Whilst you may be familiar with accumulating property outside of super and benefiting from gearing strategies, you can also gear property within your self managed super fund.
Benefits of gearing property within an SMSF:
- Accelerated wealth accumulation through SMSF Borrowing
- Greater flexibility – SMSF’s can better tailor investments to suit member needs
- Investment returns will be accumulated in the concessionally taxed superannuation environment
- Capital Gains Tax can be minimised or eliminated if the property is sold after the fund has commenced to pay a pension
- Increase your cashflow by taking responsibility for costs relating to maintaining a property throughout the year.
- There may be long-term benefits for small business owners to hold business premises within their SMSF as opposed to holding them outside super
- It is an opportunity to diversify a super portfolio and therefore reduce the overall volatility and risk on the portfolio.
- The potential to utilise traditional negative gearing strategies to generate tax-effective income.
- Protection from creditors in certain circumstances under Bankruptcy Laws
Understanding SMSF Loans
It is important to understand that SMSF Loans are different to normal home loans due to the superannuation legislation that they are linked to. The structure, process and tax implications of such a strategy can be complex and it is important you understand the costs and benefits to your personal situation before proceeding.
How does the strategy work?
Superannuation fund trustees are able to borrow money in order to purchase an investment asset provided the borrowing meets certain strict conditions. Where an SMSF borrows under these rules, it will need to ensure that the borrowing meets the requirements outlined under superannuation law. Broadly, in order for a borrowing strategy to meet the superannuation requirements, the following must apply:
- The SMSF trustee(s) enters into a loan arrangement and must use the borrowed funds to purchase an asset.
- The asset must be held by a custodian on trust for the SMSF. Under this arrangement, the SMSF will hold the beneficial ownership of the asset.
- The SMSF must have a right (but not an obligation) to acquire the legal title to the asset from the custodian by making one or more instalment payments.
- The lenders’ rights against the SMSF must be limited to the rights relating to the underlying asset.
The following diagram illustrates a basic SMSF loan borrowing arrangement, where monies are borrowed from a lender (a bank or a related party) and are used to acquire an asset in the name of a security trustee under a bare trust arrangement where the fund beneficially owns the asset.
This website contains general information only. It does not take into account your objectives, financial situation or needs. Please consider the appropriateness of the information in light of your personal circumstances.