Can You Lend Money To Your Self Managed Super Fund?
Under certain circumstances you can lend money to your SMSF for the purpose of buying property. Self Managed Superannuation Funds (SMSFs) can be funded by Limited Recourse Borrowing Arrangements (LRBA's) from financers. There is also absolutely nothing to bar you from being the financer. If you have real estate or other assets in your name; you can actually use them as collateral to secure a loan from a bank or other financial institution and then on-lend to your SMSF.
How It Works
Most SMSFs can choose to obtain funding from a bank through a loan facility. However, this must be on a limited recourse basis. This means that the bank?s security or collateral is limited to a charge over the asset acquired using the loan. Thus, the bank does not have any recourse to any other asset owned by the fund. As you can expect, this is a significant limitation on the bank?s side which forces them to adopt certain measures.
How Banks Protect Themselves
Banks protect themselves in three ways. Firstly, they lower the LVR on the loan (in most cases 65% of the property valuation). This creates a bigger buffer for them should they be forced to sell the property in a forced sale scenario. Secondly, they charge higher interest to offset the greater risk. Thirdly, they often require a guarantee from the person taking the loan or choose to take a charge over his or her private assets.
Why Would I Lend Money To My Super Fund?
That is a good question. There are two reasons why you would opt to do that. First of all, the loan from the bank will carry a lower interest rate than if it were lent directly to the SMSF. This is because an SMSF loan is classified as a Limited Recourse Borrowing. Secondly, you can in most cases fund 100% of the purchase price of the target property by taking 65% LVR loan within the SMSF and then funding the remaining 35% personally using assets that you pledge as collateral.
Interest To Charge On The Loan To The SMSF
All transactions and dealings between a member and his or her SMSF must be at arm?s length and on commercial basis. Although you can insist on a premium interest rate on the Limited Recourse Borrowing, you are better off looking at the benchmark rates charged by major banks for the SMSF loans and demand those rates. In typical commercial terms, the Limited Recourse Borrowing attracts higher interest rates than a member?s borrowing rate. If you want to successfully claim interest costs as a tax deduction, this entire arrangement must be commercial in accordance with the SIS Act. There are specific SMSF property rules that you need to adhere to when lending money to your super fund so getting professional advice from a financial planner or tax accountant first should be considered.
The Question Of Formality
The loan to an SMSF has to be legitimate borrowing supported by the level of documentation expected in loans issued in an arm?s length basis on normal commercial terms. Therefore, mortgage documents, audit trail of regular interest payment and perhaps principal, all have to be in place. This financing arrangement mirrors that of a typical loan between a financier and an SMSF only that this time round you play the banker.
Of course there are a number of risks that could impact your superfund such as increased interest rate costs, loss of your income or job and increased debt against your personal or investment assets. All of these issues will need to be discussed with your financial planner in detail.
The above article is general information and not advice. The ATO suggests that you should always seek the professional advice of an accountant or financial planner before considering superannuation investment strategies for a SMSF.
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Disclaimer: The information on this site is general in nature and not financial advice. Visitors should consider obtaining independent advice before making any financial decisions.