Frequently Asked Questions
Can my super fund borrow?
Yes, on the 24th September 2007 the Superannuation Industry Supervision Act 1993 (SISA) was amended permitting super funds to borrow money using an ‘instalment warrant’ arrangement. The borrowed funds may be used to acquire any asset that a super fund is ordinarily permitted to invest in. Typically this will be residential investment properties, commercial properties, shares, or managed funds.
How does it work?
The first step is to set up both a Self Managed Super Fund (if you don’t already have one) and an instalment warrant structure. You should work with your financial adviser to determine whether all or only part of your existing super should be rolled into the SMSF. When you find the property you want to buy, you pay the deposit using cash from the SMSF’s bank account. We work with you to arrange finance so that by settlement date there are sufficient funds, using a combination of SMSF monies and external borrowings, to complete the purchase and pay for stamp duty and other costs. The property must be held on trust for the benefit of the super fund and its members. It is only once the borrowing has been repaid in full that the asset can be transferred from the trust to the super fund. Over the life of the investment all rental income is paid into the SMSF’s cash account and all expenses are paid out of the same account.
What are some of the potential benefits?
- Take control of your super and make all of the investment decisions
- All rental income is paid into your super fund assisting your retirement planning
- Rental income in a super fund is taxed at a maximum of 15% and can be as low as 0%
- If your fund owns the property for longer than 12 months before selling, any capital gain you make will be taxed at a maximum of 10% and can be as low as 0%
- You increase the return on your investments due to the low tax environment
- You can buy your own business premises and pay rent to your own super fund
- Tax deductible super contributions can be used to make loan repayments
- Once an individual reaches age 55 and converts their super to a pension there is 0% tax on any income and 0% tax on any capital gains
What are some of the potential risks?
- Just as gearing can magnify gains, it can also magnify losses
- Interest rate rises will have a negative impact on the outcome of the strategy
- Borrowing in super is currently permitted however there is the risk of legislative change
- Purchasing a structure does not guarantee that an application for borrowing will be successful
What about Stamp Duty and Capital Gains Tax?
Stamp duty is payable on the purchase price of the asset (refer to the relevant state revenue office for the amount).
When the loan is paid out the asset is no longer required to be held on trust. If it is transferred to the super fund at this point, then there should be no stamp duty or CGT payable.
On the sale of the asset a Capital Gains Tax event occurs so CGT may be payable if the fund is in accumulation phase. If the fund has been converted to pension phase then no CGT is payable
How much money do I need?
The ATO suggests a minimum balance of $200,000 for a SMSF to be cost effective. If you are borrowing to acquire a property this threshold will normally be surpassed.
What if I don’t have enough in my super fund?
If you currently have insufficient funds in superannuation, additional contributions can be made subject to the contribution rules. You should work with your professional adviser to consider the different options available to you to increase your current balance
Are there any restrictions?
The following restrictions apply;
- Neither you nor related parties can live in the property
- Neither you nor related parties can use it for personal purposes such as holidays
- You can’t borrow to buy land (some exceptions such as rural income producing)
- You can’t purchase the from a related party (exceptions are commercial property and ASX listed shares)
- All transactions must be on commercial terms
- This list is non-exhaustive and advice should always be sought
What are my responsibilities in running my own super fund?
Refer to the ATO publication ‘Roles and Responsibilities of Trustees’
As a trustee you will also need to consider things such as fund liquidity, investment strategy, diversification, and risk management. This list is non-exhaustive and you should seek professional advice if you are uncertain about any of your responsibilities.
What are the loan terms?
- Loan term of up to 30 years
- Interest only of up to 5 years (will vary depending on lender)
- Principal and interest
- Fixed or variable rates for property
- Loan-to-Value Ratio of up to 70% for commercial loans (SMSF trustees should borrow responsibly)
- Loan-to-Value Ratio of up to 80% for residential loans (SMSF trustees should borrow responsibly)
- Fixed rates and interest only for margin loans
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