WHAT YOU NEED TO KNOW

BORROW IN AN SMSF

Under recent changes to superannuation rules a fund can now borrow, under certain circumstances, to purchase an asset. This potentially allows a fund to buy an asset that it may not otherwise have been able to afford, allowing a range of potential new assets. A popular investment that has benefited from these rule changes is property.


At iSUPER® we are able to assist trustees, who wish to borrow in super, to purchase a property utilising our experience in the SMSF sector and easy to follow processes. We can highlight key strategies available, important considerations and help guide you through the process.


To read more about what is involved in purchasing a property in super, visit Purchasing property in super. Alternatively, you can request a call back from one of team to find out more about how borrowing works in an SMSF.

IS AN SMSF RIGHT FOR ME?

Fund Balance and CostIt is generally suggested that you need upwards of $200,000 in superannuation to start a Self Managed Superannuation Fund (SMSF). This figure has been around for many years and is based on the assumption that you would be paying fees of 1% of your fund balance in a retail fund, or $2,000 in fees in an SMSF. This is the point at which the fees, based on the above assumption, become equal.One of the benefits of a SMSF, is that as your superannuation balance increases, your fees generally stay the same, if your investment activities do not change. This means your fees, as a percentage of your fund balance, will decrease, providing an overall reduction in what comes out of your retirement savings.


Greater ControlAnother advantage of a SMSF is that they allow you to choose how you invest your retirement savings. Apart from the choice of how to invest, there is also greater flexibility in what you can invest in.


SMSF’s can:

  • borrow to purchase a property;
  • invest in private company shares;
  • hold Artwork and collectibles;
  • invest in related trusts; and
  • have instalment warrant shares and options.


Note: There are additional requirements that may need to be met for some of the above investments. To discuss these requirements, please call one of our team.


“With control comes responsibility.” You need to manage your fund’s investments in the best interests of the members and in accordance with the law. Always remember the SMSF’s investments must be separate from the personal and business affairs of all fund members.


Limited Members SMSF’s can have up to four members. This means you can have four people sharing the costs of running the SMSF. While there may be a slightly higher fee for four members, however it will not be four times as much. This will result in a further reduction in the costs to you and It also allows members to purchase an asset that individually they may not have been able to buy.


For more information that you may require, please refer to our SMSF Definitions page.

THINGS YOU NEED TO CONSIDER

Before establishing an SMSF you should…


Consider who is going to be involved;

  • Decide on who will be members of the fund (maximum 4 members). *Note: Members can be added or removed later as required. Decide on whether you will use a corporate trustee.
  • Choose a name for the fund and corporate trustee (if using one). *Note: The fund name does not have to be unique, however the corporate trustee name does need to be.


Consider your investment strategy

SMSF’s have a greater pool of potential investments to choose from, including the majority of assets available in retail funds. Whilst some investments in SMSF’s are available through other superannuation platforms, several popular options may not be. Some of these investments include;


  • Investing in direct property;
  • borrowing to buy direct property;
  • owning your business premises in your super fund;
  • loans;
  • collectibles;
  • listed shares that you choose (that are not in the ASX 300); and,
  • private company shares.


It is important to note however, that there are restrictions on some of the investments listed above. Whilst you can invest in them, it is important that you seek professional advice to check the suitability of these investments for your retirement strategy before any investments are made. Having the flexibility to invest in a greater range of investments can ensure that you are able to invest at the level you are comfortable with. This also may enable you to take advantage of other investment opportunities that may not be available outside an SMSF. You now have the control invest your super, your way! We will provide you with advice on what restrictions the rules place on certain investment types, and how to set up your investments to maintain future fund compliance. As part of this, we will show you some tips and traps that will make running your fund that much easier, while maintaining your fund’s compliance.


Consider the costs of an SMSF

At iSUPER® we recognise that there are different needs for different funds. We therefore offer a tiered pricing structure to allow you to choose what level of service you would like. All levels provide the basic support of prepared financial accounts, annual SMSF returns and documentation, and preparation of an audit file. Which fee level you choose will depend on how much help you would like, and whether you see additional value in our premium services. See our fee structure for more about what services are offered in each fee range, and how these could be of benefit to you.


Consider the time to set up an SMSF

Setting up your fund can be done within 48 hours.The longest step in the process is the rolling over of funds from your industry fund into your new SMSF structure. Many funds are reluctant to see you leaving their institution and can make this process time consuming and drawn out.We manage this for you to make your transition as seamless as possible. Some funds can take up to six weeks to release your superannuation.


Consider consolidating your super

Whilst consolidating your super takes time, this can be done once your fund is established.


Some of the benefits in consolidating your superannuation include:

  • holding all your super together;
  • it allows you to invest your superannuation under one strategy;
  • it may allow you to invest in assets that may not be able to be purchased with only part of your superannuation; and
  • it should reduce the overall fees that are being paid.


At iSUPER®, we assist trustees with the paper work required to transfer the balance from your existing superannuation to your new SMSF. There are some tips in transferring your superannuation to a SMSF, contact us to find out how.


As always, if you have any outstanding questions around the suitability of an SMSF for you, we welcome you to contact us for a more in-depth discussion.

WHAT IS AN SMSF?

A SMSF is a smaller, member controlled fund, which can offer greater control over providing for your retirement.  The members are usually the Trustees of the fund which allows them to have a greater influence over the strategy and operations of the fund.  This includes;


Allowing you to tailor your SMSF’s investment strategy;allowing greater control in how your fund is managed;having greater transparency over the fees your SMSF is being charged; andcontrolling the payments of allowable pensions.


There are a number of legislative requirements that need to be met for your SMSF to be compliant, these include (however are not limited to):


The SMSF should not have more than four members;the Members will generally act as trustees for the fund;the SMSF needs to be operated for the sole purpose of providing retirement benefits; andthe members can not access their retirement savings before they are permitted.


With great control, comes great responsibility…as Trustee of your own fund you will be required to ensure that your SMSF remains compliant with SIS legislation and regulations.


You can take on these additional responsibilities or you can outsource to professional providers…this is where iSUPER® can help.

WHAT CAN AN SMSF INVEST IN?

Having an SMSF will allow you to access some investments that retail funds will ordinarily not allow. This can be liberating, whilst allowing greater control over how your money can work for you.


Some of these investments may include;


  • investing in direct property;
  • borrowing to buy direct property;
  • purchasing your business premises;
  • collectibles;
  • listed shares outside the ASX 300; and
  • private company shares.


It is important to note, that there are restrictions on some of the investments listed above. Whilst you can invest in them, it is important that you seek professional advice to ensure that all the compliance requirements are met and they are in accordance with your investment strategy.

PURCHASING PROPERTY IN AN SMSF

Buying property in a SMSF is a complicated process and it is essential that it is done correctly to ensure there are no adverse tax consequences.


Depending how you purchase the property will depend on the level of complexity.  To assist, we have provided below the iSUPER® Borrowing Matrix that will guide you through some of the processes of purchasing property in an SMSF.


Note: Please remember that the matrix provides some of the considerations, not all, so please seek professional advice before making any purchase.

Residential Property – Without Borrowing 

Before any purchase is considered, always consider whether the purchase of property in the SMSF is consistent with the investment strategy of the fund. 

Once satisfied, generally the SMSF will be able to purchase a residential property as long as the vendor is not a related party. 

One of the main issues we find is not disclosing the correct name on the contract. If you have a corporate Trustee (ABC Pty Ltd) and the fund name is the XYZ Superannuation Fund, the purchase contract should show the purchaser as ABC Pty Limited as trustee for the XYZ Superannuation Fund.

Residential Property – With Borrowing 

Before any purchase is considered, always consider whether the purchase of property in the SMSF is consistent with the investment strategy of the fund. 

Once satisfied, generally the SMSF will be able to purchase a residential property as long as the vendor is not a related party.

When borrowing to invest in property within a SMSF, the arrangement will need to be under a Limited Recourse Borrowing Arrangement (“LRBA”). This, in effect, will limit the recourse of the bank to your other SMSF assets. 

As part of this arrangement your SMSF will need to establish a custodian or bare trust to hold the asset. This is a complicated process, however, for simplicity the following diagram gives you the concept.

As with any trust, the Bare Trust will need a trustee. It is important to note that corporate trustee of the SMSF cannot be appointed as the corporate trustee of the Bare trust – it has to be a different company.


If you need assistance with the Bare Trust, iSuper is able to assist with setting up the required documentation.

The Purchase Contract

Given the above arrangement, it can be confusing as to who signs the purchase contract. Ultimately, the property will need to be purchased in the name of the Bare trust, not the name of the trustee for the SMSF.


For example, ABC Pty Limited is the trustee of the ABC Superfund. The ABC Superfund would like to borrow to invest in a residential property.


To implement the purchase the ABC Superfund will need to establish a Bare trust to hold the property – XYZ Pty Limited as trustee for the Property No 1 Trust. When executing the purchase contract, the name on the contract will need to be XYZ Pty Limited as trustee for the Property No 1 Trust.

Commercial Property – Without Borrowing

Before any purchase is considered, always consider whether the purchase of property in the SMSF is consistent with the investment strategy of the fund.


Once satisfied, generally the SMSF will be able to purchase the commercial, even if it is from a related party.


Disclosing the correct name on the contract is also another important part of the process. If you have a corporate Trustee (ABC Pty Ltd) and the fund name is the XYZ Superannuation Fund, the purchase contract should show the purchaser as ABC Pty Limited as trustee for the XYZ Superannuation Fund.

Commercial Property – With Borrowing

Before any purchase is considered, always consider whether the purchase of property in the SMSF is consistent with the investment strategy of the fund.


Once satisfied, generally the SMSF will be able to purchase the commercial property, even if it is form a related party. When borrowing to invest in property within a SMSF, the arrangement will need to be a Limited Recourse Borrowing Arrangement (“LRBA”). This, in effect, will limit the recourse of the bank to your other SMSF assets.


As part of this arrangement your SMSF will need to establish a custodian or bare trust to hold the asset. This is a complicated process, however, for simplicity we have provided a diagram below.

As with any trust, the Bare Trust will need a trustee. It is important to note that corporate trustee of the SMSF cannot be appointed as the corporate trustee of the Bare trust – it has to be a different company.


If you need assistance with the Bare Trust, iSUPER® is able to assist with setting up the required documentation.


How to Complete the Purchase Contract

Given the above arrangement, it can be confusing as to who signs the purchase contract. Ultimately, the property will need to be purchased in the name of the Bare trust, not the name of the trustee for the SMSF. For example, ABC Pty Limited is the trustee of the ABC Superfund. The ABC Superfund would like to borrow to invest in a commercial property.


To implement the purchase the ABC Superfund will need to establish a Bare trust to hold the property – XYZ Pty Limited as trustee for the Property No 1 Trust. When executing the purchase contract, the name on the contract will need to be XYZ Pty Limited as trustee for the Property No 1 Trust.

iSUPER® assisting with your purchase

Once you have established your SMSF and you have decided that you would like to invest in property, we can introduce you to a lender or work with your current bank – the choice is yours.


Choosing a lender to assist with your purchase is a difficult part of the process. At iSUPER®, we have established relationships with all the major lenders to ensure your loans get processed with minimum fuss. Each provider has different terms and conditions, so we take the time to go through these with you to give you a better understanding of the agreement.


We will continue to guide you through the process to ensure all transactions are compliant and there are no nasty surprises.


Borrowing Capacity

Banks have different lending criteria and it is important that you speak to the bank directly. However, our clients have noted that there are some similarities when borrowing in superannuation.


Most lenders will allow a SMSF with a corporate trustee to borrow up to 80% of the property value on residential property. There are limits where the 80% is no longer applicable, however this is usually with properties that are valued greater than $2 million. Once again this will vary from bank-to-bank so it is important that you check with the bank directly.


If your intention is to purchase commercial property, the lending ratio will vary from bank-to-bank. Ordinarily, banks will lend around 65% on a property less than $5 million. Once again, it is important that you check directly with the bank as these limits will vary.


Servicing the repayments for a SMSF loan can also be a limiting factor. The banks will ordinarily look at:

  • the rent that will be generated by the property (usually discounted);
  • the superannuation guarantee that has been contributed by your employer; and,
  • any other regular income in the fund.


These amounts are normally aggregated to calculate the serviceability of the potential loan.

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