The recent changes in the Superannuation Industry Supervision Act allow Self Managed Super Funds (SMSF) to borrow money to acquire an asset under specific conditions.
Banks and other lenders have developed a new range of financing products for the SMSF sector in light of the recent changes in the act. Their products are suitable for;
- Trustees of self managed super fund
- People wanting to purchase real property or transfer their commercial or investment property to their super fund
- People who have a long investment time frame
How does it work?
Your SMSF has assets in cash, this is used for a partial payment of the purchase of the property and acquisition costs, and then uses borrowed funds to pay for the rest of the property. This uses the real estate as security with a limited recourse loan.
In the event a loan default, the financier only has recourse against the property it cannot claim any other assets held in the SMSF.
The SMSF makes the payments on the loan using rent paid by the tenant of the property.
- Other SMSF assets are secure as the lender does not have recourse to claim other super fund assets
- Rental payments can be used to pay off the loan
- Capital gains on property disposal would be taxed at concessional rates
- Allows the unlocking of equity currently held in a property already owned by a family business.
- The SMSF trust deed must allow borrowing under an instalment arrangement
- Any investments should be made in accordance with the SMSF strategy
- SMSF require enough cash flow to maintain payments to the lender
- All agreements must be made on commercial terms
- All borrowers should seek independent financial advice