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What is an SMSF loan?

An SMSF home loan is for borrowers with a self-managed super fund (SMSF) who want to use the funds to purchase an investment property.

The mortgage is controlled by the members of a super fund, and rental income and capital growth generated by the investment property form part of your super fund's retirement savings.

You need a specific SMSF home loan to borrow money through your super fund, but it's getting increasingly harder to find lenders that offer these products. This page has some SMSF loans you can apply for, and more information about how these financial products work.

What are the features of an SMSF?

The list below describes some of the most critical features of an SMSF:

• Rates and fees. Like a regular home loan, an SMSF home loan charges interest on the money you've borrowed. SMSF loans have higher rates than most other home loans. Some lenders charge application or ongoing fees with these loans.
• Managing your own investments. The goal of an SMSF fund is to provide members with funds for their retirement, which means that any investing needs to directly benefit the fund members. You must keep any personal business and financial concerns separate from the fund.
• Additional contributions from the trustees. While additional contributions can be made, there are some limits that depend on how old the person in question is as well as their contribution limits. You can be charged penalties for contributions which exceed the limit, and these limits vary every year.
• Managing the fund. As a super fund trustee, you'll need to make sure that you keep excellent records of the projects the fund undertakes and that you comply with the rules and regulations regarding lodging your annual return.
• Accessing your funds. Fund members will be able to access SMSF funds once the release conditions are met, which can be at the time of retirement, otherwise known as "preservation age". Your preservation age differs depending on when you were born:

Table information taken from the Australian Taxation Office.

You won't be able to access these funds before the appropriate age unless you experience extreme financial hardship, are suffering from a terminal medical condition, or are permanently or temporarily disabled.

How do I purchase a property through my SMSF?

The process of purchasing a property through an SMSF is similar to a regular property with a few key exceptions, and each lender will have its own restrictions. The main difference is that an SMSF mortgage is more difficult to process, with fines of over $200,000 applying to trustees if their arrangements aren't properly structured. For this reason, it's a good idea to seek advice from an experienced mortgage broker or find out about any SMSF training your lender may be offering.

Steps for purchasing property with an SMSF loan

1. Create your SMSF with the help of your accountant, who can also advise you of the benefits of investing in residential properties via your fund.
2. Identify the property you wish to purchase. As with any investment, take your time and consider every aspect carefully, including potential capital gains, rental income and market value to name a few.
3. Decide who will act as a custodian for the property. The custodian holds the property title on your behalf until the loan is paid off, otherwise known as a "bare trustee".
4. You submit the home loan application along with all the required documentation.
5. The custodian issues payment of the deposit and contracts for the purchase of the property are exchanged.
6. If the loan is approved by the bank, the custodian puts the property up as security with the lender so the transaction can be finalised.
7. You cover the costs of stamp duty and legal expenses.
8. Upon settlement of the loan, you begin making repayments and cover other day-to-day expenses on the property as well as collecting the rent. If rent doesn't cover the repayments the difference will need to be made up through your SMSF contributions.
9. Once the loan has been paid off, the title can be transferred to the SMSF from the custodian or the property can be sold off.

Restrictions on an SMSF property

There are some restrictions when it comes to any property bought by an SMSF, namely that you can't construct a new home, nor can you live in the home at any stage until you're in the pension phase.

Note that if the purchase is for your business, this is acceptable. While you can't sell a residential property to your SMSF if you or someone close to you owns it, you can do so with a commercial property.

Renovations and repairs are also a complex area in regards to SMSF properties. You can renovate and repair your property, although this comes with conditions regarding how you finance these activities. Regular maintenance on a property such as fixing leaking taps and other general running costs come with no legal problems.

Which banks have loans for SMSF trusts?

Most lenders have pulled out of the SMSF home loan market due to the potential risks associated with these products for lenders. AMP, Macquarie Bank, St.George and the Big Four banks all previously offered these types of loans, and have all exited the SMSF loan market.

The lenders that still offer these products include:

• Bank of Queensland
• Liberty Financial
• Mortgage House
• Reduce Home Loans
• La Trobe Financial
• Loans.com.au
• Freedom Lend

Tax benefits of an SMSF

Owning and running your own SMSF can have some considerable tax benefits. However, it's important you understand how your SMSF is taxed first before you try to create an investment strategy based purely for tax purposes.

The tax on income derived from a superannuation fund is usually 15% for a complying fund and 45% for a non-complying fund. The tax you'll need to pay on income produced from an SMSF differs depending on the type of income it is. For example, contributions without a Tax File Number (TFN) are taxed at 46.5%. You might also be taxed more if you are notified that you aren't complying with superannuation fund rules or if you are earning income from any other investments you have not connected to the super fund.

How SMSFs are taxed

Your self-managed super fund is taxed in much the same way as an individual, with the exception of having a different tax rate. Add up all the assessable income sources and deduct all the allowable deductions to reach a taxable income figure. This figure is taxed at 15% while you're in the fund accumulation phase.

Once your SMSF goes into a pension phase it is completely exempted from tax.

What tax records do you need to keep?

In order to make the most of any tax benefits available for your SMSF, it's important you keep accurate records and provide information to the Australian Taxation Office. The records you need will include:

• Annual audit: You will need to provide an independent audit of your fund and any assets it has from an approved auditor.
• Annual tax return: You will need to prepare and submit a tax return for your fund each year.
• Rollover benefits statement: If there have been any rollovers during the financial year you need to submit a statement outlining these.
• Official fund changes: Any changes made to the fund throughout the financial year, such as changing trustees, need to be officially notified.

Questions to consider before setting up an SMSF

There are a lot of factors to consider before you establish an SMSF. You need to do plenty of research and think it through thoroughly. Start with the following questions:

• Is it cost-effective? Managing an SMSF can be quite expensive since there are a lot of fees involved. Analyse the level of retirement savings you have and decide whether it makes sense from a financial standpoint to establish an SMSF. A good place to start is to look at how much auditing an SMSF costs compared to what standard retail super funds charge, which is 1–2%.
• Can you invest the funds effectively? You really need to be objective regarding your investment knowledge and skills because a public fund has an army of specialists and experts devising and implementing investment strategies. So, if investing really isn't your thing, you aren't going to be gaining any additional benefits in terms of returns by managing the fund yourself. An SMSF is usually a good option for people with a decent level of experience in investing.
• Do you have all the information you need and do you have time to manage the fund? Running an SMSF is complicated. Firstly, you need to be fully aware of all the laws, rules and tax regulations that govern an SMSF since you have a wide range of criteria you need to meet to qualify as an SMSF. You also need to have a good understanding of investing and the financial markets.

Frequently asked questions about SMSF home loans

• How will the banks assess my loan?

  The biggest obstacle SMSF borrowers face is that they have to prove the fund earns enough to be able to easily service the loan. Most lenders will analyse the trust's income by looking at its tax returns for the previous 2 years and will then determine if the earnings of the trust along with the estimated rental income will be enough to cover the repayments and pay off the loan.

• How can I avoid double stamp duty?

  Stamp duty is paid when a property is transferred from the seller to the buyer, which means that the SMSF will have to pay stamp duty on the initial transfer. However, when the property is purchased, it is held under the ownership of a custodian whose structure can differ from bank to bank. The problem is that once the loan is paid off in full and the property needs to be transferred to the SMSF, with some structures, you will have to pay stamp duty again.

  Some lenders want SMSF borrowers to register the property under the name of their custodian, which holds the property title on trust for the SMSF. In other words, when the loan has been paid off, the SMSF might have to pay stamp duty again for the legal title of the property to be transferred to the SMSF trustee from the custodian, which could mean thousands of dollars in tax. This can sometimes be avoided by ensuring you consult the right tax law professional, as the timing of your transfer, contract of sale and deeds can influence this.

• Do banks look at the beneficiaries?

  If the SMSF is new, some banks will look further than the trust's earnings and analyse how much the beneficiaries are earning, as well as what superannuation contributions they have made on a regular basis and how much they intend to contribute in the future. If the contributions do not exceed the capped limit set by the ATO, the loan might be evaluated based on the level of these contributions. The beneficiaries also have to show that they can contribute without suffering any financial strain.

  Remember that lenders are fully aware of how much you can deposit as concessional and non-concessional contributions, but the limit can change from one year to the next. If the only way to prove that the SMSF can repay the loan is by making contributions over the imposed limits, the loan will not be approved.

• Will the lender accept my super contributions?

  This depends on the lender but if you are close to retiring, there is a chance that the lender will not take your superannuation contributions into account when evaluating the loan applications. After all, if you are no longer earning a wage or salary or making any other type of income, you will no longer be contributing to the fund.

  If this is the case, the amount of the loan might be reduced so that the money being made from renting out the property will be able to cover the repayments. The lender might also opt to shorten the term of the loan.

• Are my other super assets at risk if I default on my loan?

  By law, you're generally only permitted to purchase an asset with your SMSF using a "limited recourse borrowing arrangement" (LRBA). This means if you default on your loan, your lender cannot seize any of your other SMSF assets – only the asset that is the object of the loan. Any other assets your SMSF owns are protected. This type of loan comes with drawbacks – namely less flexibility than a regular home loan and limits to how you can deal with the purchased property which are explained below.

  Some banks might require the members of the fund to provide guarantees, but these will be structured in such a way that the guarantors can take no action against the trustee of the fund if the SMSF defaults on the loan. However, there are lenders that will not ask for a personal guarantee from the fund's members.

• Will the lender accept other forms of income?

  Some lenders are more lenient than others, so the answer to this question can change. Despite this, a lot of lenders will not take into consideration earnings derived from shares or interest being generated by the assets the trust currently owns. If these assets are being sold so that the SMSF can put down a deposit to buy the property, the income cannot be taken into account when the loan is being evaluated because it will cease to exist.

• Can my SMSF buy a property from my personal portfolio?

  There are certain restrictions when it comes to selling property you own to your SMSF. So, while your fund cannot purchase residential property from you or someone related to you, you can sell a commercial property that you own to your SMSF.

  It is imperative that you are very careful because you could be heavily penalised if you make a mistake, including having to pay a significant penalty tax which could represent a hefty percentage of your super fund's balance. So, it's best that you get advice from an accountant who specialises in SMSFs when you want to sell a property you or someone close to you owns to the fund.

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