A self-managed super fund loan or an SMSF loan is a home loan operated by an SMSF to purchase investment residential or commercial property. The investment profits, regardless if they’re from capital gains or rental income, are directed right back into the super fund which in turn will increase retirement savings.
It is worth pointing out that rental income cannot be given as a pre-retirement benefit nor can it be handed out by a trustee to a member of the fund. It may only be utilised to boost the retirement savings in which it would ultimately be distributed to the members when they retire.
In addition, the residential or commercial property cannot be lived in, acquired from, or leased (with the exception of extremely limited situations), to a member of the fund or any one of their associated parties.
What are the features of SMSF loans?
Some of the features of SMSF loans are described below:
- The SMSF will pay for the loan repayments. Once the loan is paid off, the legal ownership of the property is turned over to the SMSF.
- SMSF loans are classified as “limited recourse” which implies that if the loan defaults, the lender is restricted to seeking compensation by means of the specific asset purchased with the loan. The lender may have no recourse to various other assets held in the SMSF.
- Typically, acceptable security property includes properties in the metro (in most capital cities) which include residential and non-specialised commercial real estate.
- SMSFs are able to manage a property in any way and at any time in the same manner as investors can manage their property investments. For example, SMSFs can lease, repair, renovate, or sell. Nonetheless, it is still dependent on the terms of the loan and mortgage.
What are the benefits?
SMSFs provide significant benefits when used to purchase property. Here are some of the benefits:
- Self-managed super funds are able to purchase property worth beyond its own available funds by utilising the benefits of gearing.
- Should a loan default, other SMSF assets are protected since the lender may not have recourse to the other assets in the SMSF.
- The SMSF enjoys all capital growth and income regardless of whether the property has been fully paid for. SMSFs can utilise the income coming from the property to help pay for the loan.
- Minimising your SMSF’s tax liability may be possible as interest expenses can be declared as tax deductions by the SMSF.
Nonetheless, purchasing property through superannuation is not as simple as purchasing outside of super. Every investment decision needs to remain in favour of all the members of the fund and according to the laws that surround SMSF loans.
If you need further assistance with SMSF loans, click here to contact a Chan & Naylor Wealth Planning Specialist today.
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