Property investment is an increasingly popular way for Australians to grow their wealth for retirement – and now you can even use your self managed super fund to do this. While people have generally been able to buy a home through this fund, recent changes heave meant that you can now use your SMSF to borrow for an investment. Here are a few tips to help you join the growing throng of investors following this route.
In line with investment strategy
There are a number of conditions for taking out SMSF loans. You may be prevented from borrowing in this way if the loan doesn’t fall in line with the fund’s investment strategy. Trustees need to think carefully about how the fund will adapt to changes further along the track. For example, the SMSF needs to have enough cash flow to meet pension payment requires if you or another member were to retire,or how the members could continue to service the loan if a member pulls out.
Limits to borrowing
While you can take out a loan through your fund, this can only be done under certain circumstances. For one, SMSF borrowing falls under limited recourse borrowing arrangements, which protect your super fund if the loan were to default because the lender only have recourse to the one asset. However, this means there are some important stipulations.
You can only use a SMSF loan to purchase a single investment property, and it cannot be connected to a member of the fund in any way. For example, the fund can’t purchase from a friend or relative of a trustee, have a cohort rent on the property or even sell it to a person known to the fund. The fund’s sole purpose is to provide for its members’ retirement and anything that is seen as falling outside of this category carries severe tax consequences.