Investing through an SMSF can be complicated, and expert guidance and support are key to making it work. These real reader scenarios shed light on some tricky aspects of borrowing through an SMSF
Reader Question 1:
When you buy a property inside your SMSF, can you build a granny flat on the same block using your super fund? That way, it will increase the rental income of your property sooner and the life of the rental income when you retire. Is this possible?
Whether or not you can make property improvements through your SMSF will depend on:
• if the property is subject to a limited recourse loan
• who is going to do the property construction
If the original property was acquired via a limited recourse borrowing arrangement (LRBA) and is still subject to that arrangement, then the ability of the SMSF to improve the property by adding a granny flat may be restricted.
While an SMSF can use its own money to improve assets that are subject to loan arrangements, the ability of the SMSF to improve the property will depend on whether the improvement is considered to be so broad as to change the functional capacity of the SMSF asset.
"The ability of the SMSF to improve the property by adding a granny flat may be restricted"
If the functional capacity of the asset is changed, then this could be considered to be a ‘replacement asset’ and would contravene the borrowing provisions of the super law.
If the original SMSF property is not subject to a borrowing arrangement, then the ability of the SMSF to improve the asset is not so restrictive. However, you will also need to ensure that any bu 1ilding work is not carried out by a related party (except on arms-length terms).
This area of super law can be very complex, so we recommend that you seek expert advice before undertaking these types of SMSF transactions.
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Reader Question 2:
I have been trying to ascertain whether I will be able to get approval on a limited recourse borrowing arrangement through an SMSF. The fund isn’t set up I have been trying to ascertain whether I will be able to get approval on a limited recourse borrowing arrangement through an SMSF. The fund isn’t set up yet, but I have had advice from an accountant and mortgage adviser. The issue is that all the big players are asking that the super fund has $200k in there, and I only have $170k. The only reason I started looking at this as an option is because I read that the $200k figure was a myth, and even saw $120k investment options advertised. Should I wait until the fund is $30k better off, or are there lenders out there that will look at this? I am looking at a $250k property and would like to borrow $120k.
- Thanks, Onzlo
The logic behind having a certain amount in superannuation benefits before one should consider establishing an SMSF is really based on a cost-benefit rationale. The idea is that a basic fixed cost is required to establish and maintain any SMSF, regardless of how much is in the SMSF. Therefore, the lower the amount of benefits you have, the higher the proportion of costs relative to your benefi ts and income from those benefits. At some point, the scale will tip so the costs outweigh the benefits of running your own SMSF. As to what that ‘magic number’ is before the scale will tip to the ‘not worth it’ side, the answer is not really based on exact science.
For instance, if you have excellent accounting, legal and/or record-keeping skills, you could do a lot of the work involved in setting up and maintaining the SMSF and LRBA yourself, which could lower your costs.
Decreasing bookkeeping and compliance costs through the use of technology may also weigh in.
On the other hand, an LRBA adds complexity to the SMSF, which will cost more – and there is also the question of your own investment return philosophy. One person may think that a net annual return on investment, after costs, of 5% is quite sufficient, while another person may think that is too low.
In other words, the $200k threshold is only a rough guide based on average cases, which does not take into account ‘outliers’, and may or may not apply to your specific circumstances. While a lower amount of superannuation benefits will no doubt slow you down because of the higher relative costs, the best thing to do is to sit down with your accountant, who has the appropriate financial advisory qualifications, to work out the net return after costs that you would get. It should be noted that the financier may require the SMSF to have a sufficient level of liquid assets after the LRBA is in place, which may affect the decision as to whether an SMSF should be established for this purpose.
is a partner, tax & advisory,
private clients, at BDO
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