Probably one of the greatest advantage of self-managed super funds (SMSFs) is the amazing flexibility they offer with investments as members have the opportunity to choose where to invest their retirement savings and can manage the investments according to their specific needs. There are many investment options including shares, term deposits, income securities, managed funds, business property, direct property and many more. As one of the best ways to increase your retirement savings, property investments are a popular option among SMSF members. While in the past super funds were not allowed to borrow money to invest in real estate, nowadays you can use a SMSF loan to invest in both residential and commercial properties. With the changes in superannuation laws made in 2007, members are allowed to borrow money with the purpose of buying property through their super fund.
Considering the fact that SMSF loans come with many benefits, one of them being providing your super balance with the advantage of property growth, they can be a vital part of your investment strategy. As a SMSF member and trustee, you should know that borrowing money for buying property within your super must be done following the rules of the superannuation law. There are various regulations that determine how you can use your SMSF loan and the property itself.
What Are the Rules for Getting a Loan Approval?
The process of getting a loan approval includes few important stages. The first step is to make sure the trust deed of your fund complies with all the relevant laws and regulations set up by the ATO (Australian Taxation Office). This basically means that all the funds within the SMSF must be in accordance with the “sole purpose test”. In other words, their only function should be to provide benefits for members in retirement. Next, you should consider what kind of property, whether residential or commercial, would best suit your investment strategy. Once you’ve made your decision it’s time to obtain a pre-approval for your loan, prior to giving any money as a deposit. After you get a pre-approval, the next step is to establish a bare trust deed. Also, it is important to mention that the property trustee cannot be appointed as a bare trustee. You will get a formal approval for your SMSF loan after the contract for buying the property has been signed and you provide your lender with the necessary documents for valuation.
What Are the Key Characteristics of SMSF Loans?
The most important thing you should know when making property investments is that the asset that will be acquired through your super fund, according to the superannuation law, must be a single acquirable property. To put it simply, you can use the SMSF loan to purchase only one property, which means that multiple assets cannot be acquired with one loan arrangement. As we mentioned earlier, before investing through your SMSF, you should first set up a bare trust deed that will act as the legal owner of the property, while the super fund will have the role of beneficial owner and will be responsible for all the loan repayments. Once all the payments are completed, the super fund becomes the legal owner of the property.
