We have recently seen an increase in client interest regarding secured loan property purchases in the Self-Managed Superannuation Fund space. To our surprise many people still believe the adage that super funds may not borrow to invest, however this is an outdated view.
Changes made to SMSF legislation in 2012 loosened the rules surrounding SMSF borrowing ability, and tweaks throughout the decade since have evolved to the point that an SMSF can borrow to invest in a single investment property without fear of compliance issues. These loans have been classified in their own lending class, referred to as “limited borrowing recourse arrangements”.
There are several advantages when buying an investment property through your SMSF. The most important of these are:
- Less Capital Gains Tax – CGT in an SMSF is capped to 10% (0% in pension mode).
- Tax deductibility of interest in the SMSF, reducing tax liability for the SMSF.
- Growth towards Retirement – your super balance will see accelerated growth as all income and capital growth must go in to the SMSF, which should lead to a higher balance when you need it for retirement.
LBRAs have several government legislated characteristics, such as a minimum interest rate. These rates are typically higher than residential home loan rates, but not to an exorbitant extent. LBRAs are also typically guaranteed by members of the SMSF.
Interestingly, lenders have been reluctant to throw their hat in the ring when it comes to the SMSF space. Today, there are only a handful of lenders who will lender under a limited borrowing recourse arrangement. This has meant that proper guidance and support from experienced industry professionals is highly recommended, almost a necessity, when trying to obtain such finance.
There are three main reasons lenders are hesitant to lend in the SMSF space. They are:
- The size of the market is quite small compared to residential, investment or commercial lending.
- Trust loans are typically more complex to process.
- The lender’s remedy in case of default is limited to the property alone.
In particular, the third point means that banks cannot pursue other SMSF assets if something goes wrong. This is obviously good protection for the borrower, but not ideal for the lender. This has meant that most if not all major and second tier banks in Australia no longer offer an LBRA product, and resulted in false client expectations regarding the perceived difficulty in obtaining one.
If you have considered adding an investment property to your SMSF portfolio in the past but been put off by fears around compliance, difficulty or complexity, now is the ideal time to reach out to our office to discuss your plans. Our experienced team will help you navigate this tricky landscape, pointing you in the right direction to maximise the potential of an SMSF lending arrangement and ultimately a more comfortable retirement.
By Matthew Siklich – Accountant, Venture Private Advisory.