Property lending in SMSF – how does it work?

A common question we are asked is about purchasing property in a Self Managed Super Fund.

A common question we are asked is about purchasing property in a Self Managed Super Fund.

For a long time you were unable to borrow to purchase an asset in a SMSF. Several years ago the Government changed the laws so that you are now able to borrow to purchase property in a super fund, providing the funds are borrowed as a LRBA.

So what is a LRBA and what does it mean?

A Limited Recourse Borrowing Arrangement is where a super fund is allowed to borrow funds against the purchase of property, but only where a bare trust has been established.

A LRBA is the only type of lending allowed under the Superannuation Industry Act 1993.  Limited Recourse means that should you be unable to make loan repayments, the bank loan provider can only sell the asset that the loan relates to in the bare trust.  This provides protection for all other assets that are owned by the SMSF and means that they cannot be sold to pay for debt on property.

It is through a bare trust structure and LRBA that SMSFs are able to borrow to invest in property, however it is important to keep in mind that the new bare trust needs to be set-up for any new property or asset purchased using finance.

There are both pros and cons to a LRBA:

Pro

  • It can help to diversify your SMSF’s investments into other assets like commercial property.
  • If you’re a business owner, you can buy business premises.
  • It protects the other assets in your SMSF from “recourse” or from the lender selling those assets to recoup any losses that weren’t covered by the sale of the property you purchased.
  • There can be tax benefits such as capital gains tax (CGT) concessions. The maximum CGT rate drops from 15% to 10% where a property is held for more than 12 months.
  • As long as you’re not too close to retirement age, you can actually use concessional super contributions in order to pay down your loan faster. You don’t get this benefit with a standard home loan!

Risks

Consider whether the purchase of the property will actually put you in a better position for retirement.

That means taking into account rental income and capital growth versus the mortgage interest and the cost of property maintenance and repairs.

  • You’re investing so you’re still at the mercy of the property market.
  • There is illiquidity risk if the property makes up a large portion of the SMSF’s total assets. If the property cannot be sold quickly in the event of default, it may impact on an SMSF’s ability to meet its obligations to members.
  • Borrowing itself can affect the SMSF’s ability to meet member benefits obligations.
  • SMSF and superannuation legislation changes on a regular basis and with each successive government. It can be hard to follow these rule changes and breaches can cost you thousands of dollars in fines depending on the size of your SMSF.

*Please note that the above information is general information only and you should seek independent advice.

Subscribe to our newsletter

Make a Payment