Borrowing in Super – Key Concepts

Single acquirable asset: When you buy a property in your SMSF, it must be a single acquirable asset and has to meet the ATO’s definition of a single acquirable asset in order to be financed. Generally, a Super Fund Loan cannot be established over multiple residential or business real properties unless there is some unifying physical object or significant value which ties the multiple properties together. If an SMSF acquires a property that does not meet the single acquirable asset rules, the SMSF trustees may be required to sell the property. This may result in a substantial loss to the SMSF. The SMSF trustees may also be subject to monetary penalties and other sanctions for breaching the superannuation borrowing rules.

Repairs, maintenance and improvements: Assets acquired under a LRBA cannot generally be replaced with a different asset. This means that during the life of the loan, alterations to a property acquired with a Super Fund Loan cannot be made if it fundamentally changes the character of the asset. Alterations or improvements to the property that have the effect of improving the functional efficiency of the property, but do not change its character are permitted, provided they are not funded by the loan.

Borrowed funds may be used to repair or maintain the property that is acquired under a Super Fund Loan. Borrowed funds must NOT be used to improve the security:

  • Repair: a repair merely restores the function and does not change the character of the property. It generally involves the use of similar materials to that which were used when the property was originally built.
  • Maintenance: of a property is work done to prevent defects in, damage to, or deterioration of the property to enable its continued functioning.
  • Improvement: Improvements are permitted to a property acquired with a Super Fund Loan but must be funded from the existing cash reserves of the SMSF for the Super Fund Loan to continue. The improvements must not result in the property becoming a different asset.

SMSF trustees must be careful not to breach the regulations in this regard as they may be subject to monetary penalties and other sanctions if the replacement asset rules are breached.

Timing: There are technical issues regarding the timing and manner of establishment of the Bare/Property trust in relation to the acquisition of the property, which differ in many Australian states. If the correct timing is not followed the consequences may include:

  • Additional stamp duty payments when the property is acquired from the vendor.
  • Additional stamp duty when the property is transferred from the Bare/Property trust to the SMSF when the loan is extinguished.

Limited recourse by lender: Due to the limited recourse nature of the loan borrowing arrangements, financial institutions often insist on personal guarantees from fund members.

Related party dealings: Generally an SMSF cannot acquire an asset from a member or related party of the fund. One important exception to this rule is business real property which is used wholly and exclusively for business purposes, i.e. ‘business real property’ may be acquired by an SMSF from a member or related party.

Early access to funds: Fundamentally, SMSFs are used to provide retirement benefits for its members. Ensuring members don’t jeopardise their retirement by accessing superannuation funds early is a huge concern for the ATO, who diligently monitor superannuation funds to ensure this does not occur. Trustees must ensure members do not obtain early benefits, for example, purchasing a residential investment property and allowing members or related parties to use the property, regardless of whether market rates were/are charged to lease the property.

Benefits and Risks of borrowing in your super fund >

 

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Disclaimer: This information has been prepared by Aurora Finance Group as a guide only. You should not act solely on the basis of this information because it has been generalised and tax laws apply differently to different circumstances. As tax and related laws change frequently, there may have been changes to the law since this information was prepared. None of the comments in this page are intended to be advice, whether legal, financial or professional. Do not act on this information without first obtaining specific information about your particular situation from either Aurora Finance Group or other superannuation professionals.