SMSF – The Basics
Like many people, you may have read or heard about borrowing via your Self-Managed Super Fund (SMSF) to purchase assets as part of an investment strategy. The first part of this equation is ensuring you have an SMSF to begin with.
Did you know that SMSF’s are not just for the self-employed? If you are employed by someone else, you can still set up your own fund to invest on your behalf and provide for your retirement. Of course, setting up a fund can take time and money so be sure to talk with your financial adviser to determine if it’s the best option for you and your future.
Once you have decided to proceed, you may wish to consider the option of investing in residential or commercial property using your SMSF. You can always do this with the cash you have available in the fund, but you can also borrow money to do so.
The superannuation fund can buy any property but the purchase must usually be an arms-length transaction. This means that you cannot buy from yourself or from a related party (ie the property is purchased from a “stranger”). However, this does not apply to what is called, Business Real Property. So, in this case a Superannuation Fund may buy the property that houses your business as long as the business is its own legal entity and there is a commercial lease in place for rental payments to be made to the fund.
The lender will lend to the SMSF on a limited recourse basis. This means that the lender can only have the property you are buying as its security – it cannot then access other assets within the fund to repay the loan. You will find in most cases though that the lender will require personal guarantees from members of the SMSF.
When the mortgage is paid out in full, title to the property may be transferred to the SMSF by the Property Trustee or the Property Trustee may continue as registered proprietor.
To summarize this
- The SMSF can buy property
- You cannot buy residential property from yourself or a related party BUT
- You can buy the property your business is located in or will be located in
- The bank’s loan is against that asset in the fund only BUT
- They will take a personal guarantee from you (the SMSF members)
On the next page, you can learn about setting up
your SMSF and applying for SMSF loan