For many Aussies our superannuation is either set and forget (and believe me, forget is the right word, so many people I meet have multiple funds sitting forgotten and being eaten by fees) or we’re a little complacent because we don’t understand our investing options. Or retirement seems so far away we don’t give it a lot of thought.
And by and large we don’t understand the shares and investments our super money is sitting in.
Now – I have to stop here and insert a disclaimer – we’re talking general information here, nothing specific or personal to you and you must always seek professional advice that is specific and personal to your circumstances. We’re just talking what is possible.
If you have a self managed super fund, and your investment strategy in your super fund deed – the “rules” if you like – allows for investing in property; and you have a bit of cash in there you may be very interested to know that both the rules around borrowing and the costs of buying a property in the fund have reduced significantly.
If your “rules” allow, you can invest in all types of real property including residential property, commercial property, industrial property and even in some circumstances you can run your business from the new property you’ve bought (but you must pay your Super fund fair rent – don’t forget that’s the purpose of Super after all, creating an asset for retirement).
And as I said you can now borrow the extra money you need to buy a property with what is called a Limited Recourse loan or Limited Recourse Borrowing Arrangement (LRBA).
To understand a little bit more about why this is important, to the Australian Government your superannuation fund is gold and must be protected at all costs, pretty reasonable actually. What makes “the powers that be” happy with this arrangement is the “limited recourse”. In other words, the lender is, if you are unable to make your repayments, limited in what they can take to repay any debt that you owe to them. What they can take, in this case, is only the assets within a special trust you setup to buy the property in – and – the only asset that can be held in this trust is the property itself. This satisfies the rules of the superannuation legislation. (Note: some will require a personal guarantee from you which relates to your personal assets outside of the fund.)
Because of this any lender will only lend a lower percentage of the value of the property to you (the idea being of course that if all goes pear shaped they can sell the property and *should* be able to recover their loan) and what this means is that you do need to have a bit of cash in your fund to cover your deposit and your setup costs – and ideally still have a little reserve. Given the loan amount is lower it generally means the rent covers the repayments which is a plus.
You can even have an offset account against your loan, so cash like your contributions and any surplus rent can save you interest on the loan and that helps you pay off your new golden egg even faster.
Key SMSF borrowing rules
When a SMSF uses an LRBA to purchase an asset, the arrangement must satisfy the following conditions:
- The SMSF uses the borrowed monies to purchase a single asset, or a collection of identical assets that have the same market value
- The SMSF can’t use the LRBA monies to improve a purchased asset, although there is commentary on renovating the property in the vein of “maintenance”. Note this refers to borrowed money from the LRBA.
- Any recourse that the lender has under the LRBA against the SMSF trustees is limited to the single fund asset (including rights to income). Lenders can legally demand an individual (that’s you as the super fund owner) to provide a personal guarantee against personal assets
- The SMSF trustees hold the beneficial interest in the purchased asset but the legal ownership of the asset is held on trust (the holding trust) until such time as the loan is repaid.
- The SMSF trustees have the right to acquire the legal ownership of the asset by making one or more payments, and there are stamp duty rules in place to make this economic.
There are a whole bunch of other rules and conditions but that’s a good summary.
So, what can you buy? You can buy a home, a house and land package (but you can’t do progress payments, so you can only buy it once it’s finished), a unit or town house, a commercial property, an NRAS (national rental affordability scheme) property and other assets that can be identified and separated (remember that one asset per trust rule).
And as I mentioned earlier, as a small business owner, you may be able to purchase your business premises through your SMSF and have your business as the tenant. It is important, though, that your business and any other tenant pays you a fair rent because after all you are building a retirement fund here.
As with everything, you’re going to need some expert support from your accountant, solicitor and mortgage broker to make the process a breeze.