To borrow or not to borrow – SMSF property investments

A limited recourse borrowing arrangement (LRBA) involves a self-managed super fund (SMSF) trustee taking out a loan from a bank. The trustee then uses those funds to purchase a single asset (property), which are held in a separate trust.

You are allowed to invest in either residential or commercial property with funds borrowed under the LRBA, and as such you have the potential for a greater cost base with funds used to purchase a property.

The clear advantages of owning direct property in your SMSF include receiving the rental income paid to the SMSF for use of the asset and a lower capital gains tax rate on disposal of the property. The rental income adds to your retirement savings and is taxed at the concessional rate of 15 per cent.

Where the property is owned for greater than 12 months before sale, then only two-thirds of the resulting capital gain is taxed at the 15 per cent fund tax rate. Expenses of owning and deriving the rental income are tax-deductible, just as they are for any other rental property investment. Also, a property owned in retirement phase, does not attract capital gains tax on any rental income received.

However, unlike owning rental property personally, there are some specific rules and potential limitations about owning and renting property in your SMSF. Some important issues to keep in mind when considering the purchase of direct property include:

Restrictions on the use by you, your relatives and other related parties of residential property owned by your SMSF whether you pay market rent for using the property or not;
Lack of diversification due to the large proportion of SMSF money that might be needed to acquire a single direct property;
Dealing with unforeseen events such as early death of a member or divorce, requiring the forced sale of the property at an inappropriate time;
Where borrowed money is used to acquire the property by the SMSF, there are significant restrictions on the manner and type of modifications that can be made to the property while the borrowing remains in place.

If you are interested in discussing the above strategy, please contact ………………………

Craig Bunce
Leaf Financial Pty Ltd
Director
Leaf Financial Pty Ltd

cbunce@leaf-financial.com.au
0450 363 009
www.leaf-financial.com.au