Is a self managed super fund loan right for you?

Until recently state government legislation prevented self managed super funds (SMSF) from borrowing money to buy assets. However recent amendments have changed the landscape and your fund is now able to take out self managed super fund loans to secure a property.

However, under these changes there are a number of stipulations that limit purchases to specific circumstances. If you are thinking about using your SMSF to purchase an asset for investment purposes, here are some of requirements you need to meet.

Limited recourse borrowing

If your SMSF has enough for a deposit on a property, it can take out a loan to settle the balance. However, any recourse the lender has under the borrowing arrangement is limited to the single asset.

For this reason, the lender normally requires a guarantee. Without any confirmation of remittance they aren’t likely to approve your application, so make sure there is sufficient cash flow to service the loan.

Property must be purchased at arm’s length

The SMSF can purchase any residential or commercial property, granted that it is made at an ‘arm’s length’. This means the transaction must be made with a stranger with whom the super fund has no dealings whatsoever, whether this be personal or familial. Under this condition you can not sell your own house to the fund and the fund cannot collect rent from a property leased by any person associated with you or another member.

The legislation contains an exception for business assets, in which case the property can be purchased from a related party.

The legal title must be held bare trust by an independent trustee

The property must be owned in bare trust – in other words, a separate trustee holds the title until the loan is paid off in full.

The SMSF has beneficial title to the property meaning that it will receive lease payments from the tenant of the investment property, which settles interest paid on the SMSF loan. Once the loan is repaid the fund has the right to legal ownership by acquiring the title – but this is not an obligation.

The fund can undertake the usual maintenance as you would on a usual investment property but is prevented from redeveloping the site. This could be interpreted as the fund being a profit-making exercise, rather than fulfilling its ‘sole purpose’ – to provide for members’ retirement.