Lending Money To Your SMSF
Does your SMSF need finance to fund the purchase of a residential or commercial investment property?
Most banks will only allow a SMSF to borrow money on a limited recourse basis as part of a limited recourse borrowing arrangement.
However, there is nothing stopping the fund from borrowing from a fund member as part of the arrangement.
Please read on to find how you can lend to your SMSF.
Do I need to guarantee the loan?
You may be required to provide a personal guarantee If you need to borrow additional funds from a bank.
However, it largely depends on how much the fund needs to borrow and how high risk the loan is.
As loans to Self Managed Super Funds (SMSF) are limited recourse in nature, a personal guarantee gives the lender further security, in the event that the fund defaults.
Each bank will assess your situation on a case by case basis when determining whether a personal guarantee is appropriate.
The loan structure
Before a member can lend money to their SMSF the fund must set up a proper borrowing arrangement between the member and the SMSF.
This arrangement must meet all the legislative conditions and regulations.
The member will then lend the SMSF money under the agreement. This financing arrangement is essentially just like a regular loan between a financial institution and the SMSF, the only difference being that the funds are provided by a member and not the bank.
What do I need to provide?
You will be required to supply all proper loan documentation as well as anything else necessary to complete the process.
It is best to speak to a SMSF financial expert who can help you compile the documentation you need to set up this arrangement.
How is the loan secured?
Do you have real estate in your own name? Depending on your equity position you may be able to use it as security for the loan to your SMSF.
This strategy can be better than using the property in the SMSF as security for the loan:
- Your loan will have a lower interest rate.You may receive negative gearing benefits (please refer to us for specific financial advice).
- If you get a loan in your personal name and lend it to your trust and also borrow in your SMSF then you may be able to borrow 100% of the purchase price of your investment property.
- You can use the funds to buy shares or other investments, not just real estate.
Can I lend money to the SMSF at a higher rate?
Just like any commercial or business arrangement, when dealing with your SMSF all transactions must be made at arm’s length.
However, the limited recourse nature of the loan made to the fund may require you to charge a premium above the full recourse rate that you are paying.
Although, it is best for the fund member to look at similar prevailing interest rates charges by major banks to SMSFs and choose these rates as the benchmark.
To find out more about lending to your SMSF please enquire online today and our expert mortgage brokers will provide you with specialist advice for your situation.
Can I lend money to the SMSF at a lower rate?
The limited recourse nature of the loan is unlikely to attract a lower rate than your home loan, so charging less than you are paying is unlikely to be acceptable to the regulator.
The Australian Taxation Office (ATO) may also be concerned that you are attempting to circumvent the contribution limits and are putting excess amounts into your super fund.
In your personal capacity, you are unlikely to be able to claim the tax loss in your tax return as there is no expectation of making a profit.
Speak to our experts!
We can help you to setup a home loan using your properties and can help you arrange a loan agreement between you and the SMSF.
This way you will have extra liquidity to fund the purchase and cover any unexpected costs.
To get lending advice specific to your situation please enquire online and one of our specialist mortgage brokers will give you a call.
Note: this website is for informational purposes only and should not be substituted for professional financial or taxation advice.