I researched the family of articles using an outline from Colin at CJG Finance, crafting real world scenarios to help illustrate the ways in which Colin assists his clients.
A self-managed super fund (SMSF) allows those with the time and skill required to invest their retirement savings within the frameworks and regulations provided by the Australian government. Trustees of an SMSF can sometimes use retirement savings to purchase investments to help fund their members' retirement. This specialised loaning and investment environment can be easier to navigate with the help of a skilled finance broker. Let's touch on some vital information that SMSFs need to consider when acquiring an investment through their fund.
What is a Self-Managed Super Fund?
An SMSF is a retirement savings vehicle similar to the super accounts that most working Australians have; the critical difference is that those involved are usually fund trustees instead of members. The role of a trustee involves a great deal of knowledge, experience and adherence to strict protocols. Managing a fund consists of setting out investment plans for the fund, including the research, analysis and timing of investment decisions. SMSFs are usually more enticing to those wanting more control, those with the skill set to manage efficiently, and those with a clear investment strategy in mind.
For an SMSF to be competitive with retail super funds for value, a rather large balance is needed to contend with the various fees. People who elect for an SMSF are willing to accept responsibility for their investment decisions and outcomes in exchange for the right to steer the fund themselves. They may do so in response to weak performance by their current fund or at the advisement of a financial professional.
How does an SMSF borrow money?
Let's imagine that Francine has built up a balance of $400,000 in her retail superannuation fund. After researching, she decides to set up an SMSF, following the legal frameworks and appointing herself and another person as a trustee. Francine has the skills to keep tabs on her investments and ensure her fund is performing well. One of her goals is to acquire a piece of property as an investment toward her superannuation balance and future retirement savings.
People in Francine's position need to understand that, generally, SMSFs are not allowed to borrow money or take a loan. There are only a handful of occasions during which a fund can apply for a loan. However, the Australian super laws provide one method by which an SMSF can take a loan to fund the purchase of an asset, most often in the form of a property.
This method is known as a Limited Recourse Borrowing Arrangement or LRBA. An LRBA is a particular type of loan that protects the SMSF, its trustees and its assets from lenders if a default occurs on the loan. Let's illustrate this to see how these work.
In our scenario, Francine is interested in acquiring a loan for her SMSF fund to purchase an investment property. She aims for the fund to benefit from the property's rental income and the potential appreciation in the home's value over time. This point is essential; SMSFs are regularly audited, and the intent of the investment must be explicit. Francine must clarify that she is only investing to benefit her retirement savings. She may not pocket rental incomes or potential earnings from equity if she decides to sell the asset. The fund's trustee becomes the beneficiary of all gains from the investment. She works with a skilled finance professional to ensure she complies with all regulations and does not face serious investigations or possible legal consequences.
Francine carefully ensures that her loan is a Limited Recourse Borrowing Arrangement. By doing this, if her fund defaults on its repayments to the lender, the lender may only take action against the asset itself to recoup the loan's value. The lender may not take action against her fund's other assets and investments. Francine is protected; the lender's recourse is limited to the property. In this way, the property becomes collateral for the loan. She is also compliant with all super legislation.
Francine works hard to ensure that her fund continues to grow over the years, and eventually, the fund has fully repaid its loan to the lender. A holding trust has legally owned the property all of this time. This holding trust represents the asset separately from the SMSF that Francine has set up. The holding trust can now transfer ownership of the asset to her SMSF and continue to receive income from it. Excellent work, Francine!
Lenders in this space have unique guidelines when considering a loan application. Some may only loan a certain percentage of a property's value. It's worth noting that the property may be residential or commercial. As always, interest rates differ between lenders. It is also important that the investments remain at 'arms-length'; for instance, rental income can not come from a trustee's family member.
SMSF borrowing for these sorts of arrangements is a complex and detailed process. Speaking with a financial specialist is highly recommended. CJG Finance specialises in connecting people to acquire property through SMSFs with suitable lenders. Colin can help to navigate the process and speak with compatible lenders. Reach out today if you're interested in exploring this investment avenue for your SMSF; we're happy to help.
What is a limited recourse borrowing arrangement?
An LRBA ensures that only the purchased asset is accessible to the lender in case of loan default. In this scenario, the lender may not recoup their loan investment by accessing the other funds held by an SMSF. The property alone acts as collateral for the loan used to acquire it.
What assets can I purchase?
An SMSF can make an LRBA acquire a residential or commercial property. They may also use borrowed funds to cover stamp duty or commissions paid to real estate professionals. By contrast, SMSFs may not use borrowed funds to improve or renovate the property.
What is the typical LVR available?
Loan-to-value ratios vary between lenders, but in most cases, an SMSF can borrow up to 85% of a residential asset and 70% of a commercial asset.
Can I construct a property?
No, this is not allowed within the Australian Super Laws. Constructing a property would constitute an 'improvement' to a piece of land or an asset, even for investment purposes.
Can I refinance my existing SMSF loan?
It is possible to refinance an LRBA loan; this is a detailed process, and in most cases, it is recommended to consult an expert.
Why should I use an SMSF finance broker?
An SMSF broker has a deep understanding of the LRBA process. CJG Finance can help determine your potential lending options, ensure that your fund meets all legal requirements, and allow you to borrow at the most competitive interest rates. We're eager to help you determine the right approach and connect you with our extensive panel of lenders. Please consider reaching out if you want to learn more about borrowing for investment in your SMSF.
