HOW IS AN
SMSF LOAN
DIFFERENT TO
A HOME LOAN?

It may be tempting to think there aren’t many differences between a self-managed superannuation fund (SMSF) loan and a home loan.

Yes, an SMSF loan requires only a couple of additional legal documents, however the process of buying the property can quickly become overly complicated if the documentation is not properly generated.

Financing an SMSF loan can take longer than financing a traditional loan, sometimes between four and six weeks from application to settlement. It’s also important to familiarise yourself with the differences between an SMSF loan and a home loan to ensure your fund and loan are compliant at all times.

Borrowing to purchase an investment property within an SMSF is subject to specific regulations and is different to a normal home loan in several ways.

HERE’S HOW IT WORKS

Regulations and structure

The Limited Recourse Borrowing Arrangement (LRBA) is one of the biggest and most valuable differences. The structure of these loans protects the other assets in your super fund via limited recourse to stop the lender from laying a claim to other assets in your fund. Therefore the recourse is only associated with the loan against the property should the fund default and not the SMSF’s other assets.

The SMSF can borrow money to purchase the property, but the loan must be limited to the property itself. However, lenders may still ask for a personal guarantee for the full loan amount in the event the SMSF cannot make the monthly loan repayments. The risk will then apply to your personal assets (similar to your standard home loan). This means you still must find the money to make the loan repayments or you may be forced to sell the property.

Loan requirements

Borrowing within an SMSF typically requires a larger deposit compared to a regular home loan. Lenders often require a minimum deposit of 20% to 30% of the property’s value.

Loan repayments

Loan repayments must be made from the SMSF’s assets, primarily from rental income or superannuation contributions. Personal assets of the SMSF members cannot be used to service the loan.

Sole purpose test

The investment property must meet the sole purpose test, meaning it must be solely for the purpose of providing retirement benefits to SMSF members. You cannot use the property for personal use, such as a holiday home.

Property management

The property must be managed at arm’s length, meaning it should be rented out at market rates with all expenses and income administered through the SMSF.

Tax considerations

The income earned from the property is typically taxed at a concessional rate of 15%. If the property is sold it may also be subject to Capital Gains Tax (CGT), however at a lower rate. There are complex tax rules and potential penalties if the rules are not followed.

Restrictions – Forget that renovation for your SMSF!

A significant difference is that while you are still repaying the loan, you are prevented from making any structural changes to the property.

Yep! It is not designed for those who like to renovate to add value to appreciate a property.

This means you cannot:

  • add a granny flat to the property
  • complete major renovations to the kitchen or bathroom
  • add additional rooms, or
  • extend or improve the property in any way.

You are only permitted to make improvements or repairs to the property that are crucial to its function and without the property characteristics changing significantly. For example, re-carpeting after flood damage.

Legal and financial advice

Due to the complex nature of SMSF property investments, it is highly advisable to seek professional advice from our team of financial advisors, accountants and lawyers who specialise in SMSF and property investment.

Compliance

Failure to comply with SMSF borrowing regulations can result in significant penalties including the potential loss of the concessional tax treatment.

Ensure your new SMSF loan is adhering to the rules and regulations set by the ATO to prevent an audit of your fund and its investment.

‘There are now over 600,000 SMSFs in Australia representing over 30% of all superannuation assets.’

Borrowing to purchase an investment property within an SMSF is possible, but it comes with stringent regulations to ensure that the property is used for the sole purpose of providing retirement benefits. It’s essential to understand the legal and financial requirements and seek professional guidance to navigate this complex area of investment.


If you already have an SMSF loan and would like to consider refinancing to obtain interest savings, read our article then contact us to coordinate with our finance team to see if they can find a more suitable finance product for you.

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