In the current financial climate many self managed superannuation funds (SMSF) have lost considerable value due to the volatile movements within the share market. It is because of these conditions that it is imperative to have a diversified portfolio within a superannuation fund.
As of September 2007 the opportunity for funds to increase and diversify their portfolio arose with borrowing restrictions on SMSF’s abolished on the acquisition of residential and commercial property. Funds are no longer required to purchase property outright, with trustees of SMSF’s now able to borrow and invest directly in property, taking advantage of an array of benefits associated with holding property within a SMSF.
Advantages of borrowing in a SMSF
Not only does the ability to borrow assist SMSF’s to acquire a larger more diversified portfolio but it also may act as a catalyst for investment growth speeding up wealth creation as there is more money working for the fund.
The more significant and on going benefits however are the result of the tax advantages associated with owning property in the SMSF.
Conditions of borrowing
If money is borrowed to buy property in a SMSF, the asset must satisfy the Australian Taxation Office’s ‘sole purpose test ’. This means the investment must provide a benefit for retirement only and not be for the immediate benefit to the member (i.e the SMSF cannot hold or fund their own residence or holiday home).
Should the SMSF fail to meet repayments of the loan the lender has no right of recourse on other assets held by the fund. This means that the lender cannot sell other assets in the fund to recover the money owed – this can vary depending on the financier, so always check the loan documents carefully.
Once the mortgage is repaid in full, the SMSF obtains title of the property upon which the assets are either transferred to the fund or they can be sold with the proceeds flowing through to the fund.
Considerations upon investment
Like any acquisition of property, its investment potential should be the primary focus rather than purely the associated taxation advantages.
Laws surrounding SMSF are complex and upon consideration of borrowing to purchase a property you should seek professional advice as penalties for non compliance within a SMSF are severe. It should also be remembered that poor judgment or ill advice when dealing with these borrowing products could have a negative effect on future retirement savings upon which you may rely on. So if you have any questions surrounding the issue please contact us.
