Self-Managed Super Funds (SMSF) can be a highly tax effective way of purchasing an investment property slashing your income and capital gains tax liabilities, but there is a lot to know and understand. This blog gives you an insight into borrowing for the purchase of an investment property inside a SMSF.
There is quite a bit involved in securing a loan to purchase a property inside a SMSF loan and it is tightly regulated, but still there are good reasons to do so. A side benefit is that if you contribute enough cash towards the purchase you may not be required to meet the usually loan servicing requirements, a real benefit when you have otherwise depleted your usual servicing capacity. The maximum loan to valuation ratio for SMSF loans is 70%. As a guide, depending on the yield of the property, break even is around 60 â€“ 65% and servicing requirements could be reduced/removed around 50% â€“ 55% LVR.
SMSF Tax Benefits
Other reasons include the significant tax benefits you will enjoy within your fund. Profits are taxed at just 15% while capital gain at 10%, likewise, negative gearing benefits are limited to 15%, but it is not an issue for a property running at a profit.
SMSF Fees & Rates
Application fees are around $2500 depending on the lender, interest rates can be about 1% higher than home loans and quite a bit of documentation is required by the lender. But once you get past the initial costs and paperwork you can look forward to lucrative tax benefits over the years ahead.
There are rules around the level of improvement you are permitted with a geared property owned in a SMSF. In broad terms you are permitted to bring the property up to a reasonable standard but you would not be able to substantially improved its value, for example, doing an extension or substantial renovations. Talk to your accountant for the detail, this blog gives you an idea of the questions to ask and the topics to discuss.
The bank will require a certified copy of your SMSF deed and trustee details. If you and your spouse are personal trustees, it may well be worth a conversation with your advisors about the value of installing a corporate trustee. Banks typically prefer a corporate trustee, though at this stage some still accept personal trustees.
The main reason many people appoint a corporate trustee is because a SMSF require two personal trustees which could cause problems if anything should happen to one of the trustees whereas a corporate trustee can remain in force in such a situation. An important topic to discuss with your advisors if you have personal trustees.
Limited recourse loans are used to finance the purchase of a geared property inside a SMSF. Super rules require the asset (the property) to be held outside the super fund until the loan is paid out. To facilitate this a â€˜bareâ€™ trust is used. A â€˜bareâ€™ trust is a simple, single purpose trust to hold the property on behalf of the super fund so the other assets of the fund are effectively outside the reach of the lender. This limits the lenderâ€™s recourse ONLY to the security for the loan. Of course, the lender isnâ€™t limited to just that property, naturally, banks being banks, require personal guarantees.
Once the loan is in place and the property has been purchase, everything reverts back to a relatively simple operation. Your SMSF receives the rent and pays the outgoings, interest, any tax obligations etc. The â€˜bareâ€™ trust does not trade, it doesnâ€™t do anything, it only holds the property until the loan is paid out at which time the property is transferred into the super fund.
A corporate trustee is required for a â€˜bareâ€™ trust. In Victoria the property is purchased in the name of the corporate trustee, so it needs to be set up prior to the purchase, the establishment of the â€˜bareâ€™ trust follows.
Before contemplating the purchase of a property inside your smsf, get competent advice from your advisors, there are many things to consider. To get advice on whatâ€™s required to finance the purchase of property inside your super fund, give us and call and we will work through the detail with you and what you need to do to access this exciting and potentially rewarding investment model.