The costs of not getting the correct advice can be disastrous as the penalties imposed by the ATO for non-compliance can be huge.
SMSF lending via an SMSF mortgage or an SMSF loan has increased considerably in recent years. As of June 2013, APRA noted there were 509,362 SMSF funds which was an increase of 7.1% from the previous year. This equates to over $506.0 billion dollars being managed by SMSFs versus $970.1 billion dollars held by APRA-regulated superannuation entities. This means that SMSFs now control about a third of the total superannuation assets in Australia. More information can be found from the APRA website at http://www.apra.gov.au/Super/Publications/Pages/annual-superannuation-publication.aspx
Pull-back by the Big-4
As of 2-Oct-2018, all big four lenders, CBA, ANZ, Westpac and NAB have all pulled out of the SMSF lending space. I believe it is the result of the royal commission where there were instances where investors bought poor performing properties and had to take a loss on the the Net Asset Value within their SMSF. This is something the regulators and government do not want. As such, all major lenders have pulled out of the space but will continue to support their existing SMSF mortgage and SMSF loan clients.
SMSF loans and property
Considering that property is one of the largest asset classes held in superannuation funds, it makes sense that more people are looking to purchase property within their SMSF.
What type of property can be bought within a SMSF?
Residential – investment properties.
Commercial – different types of properties including commercial, retail and light industrial are common to be held within the SMSF.
Rural – rural residential investment properties can be held by it is more difficult as lenders are shying away from rural properties in general.
What do you need to be aware of if you are thinking of purchasing property via an SMSF?
The compliance requirements to purchase property within an SMSF is quite onerous. You need to make sure:
What are the specific SMSF loan / SMSF mortgage features?
Due to the compliance requirements by APRA and the ATO, SMSF mortgage / SMSF loans are different to the more conventional non-SMSF loans. The key (but not limited to) features are:
- The self managed super fund property loan must be limited recourse lending. This means that if the SMSF fails to meet its obligations to make payments for the loan, the bank’s right to recovery in the event of default is limited to the property and not any other assets in the SMSF. However, the bank will also require personal guarantees from the beneficiaries (members) of the SMSF. This means that the other SMSF assets (i.e. everything except the property in question) are ringfenced but the beneficiaries assets external to the SMSF are indirectly (by way of personal guarantees) are at risk.
- The maximum Loan to Value of the SMSF loan will be lower than conventional. Typically, the maximum LVR for residential SMSF loans are at 72% and the maximum LVR for commercial SMSF loans are 64%.
- Serviceability is from all contributions to the SMSF which include the Employer Superannuation Guarantee payments and rental income.
SMSF lending set up costs
There is a large difference in the set up costs of purchasing property via an SMSF versus buying property external to an SMSF. Considering most traditional lenders charge a minimal application fee (less than a couple hundred dollars), self managed super fund property loans can have fees up to $5,000 largely due to legal fees in confirming the SMSF trust deed and property custodian/property trust have the correct holding structure and authority to purchase property.