Self Managed Super Funds
Mixing property and your self managed super requires compliance to many rules and regulations.
The team at AAA Mortgages can help you understand the rules, costs and risks associated with setting up an SMSF to invest in residential property.
Self Managed Super Funds
SMSF Loans - Important Context
SMSF loans are highly complex financial products, so much so that the big four banks have ceased lending to SMSFs for residential and commercial loans.
This is because of the complex ownership structures in SMSFs which require specific knowledge and experience from credit officers, which is a specific skillset with limited access. The guidelines for lending to SMSFs are many, and onerous in comparison to other loans. Watchdogs are also tightening regulations and becoming increasingly diligent with regulation in the SMSF space.
However, at AAA we have the experience and knowledge to provide SMSFs with bank and non-bank options for purchasing as well as refinance. 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.
Make sure you're up to date on the most recent up to date on current regulations for self-managed super funds. We've compiled some of the need-to-know changes below.
Non-arms length investments
The ATO is becoming more active in terms of compliance for SMSFs with regards to non-arms length transactions.
Here are the situations where income is treated as non-arm's length:
Limited recourse borrowings which are not on a commercial basis.
Public and private company shares or units in a public or private trust which are not acquired at market price
Situations where services are provided to the fund at no cost or at a substantial discount
If you think you may have a non-arm's length income issue, dating from 1 July 2018, contact your accountant or fund administrator.
Outcomes from the 2021 Budget
The maximum number of parties in a SMSF has been increased from four to six.
This is good news for families with more than four members, as instead of having two SMSFs, there's possibility to include more members.
However, there were no changes to taxation of SMSFs as many expected. Overall, the budget was good news to people with SMSFs.
The ATO is concerned over investment strategies
Particularly with a high concentration of investments in one asset class like property, equities, cash or fixed deposits.
This concern is understood as focusing on fund trustees not providing reasons for their decisions regarding the fund's investments.
Self Managed Super Funds Overview of the Rules
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 leased to a fund member for their business, but it must be leased at the market rate and follow a specific set of rules.
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.
Borrowing with a SMSF
Borrowing or putting your super into property calls for strict borrowing conditions - this is referred to as 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 tax 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.
Get in Touch
Have an inquiry about an SMSF loan? Send a message and we'll get back to you ASAP.