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How SMSF loans work and what to watch out for.
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what you need to know about SMSF loans
what is a SMSF loan?
SMSF loans are investment loans allowing you to leverage the funds in your self-managed super fund to purchase an investment property. This means you can take control of your retirement and grow your investment portfolio sooner rather than later.
how much can I borrow for SMSF loans?
how do SMSF loans work?
SMSF loans enable trustees to borrow money through their SMSF to purchase an investment property they may not be able to afford outright. This is done under a Limited Recourse Borrowing Arrangement (LRBA), where a SMSF trustee takes out a loan from a third-party lender.
The property is held in a custodian trust until the loan is fully repaid, at which point the SMSF takes legal ownership. During the loan term, SMSF members retain a beneficial interest in the property, and any income it generates is reinvested into the fund to help repay the loan or increase the fund value.
how do I apply for a SMSF loan?
how to stay compliant with SMSF loan rules
SMSF setup
SMSF loan requirements
transaction oversight
investment strategy
We set up real-time financial dashboards, giving you instant access to key metrics like cash flow, expenses, and profitability, eliminating the need to rely on post-quarter reporting.
Managing your SMSF property
- Higher costs: An smsf loan for property investment will likely have higher interest charges and fees.
- Possible tax implications: Because the property is owned by the SMSF, not you personally, any losses from the property cannot be offset against your personal taxable income. While the SMSF can offset those losses against its own taxable income, it is generally taxed at a concessional rate of 15%. This rate is typically lower than an individual’s marginal tax rate, which means the usual tax advantages of negative gearing are not fully realised in an SMSF structure.
Running a SMSF is a major responsibility, and the Australian Tax Office (ATO) strongly recommends doing your due diligence and seeking out professionals who are “qualified, registered, licensed, and right for your circumstances.” These professionals, including SMSF accountants, auditors, financial advisers, tax agents, fund administrators, and legal practitioners, can walk you through the process of setting up and helping you manage your fund. By ensuring compliance, you avoid breaching super laws and facing severe fines.
Borrowing, gearing and repaying an SMSF loan
How long does SMSf approval loan take?
Can I apply for a SMSF loan for property if my SMSF is not set up yet?
Why use an SMSF accountant?
How much your SMSF can actually borrow
Lenders will usually advance up to 80% of a residential property or 70% of a commercial one through an SMSF, but the real limit is what the fund has left after the deposit, the costs and the cash buffer the lender wants it to keep.
Example: the deposit is only the start
Say a fund has $200,000 and wants a $500,000 residential property. At 80% the loan covers $400,000, so the fund still has to find the $100,000 deposit, plus roughly $17,000 in stamp duty and several thousand more in legal, bare trust and setup costs. That’s around $125,000 of its $200,000 committed before settlement, and most lenders then want the fund to keep a cash buffer of several per cent of its balance for repayments and expenses. The number that decides the purchase isn’t the 80% you can borrow, it’s whether what’s left after the deposit, the duty and the buffer keeps the fund liquid.
Why negative gearing works differently in an SMSF
When a geared property runs at a loss, an SMSF can only offset that loss against the fund’s own income, which is taxed at 15%, so the tax benefit of negative gearing is worth far less inside super than it is to an individual on a higher marginal rate.
Example: the same loss, a smaller benefit
Say a property is negatively geared by $10,000 in a year. Held personally by an investor on the 37% marginal rate, that loss saves about $3,700 in tax. Held in an SMSF, the same $10,000 loss only offsets income taxed at 15%, so it’s worth $1,500, and only if the fund has other income to absorb it. Gearing inside super can still stack up for the long-term growth and the low tax on eventual sale, but if the case for the property leans on the gearing tax benefit, the SMSF is the wrong place for it.
How SMSF loan repayments work
An SMSF loan has to be serviced entirely from inside the fund, from the property’s rent and from contributions, never from a member’s own pocket, and the concessional contribution cap sets a hard ceiling on how much you can add each year to help.
Example: making the repayments work
Say a fund buys a $500,000 property returning $26,000 a year in rent, against loan repayments and property costs of about $34,000. That $8,000 shortfall has to come from inside the fund, usually from concessional contributions, which are capped at $30,000 per member a year and are also meant to be building the members’ retirement savings. If the members are already contributing near the cap, there’s little room left to prop up the loan, and paying it from a member’s personal account instead creates a contribution problem or a straight compliance breach. Serviceability in an SMSF runs on the fund’s cashflow and the cap, not the members’ salaries.
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Bella Vista, NSW 2153
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Deakin, ACT 2600
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2/8 Phipps Cl, Deakin ACT 2600
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Contact
(02) 9788 1850