Self Managed Super Fund

In recent years it has become more popular amongst Australians to use their Self Managed Super Fund (SMSF) to buy investment properties.

A self managed super fund is a savings account that you manage yourself to fund your retirement, as opposed to a fund that is managed by a superannuation provider.

How does the borrowing work?

Once your SMSF is established, and your existing superannuation is transferred across, you will be able to use the existing superannuation as a deposit. If you decide to invest in property and use borrowings to achieve this end, you will be required to establish a Bare Trust which will hold the property on behalf of the SMSF.

Once your Bare Trust is established, Lenders will then advance (subject to servicing guidelines) up to 80% of the purchase price to assist with the settlement of the property.  The SMSF will then need to have sufficient funds to cover the deposit and settlement costs.  It’s also important that the SMSF has some surplus funds available after settlement.

The loan will be serviced from a combination of the rent received, returns from other investments, SGC payments and any Salary Sacrifice contributions.

To comply with the legislation, the borrowings will have to be Limited Recourse borrowings, meaning that the lenders only have recourse against the security property in the event of default, thus protecting your remaining Superannuation assets.

Lenders Loan to Valuation Ratio’s and servicing guidelines differ significantly, as do the costs and the interest rates charged.  It is essential that you have your finance sorted before you proceed with any property purchase.

There are a number of benefits to investing in property via your superannuation fund.

Most Superannuation funds are predominantly invested in a combination of equities, share market listed property holdings, bonds and perhaps straight cash.  As the past few years have indicated, this exposure can have a major impact on the value of your superannuation investments due to the volatility of the world’s share markets.  It can also prove cheaper to run your own fund as opposed to what you may be getting charged from your current Fund Manager.

We all know that leverage is    an excellent way to enhance the returns on your investments.  If you’re invested in a retail or industry fund, there is no way of obtaining leverage on your investments.

This may not appeal to everyone, but to many the idea of being able to decide where their funds are invested and to manage those funds is quite appealing.  Property is an investment class that most people feel comfortable managing.

Without going into too much detail, as this is an area that warrants it’s own article, purchasing property via a SMSF provides a number of taxation benefits both immediately and in the future that just aren’t achievable when you invest outside of super.  For instance, Superannuation Guarantee Contributions  (SGC) and Salary Sacrifice contributions to the SMSF are only taxed at 15%, whereas if this income was paid to the member as a salary it would be taxed at their marginal rate which is most likely above 30% and possibly as high as 42.5%.

The ability to use your superannuation guarantee payments to service any proposed loans means that you can purchase a property without impacting your day to day lifestyle.