Even heard of SMSF loan? SMSF stands for Self-Managed Super Funds. It’s a fund that has super members coming together to manage their funds individually through trustees who are also members. They may decide to grow their savings by borrowing a loan which is known as SMSF loan. This loan should be for the sole purpose of investing to enable the member’s savings to grow.
As the trustees make decisions on what to invest in, they must comply with the tax laws. Whether the SMSF is borrowing, lending, or investing anywhere else, the benefits are not for particular individuals but the fund entirely. Another requirement by the laws governing SMSF is that the returns made from investments focus on the retirement of the members.
If you are involved in establishing an SMSF, note that this is not a fund where members can easily access cash, renovate their homes, or go on holiday. Using any funds to benefit a member individually is illegal, and it is recommended you seek professional financial advice in advance.
That said, there are legal ways that an SMSF can put money into. First, the members need to have a well-thought-out plan on the various routes they will use while investing and the core objectives. This plan should include what assets they buy, how fast they can be changed into liquid cash, and after paying all the expenses, what the benefits are. Any risks to be undertaken should be put into consideration. Some assets SMSF’s can invest in include property, shares, managed funds and term deposits. They can get collectibles like antiques, artwork, vintage wines, and cars. However, there are rules regarding collectibles that should be adhered to. All these items have to be bought and sold within the current prices, and the gains should be at the same rate. Even though members may have items the SMSF can purchase, it’s illegal to buy from them, including any relations.
As indicated earlier, borrowing money from an SMSF for personal gain is illegal. If any member is caught, the fund is labeled as non-compliance, which can lead to the loss of half of the funds in the SMSF. This is inclusive of high penalties where you may end up paying hefty amounts and a high risk of going to jail.
Apart from being illegal for members not to borrow money for their individual use, they cannot do the same for any of their close relations. This includes other members in the SMSF, relatives, friends, including business partners. They are also not allowed to borrow money that will not have gains. The sole reason of SMFS loans is to have gained back in that will benefit members when they retire.
Legally a trustee and a third part lender come together to take a loan under a Limited Recourse Borrowing Arrangement (LIBRA) to purchase assets. This type of investment is legal, long-term and provides the fund with gains at the same rates as in the market arena. If the SMSF doesn’t meet its part of the agreement, under the LIBRA laws, the third party only gains access to the asset invested in. Any other property or funds owned by the SMSF remain intact.
While setting up the SMSF, organizing a LIBRA is a requirement as well. The regulations contained in the LIBRA protect the SMSF from losses that may result if the investment does not grow as expected. There are penalties for the member who borrowed the loan without the LIBRA and the SMSF itself. The member may be fined heftily while the SMSF loses by being ordered to sell the asset immediately. Meaning the duration needed for the investment to make adequate returns is shortened, resulting in losses.
It is legal to use the loan to buy property for the SMSF. However, the said seller should not be a member of the fund neither should they have close relations to the trustees. The members or their relations should not have owned the said property at any one time.
Loaning by SMSF
It’s a general rule that SMSF’s are not allowed to lend money unless it’s in line with their objectives and the interests favor all the members. They are also not allowed to lend to any of their members and their relations or stand as guarantors.
On the other hand, it is legal for the SMSF to loan individuals and businesses if the returns are positive and benefit the members. These returns are targeted to come in handy when the members reach retirement age.
If an SMSF gives a business loan that has interest over ten years, then that can be regarded as legal. As long as it does not engage with third parties and is one of the SMSF’s strategies.
There are penalties for SMSF’s that loan without adhering to the overall benefit of every member. The fund may lose more than half of their assets regarding how much they had loaned, plus the members will also be penalized. It is advisable to first consult a financial expert before loaning out.
Buying assets through SMSF
The following are facts to consider if you want to get funds from your SMSF to buy property.
- How much can the fund afford
The SMSF should cater to the repayments on the loan interest for the mortgage and other costs such as stamp duty.
- Search for property
Get property that none of the fund members has associates. The commercial or residential property should not have been rented out, owned, or bought from an SMSF member, including their family members.
- Have a LIBRA
This entity will legally stand in for the SMSF and protect it from losing any more assets in case of a default.
- Loan Application
This step is similar to getting a loan for investing in a property. However, due to the various legal requirements, it’s wise to seek financial advice initially. Some loan lenders may have specific requirements from SMSFs, such as each member of the fund being a guarantor of the loan.
How much an SMFS borrows depends on the amount available to settle the repayments.