One of the smsf advantages is that you can invest directly in both purchasing residential property and commercial investment property, provided that you comply with Australia’s superannuation legislation. The property must:
- • Be bought for the sole purpose of providing an asset or income for your retirement.
- • Not be lived in by a fund member or any of their relatives.
- • Not be rented by a fund member or any of their relatives
- (unless it is a commercial leasing arrangement).
- • Not bought from a relative of a fund member.
In other words, a residential property must be a genuine investment property. It must also be an arm’s length transaction with independent third parties in terms of both the property seller and the tenant.
Buying property via an Self Managed Super Fund loan can also be done by borrowing funds under a limited recourse borrowing arrangement (LRBA). Read on to find out more about how LRBAs work.
Investing in property must also be consistent with your SMSF’s investment strategy.
How limited recourse borrowing arrangements work
Self-managed super funds (SMSFs) can only borrow funds under what’s called a limited recourse borrowing arrangement (LRBA). This requires a separate trust to be set up to hold the asset while you repay the loan. The benefit of buying property under an LRBA is that your other SMSF assets are protected if you default on your loan repayments.
Rental income from an LRBA property can be used to make all or some of your loan repayments. You can typically borrow up to 80% of a residential property’s value under an LRBA, or up to 75% for a commercial property. However, SMSF Loan Experts have been chosen to pilot a new SMSF loan product where you can borrow up to 90% of the property value!
Growth in SMSF property borrowing
According to the most recent statistics, about 11% of SMSFs have an LRBA in place, but the number is growing rapidly due to the recent property boom. $66 billion worth of LRBA loans were taken out in 2022 alone, and the value of SMSF property assets increased to $140 billion.
SMSF changes in the 2021/2022 financial year
It’s important for SMSF members to be aware of changes that were put in place at the start of this financial year. From 1 July 2021, SMSFs can have up to six members. Previously, the maximum number was four. Potentially, three couples who are business partners can now be part of the same SMSF, or 3 or 4 adult children can become part of their parents’ SMSF.
An investment property may be a good long-term investment for younger SMSF members, as it can maximise the opportunities for capital growth. Everyone knows that there has been a recent property boom in Australia, but Australian properties in good locations also have a long-term track record of growth.
More members in an SMSF means a potential increase in the size of the assets in a fund, as well as an increase in member contributions. The concessional contributions cap for superannuation fund members (including SMSF members) has also increased for the 2021/2022 financial year (from $25,000 to $27,500).
This cap is the maximum amount that can be contributed to super before tax in any one financial year and still remain eligible for the concessional superannuation tax rate of 15%. Concessional contributions may also be claimed as a tax deduction when contributed from after-tax money. It’s important to note that employer contributions count towards the concessional contributions cap.
The bottom line
For more information on LRBAs and SMSF investments, please get in touch with us today.