Australians intend to retire between the ages of 65 and 66, according to the Australian Bureau of Statistics. With superannuation being the main source of income for a significant portion of retirees (21% of women and 33% of men), it’s crucial to explore strategies to maximise your superannuation. One possibility is to use your self-managed superannuation fund (SMSF) to invest in property through an SMSF home loan.
An SMSF home loan can help grow your superannuation balance. They can be used to purchase residential or commercial property. But, it’s important to understand the requirements, advantages and some considerations before taking out the loan.
Considerations for the Australian Taxation Office
Getting an SMSF home loan requires meeting specific rules set by the Australian Taxation Office (ATO). The property must:
- meet the ‘sole purpose test’ of solely providing retirement benefits to fund members
- not be acquired from a related party of a member
- not be lived in by a fund member or any fund members’ related parties
- not be rented by a fund member or any fund members’ related parties
In the case of commercial property, you are able to rent the property to a business owned or managed by a trustee. However, it must be leased at the market rate and follow specific rules.
Requirements for an SMSF home loan
An SMSF home loan will be on a limited recourse borrowing arrangement (LRBA). This means a separate trust or trustee, known as a custodian, must be set up to minimise the risk to other assets within the SMSF if something goes wrong with paying back the mortgage. If the investment property is under an LRBA and the SMSF defaults on payments, your lender won’t be able to pursue the other assets in the SMSF as compensation.
Lenders typically limit the loan-to-value ratio for SMSF loans. This could be around 80% for residential properties and 70% for commercial properties.
Advantages of using an SMSF home loan for investment
Investing in property through your SMSF can offer advantages:
- Growth potential: The latest CoreLogic home value index shows property prices have increased 8.3% nationally over the last year. Given the capital growth offered by property, you could potentially boost your superannuation over time.
- Rental income: You can earn money through the rent charged to tenants. In the case of commercial property, you could offset the expense of the mortgage by renting to a business owned by one of your trustees. This means your business’s rent is being paid back into your SMSF.
- Tax benefits: The rental income earned by the property may be eligible for tax concessions.
Important factors to consider before investing in your SMSF
Managing an SMSF home loan and rental property can be a complex and time-consuming process. It is helpful to seek professional advice from a mortgage broker as well as your SMSF accountant to help. There are strict regulations governing SMSF mortgages. You must ensure you stay compliant with the ATO to avoid penalties.
Property investment can limit the liquidity available in your SMSF. When the time comes to sell, this may take time which could limit your access to the funds.
Note: This is general information only. It should not be taken as constituting professional investment advice.