per cent.
You can now purchase property
While your earnings outside your super fund might not be enough to purchase an investment property – and even you individual contributions to the fund might not be quite enough – a SMSF allows you to combine your capital and borrow with other parties of the SMSF, which might give you the boost you need to purchase.
Limited recourse
Under government stipulation all SMSF are made under conditions of limited recourse, meaning the lender does not have a right to more than the single asset in your fund.
Exceptions for business purposes
SMSF borrowing rules strictly prevent you from purchasing a property from any related party, but a fund can purchase commercial property for your business to lease. However, the company must pay a set level of commercial rent to keep the asset from becoming non-compliant.
There are many nuts and bolts within SMSF loans, so ensure you thoroughly research your options and seek professional advice before you embark with this strategy.
