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You are here: Home / News / Superannuation / Regulators loosen grip to allow Self-managed Superfunds to buy property using borrowed funds

Regulators loosen grip to allow Self-managed Superfunds to buy property using borrowed funds

Regulators have loosened their grip to allow Self-Managed Superfunds (SMSF) to allow members to purchase property using borrowed funds. Careful consideration needs to be given to determine whether this is the right strategy for members of a SMSF and before any decision is made, such members should seek independent financial advice and become acquainted with the strict borrowing rules and regulations.

Before any decision is made, it is necessary to make a determination as to whether the SMSF has the resources available for any improvements required to the property, given borrowed funds can only be used for repairs.

A member of the SMSF cannot live in or rent the property to the member or any of the ‘related parties’ to the member, unless the member purchases a commercial property and uses the SMSF to rent the property to a business owned by the member.

Members also need to decide whether they are prepared to hold the property for a full cycle of 7 – 10 years if the market enters a downturn after purchase.

It is not necessary to exhaust the superannuation balance of the SMSF to purchase a single asset. Previously, regulators prohibited the borrowing of SMSF funds, limiting members to either choose between waiting until they have enough funds in the SMSF to purchase a property as an investment for the SMSF or steering clear of investing in a property.

Positively geared investments are taxed at the SMSF’s rate of 15% rather than the normal tax rate, creating what could be a fairly substantial tax incentive. Further, the rent received from the property before the commencement of a pension could prove to be a significant alternative income generator for the SMSF. Similarly, any rent received by the SMSF after a member commences a pension is also tax-free.

There is also the possibility of eliminating Capital Gains Tax (CGT) on the investment if the property is sold at a profit after the members of the SMSF enter into pension phase.

If you would like to know more about SMSF and need assistance or advice on setting up a SMSF, or if you already have a SMSF and would like further guidance, we invite you to contact the experienced team at Rockliffs Lawyers today to have a discussion on how we can assist you to achieve your financial goals.

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