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Australian’s a bullish bunch when it comes to borrowing money to buy a home.
If any evidence of this was required, it came via ABS data released last week. It showed that the average new owner-occupier mortgage in Australia reached a record high of $626,055 in May, despite the highest cash rate since November 2011. But it’s not an even spread, and perhaps unusually, it’s not the two largest states racking up the higher debt levels.
Queensland, South Australia, and Western Australia saw record highs in loan sizes. However in NSW, the average new mortgage is $767,584, below the January 2022 peak of $803,235. Similarly, Victoria’s average new loan size declined this month, remaining significantly below its January 2022 peak of $651,364.
In this week’s newsletter, we take a look at what’s involved when contemplating using an SMSF to invest in property.
Self-Managed Superannuation Funds (SMSFs) offer a unique way to purchase residential property as part of their retirement strategy. There is more work and cost involved in getting the appropriate structure in place, but if done under the right circumstances and in the correct way, the strategy can be a very effective way of boosting your retirement savings given the impact of capital growth and gearing.
What’s The Process?
Establish the SMSF: The first step is to set up the fund, which involves creating a trust and appointing trustees. The fund must be registered with the ATO and have a trust deed outlining its operation, and noting that investment in direct property is part of it’s strategy. It sounds complicated on the surface, but it’s actually pretty straight forward if you engage someone who knows what they’re doing.
Fund the SMSF: Trustees need to ensure the SMSF has sufficient funds to purchase property. This can be achieved by rolling all existing superannuation funds into the SMSF, and via member contributions. If the fund doesn’t have enough in it to purchase a property outright, it is possible to borrow money…see below.
Borrowing for Property Purchase: If the SMSF doesn’t have enough funds to buy the property outright, it can borrow money through a limited recourse borrowing arrangement (LRBA). This arrangement function like a normal mortgage, albeit with a slightly higher interest rate, but notably, this type of lending arrangement means the lender ONLY has a claim over the property in question, and no other assets such as the family home etc.
Find and Purchase Property: The SMSF can then purchase a residential property. The property must be solely for investment purposes, meaning members or their relatives cannot live in it or rent it.
Guidelines and Regulations
Sole Purpose Test: The property investment must comply with the sole purpose test, ensuring it solely supports the retirement benefits of the SMSF members.
Prohibition on Personal Use: The residential property cannot be lived in or rented by any SMSF member or related party. It must be an arm’s length transaction, strictly for investment purposes.
Compliance with Borrowing Rules: If using an LRBA, the SMSF must comply with strict borrowing rules, ensuring the arrangement is properly documented, the loan is structured correctly, and the property is held in a separate trust.
Ongoing Trustee Responsibilities: Trustees must manage the SMSF in accordance with the trust deed and superannuation laws, including regular audits and accurate record-keeping.
Taxation
Capital gains tax and income tax on rental income, are both concessional taxed at 15% during the accumulation (pre-retirement) phase and tax-free in the pension phase, so there are significant tax benefits of owning direct property within a SMSF.
Financial Advice
It’s advisable your clients seek professional financial advice to ensure this strategy is suitable for them and that they understand all the compliance requirements.
If you have any clients who are keen to invest in property via a SMSF and who need loan advice, have them contact us.
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.
