An SMSF can borrow to purchase property
Added on by Etairos AccountingA Self-Managed Superannuation Fund (SMSF) can borrow money to:
- Purchase a property (including all acquisition costs)
- Pay for repairs and maintenance and
- Capitalise interest.
You cannot use borrowed funds to improve the property once purchased. Improvements include additions, granny flat, extensions etc. To undertake these kind of activities, you must use the current cash resources of the fund so it's critical to keep good records about your SMSF activities to identify whether you're using borrowed funds or internal cash.
When debt is used to buy a property, the property must be held in a Holding Trust (a Bare Trust) with a Corporate Trustee and not directly in the SMSF.
Loan amounts are determined by bank lending policy under their Limited Recourse Borrowing Arrangement (LRBA) guidelines but generally borrowing in and SMSF is limited to 70 per cent of the purchase price. The balance must come from the Fund's current investments.
Many people use external funds to assist them in completing the purchase by contributing the cash as a non-concessional contribution which is fine. The problem is that once contributed you cannot get the funds back until retirement or you may not be able to contribute sufficient funds within the allowable limits. You can however lend the funds to your superannuation. This arrangement allows for the funds to be released if refinanced and there is no limit on the amount of the loan. The mistake that many people make is to lend the funds with a simple loan agreement. The loan agreement must meet the limited recourse borrowing requirements of the legislation as well as clearly identifying all terms and conditions.