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Investor Hotspot: How super funds can borrow money and buy property Posted on October 9, 2018
The amendment to the Superannuation Industry Supervision Act established the right for super funds to borrow to invest in any asset they would otherwise be allowed to buy outright, such as property or shares.
Borrowing money to purchase growth assets – assets which can produce income and can grow in value over time – can have the ability to increase net wealth over time.
To do this in a SMSF the super fund can consider using an instalment warrant. This is an arrangement where an asset is purchased over time via periodical payments or instalments.
David Evers explains, “for example, a SMSF might pay a reduced price on a property, the unpaid balance is a ‘loan’ and rental income earned is used to pay off the loan. Eventually the SMSF would own the property.”
“Instead of investing only the money they have available, someone might borrow money and therefore invest with more; the aim being to earn higher returns due to a higher amount being invested.”
David says “there are some key considerations to be thought about upfront. Anyone considering taking advantage of this new opportunity should be careful about the types of loan arrangements they enter into and seek the advice of a professional adviser first.”
“There are complex rules surrounding the new SMSF borrowing guidelines. Lending to a SMSF is certainly not as straight forward as lending to an individual.”
David Evers stresses, “The sole purpose of superannuation is to accumulate benefits for use in retirement, and this must be kept in mind when making any decision”.
Also, the money borrowed must be used for the purchase of an asset, and the fund cannot take full legal ownership of the asset until the loan is paid out. Additionally, the fund is generally not able to buy an asset from a related party (for example, a member of the fund).
There are a number of exceptions to this rule, such as property used wholly for business purposes and listed shares. However, David Evers points out “a SMSF would not be able to buy a residential investment property off a related party.”
Penalties for getting it wrong can include fines and jail terms for the Trustees and loss of up to 45% of the superannuation fund assets as a taxation penalty.
Many Australians struggle to save enough for retirement; however new rules for SMSF may open up good opportunities. David Evers explains, “Obviously it is important to get independent tax and financial advice before making a decision that will affect your future and retirement savings, and that of other SMSF Trustees.”
A professional adviser can help select the right loan to suit your needs and the investment goals of your SMSF.
If you would like to know if you can buy property with your super fund or if you would like to know if setting up your own superfund is the right thing for you, contact contact David NOW.