The SMSF borrows funds to acquire an asset, such as real estate. The SMSF holds a beneficial interest in the investment until such a time as the loan is repaid. The Trustee of the Bare Trust holds legal ownership of the asset on behalf of the Fund until the loan is repaid and the title is transferred. The structure is shown in the diagram (to the left)
Benefits of borrowing within your SMSF
- Pay debt down faster through using your concessional contributions (salary sacrifice or employer compulsory contributions) to service the debt
- Reduced cashflow commitment by utilising capital within your Super Fund to lower your loan to value ratio (LVR)
- Increased size of your SMSF investment without contributions
- Concessional tax treatment as income and capital gains are taxed at a maximum rate of 15%, or 0% if the fund is in pension phase
Costs and risks
- Establishment costs are higher due to the unique structure of the SMSF borrowing and need to be taken into account when assessing the overall investment return
- Gearing risks as borrowing to invest magnifies both the potential gains but also the losses
Is borrowing suitable for everyone?
As with any investment strategy, borrowing inside your superannuation fund will not be suitable for everyone. Below are a few considerations when assessing if borrowing in super may be right for you:
- You have experience or an interest in property investments;
- You have a reasonable tolerance to risk and investment values going up and down;
- You are looking to diversify your investment portfolio into property;
- Your SMSF has sufficient cashflow to facilitate loan payments;
- You have secure employment to ensure continued contributions
For more information on Self Manager Superannuation:
Case Study – Robert
