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How Borrowing can help

There are many reasons why a member should consider purchasing a property with borrowing in a SMSF instead of a negatively geared property outside of super. Below are some of the reasons:

1. Members can reduce their SMSF loan by making Concessional (deductible) contributions to their SMSF or via salary sacrifice
2. Since the maximum concessional you can contribute is $25,000 per year under the age of 50 and $50,000 for 50 years and over, by borrowing, a member can leverage its contributions and purchase a larger growth asset for a more comfortable retirement. Note that borrowing has its own risk and do not suit everyone's personal situation.
3. A member can purchase its retirement home in a SMSF. Once the member retires the SMSF can sell the property to the member at market value. If the SMSF is in pension phase, the super fund will not pay any Capital Gains Tax.
4. A property purchased with borrowing in a SMSF can create a situation where there is a loss due to interest and depreciation. This loss can create a tax shelter for 9% contributions and salary sacrifice contributions to the fund. Which means that a member, instead of paying tax on income, can salary sacrifice to his SMSF and pay NIL tax on these contributions in the SMSF.

Can a SMSF Borrow Money?

A Self Managed Super Fund (SMSF) can now purchase property with borrowed moneys with the following structure in place:

• Property Holding Trust (HT): For SMSF to borrow to purchase an asset under section 67A & 67B of the SIS Act, the asset has to be held by another trust, a holding trust, a trust other than the SMSF. The other trust must hold the property, as property custodian for the SMSF, until the borrowing is paid off.
• Right to transfer legal ownership: Since the legal owner of this new asset is the trustee of the HT – the trustee of the SMSF has the right to transfer the asset in its own name at any time. Once the loan is repaid, the property can be transferred from the trustee of the HT to the trustee of the SMSF.
• Purchase of a new asset: The SMSF is able to purchase any acquirable asset which the SMSF is permitted to hold directly. However, you cannot sell your own residential property to your SMSF and no associates of members can live in a residential property owned by the SMSF.
• Limited Recourse Loan: The lender has a right (or mortgage/security over) to recover any amounts owing over the asset – only from the asset purchased and the lender has no right over other assets of the SMSF.
• Income and Expenses of the new property: All the income from the property is reported by the SMSF who also pays all the holding costs such as strata, council rates and water rates and interest for borrowing etc
• Once the loan is repaid: Once the loan is paid off, the purpose of the property custodian trust is over. The property can be transferred to the trustee of the SMSF, or the property can be left in the name of the trustee of the property custodian trust until it is ultimately sold to an outside party, hopefully when the SMSF moves to pension phase.
• The property can be sold at any time: The trustees of the SMSF can decide to sell the property at any time. Once the property is sold, the loan is first repaid to the lender and then any remaining amount is paid to the SMSF.

SMSF Borrowing Structure

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