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Welcome to the finance update for the week ending 1 July, 2023.
The start of a new financial year, and some promising news with data released during the week showing inflation has come in lower than expected and sunk back to 5.6 per cent in May from 6.8 per cent in April, prompting some to speculate that the Reserve Bank of Australia (RBA) may pause its interest rate hikes. Whether this translates to a shift in the RBA’s thinking remains to be seen.
In this week’s newsletter, we take a look at purchasing property through a Self Managed Super Fund (SMSF). Whilst a great investment strategy for some, it’s not as straight forward as buying property in your own name.
More borrowers are taking advantage of their SMSF to finance their investment purchase.
Through an SMSF loan, you can fund residential and commercial property purchases, which can be used to help grow the SMSF retirement savings. However, it is important to know that there are some key rules that must be followed when borrowing an SMSF loan.
Limited Recourse Borrowing Arrangement (LRBA)
Borrowers wishing to borrow an SMSF loan must understand the concept of limited recourse borrowing arrangement.
An LRBA is a financial arrangement that enables SMSFs to purchase property with borrowed money. The purchased property will then be held in a separate trust structure.
The LRBA protects all other assets in the SMSF. This means that if the SMSF defaults on the loan, the lender can only seize and sell the asset held in the trust and cannot pursue any other assets of the SMSF or its members.
One of the main advantage of borrowing to fund a property within an SMSF is the concessional tax for capital gains.
For instance, a property held for longer than a year is taxed at only 10%. In the retirement pension phase, capital gains are tax-free.
However, the risks must be noted — it can potentially lead to SMSF being left with a debt that it cannot repay especially if the asset’s value falls significantly below market value or if the fund is unable to repay.
Loan size
Lenders will lend up to 80% of the property’s value and would ask a guarantee from the trustees.
Loan purpose
The SMSF loan must only be used to acquire a property. It cannot be used to improve or develop the property.
Generally, anything that can alter the property’s structure is prohibited. However, any improvements or developments must be financed using the funds within the SMSF.
Prohibited investments
SMSFs are not allowed to borrow to invest in properties owned by a related party such as a relative, or themselves. Furthermore, any member must not live in or rent in the property purchased.
Sole purpose test
The property being acquired by the SMSF with the borrowed funds must meet the sole purpose test.
Under the test, the property must be purchased solely for the purpose of generating retirement benefits for the members of the SMSF.
This also means that the borrowed money must not be used for personal gains, such as providing financial assistance to any members or their relatives, families, or friends.
Can SMSF loans be refinanced
Yes, there are now a number of lenders who offer loans for SMSF property purchases and refinancing from one lender to another can be a very worthwhile exercise.
If you’d like to know more about purchasing property through a SMSF, or refinancing a SMSF loan, call us on 1300 366 296.
Any changes in interest rates from last week are highlighted in orange.
Note – Increases announced by lenders as a result of RBA decisions normally take 1-2 weeks to come into affect.
Standard Variable
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR.
1 Year Fixed
The rates below are based on a $500,000 loan, with the borrower making principle and interest payments with a loan term of 30 years. The rates quoted may vary depending on the borrowers LVR. At the end of the three year fixed period, the borrowers interest rate will revert to a standard variable rate for the life of the loan.
