SMSF loans are complex financial products, so much so that the big four banks (Commonwealth Bank, Westpac, NAB and ANZ) are no longer approving mortgages for SMSFs. This is because of the complex ownership structures in SMSFs which require specific knowledge and experience from credit officers, which is apparently sparse these days. The guidelines for lending to SMSFs are many, and onerous in comparison to other loans.
However, at AAA we have the experience and knowledge to provide SMSFs with bank and non-bank options for purchasing as well as refinances. While the process is complex, we make it as simple as possible. Here are some things to consider when using your SMSF to buy property.
Some General Guidelines
There are some general guidelines for buying property through your SMSF - the property must:
Meet the 'sole purpose test' of solely providing retirement benefits to fund members
not be acquired from a related party of a member
Not be lived in by a fund member or any fund members' related parties
Not be rented by a fund member or any fund members' related parties
If your SMSF purchases a commercial property, it can be least to a fund member for their business, but it must be leased at the market rate and follow a specific set of rules.
Borrowing or putting your super into property calls for strict borrowing conditions - this is referred to a a 'limited recourse borrowing arrangement. You can borrow or gear your super into residential or commercial property. Some notable risks of doing so include:
Higher costs - SMSF property loans are more costly than other property loans.
Cash Flow - Loan repayment must come from your SMSF so your fund needs to have adequate liquidity to meet the loan repayments.
Hard to Cancel - Unless your contract is crafted otherwise, it can be difficult to unwind the arrangement.
Possible Tax Losses - You cannot offset tac losses from the property against your taxable income outside the fund.
No Alterations to the Property - The character of the property cannot be altered through changes until you pay off the SMSF property loan.
Costs of a SMSF Property
SMSF properties come with many fees and charges, which can ultimately add up and reduce your super balance. Costs can include; upfront fees, legal fees, advice fees, stamp duty, property management fees, bank fees. The most important thing is to get independent advice about your SMSF, this will have to come from someone who holds an AFS licence, meaning they are regulated by ASIC.
If you want to know more about using your SMSF to buy property, contact us today.