Self Managed Superannuation Funds (SMSF’s) are highly regulated with a key rule being that your SMSF cannot borrow money except for limited, specific circumstances. Thankfully, one of those is borrowing to buy an asset – as long as you meet very strict rules.
One of the more common questions we get regarding what a SMSF can do, is whether it can buy and investment property, and if it can borrow to do so.
We have the answers for you here.
WHY ARE THEIR RULES RESTRICTING BORROWING BY SMSF'S?
It probably helps to start with the overriding principle that the Government does not want people taking our loans in their SMSF. Why? Because you having superannuation means less the Government (and the taxpayers) need to fund your retirement at the expense of other services the Government could provide.
Giving people unfettered access to borrow inside super would see people doing all sorts of crazy things, putting their super at risk just so they can chase that “once in a lifetime” opportunity that is literally too good to be true.
So the default position is no, you can’t borrow unless you meet some very strict rules.
OVERVIEW OF THOSE RULES
There are a few exemptions, for example, a short-term borrowing to settle ASX trades or a short-term borrowing to pay a pension payment, but in the context of this article we will focus on the exemption that allows SMSF’s to borrow in order to buy assets (and specifically property).
The general rules are:
- Your SMSF’s deed must allow the borrowing;
- Your SMSF’s investment strategy must allow the borrowing;
- You can only borrow to buy a “single acquirable asset”;
- You cannot change the asset you have purchased while it has a borrowing on it;
- You cannot borrow to improve an asset;
- The asset must be owned by a separate trust, not the SMSF;
- The lender can only have rights over the asset (and not other assets of the SMSF); and
- The asset can not have any other mortgages against it.
We have more detail on all of these (and more) within our “Geared Property in a SMSF” brochure, which you can download (for free) below.
YOU ARE STILL INTERESTED?
Borrowing to buy property (or any asset) inside your super fund is not a decision to take lightly. Aside from the normal risks of borrowing money to buy an asset, you have the risk that should you inadvertently breach one of the SMSF rules the ATO can levy some very hefty penalties (including the force sale of your assets).
You should also be aware that banks are not overly keen on giving loans to SMSF’s, and when they do they charge significantly higher fees (say $5k setup fees) and higher interest rates. We can refer you to an awesome mortgage broker if you need help with this.
But before you do anything, you should chat to your accountant to ensure that you understand the rules that your SMSF operates in and see if borrowing inside super is something that is the right fit for you.