Lending to my SMSF

If I want to buy property in my SMSF, and I can’t borrow as much as I need, can I also lend money to the SMSF?

If it can be done, has anyone done this and what should I beware of?

Yes I am getting advice from legal advisors and accountant.

 

beware of the ATO's view on SMSF trustees borrowing under a related party loan. LVRs and interest rates that they accept are listed in a ruling. You could not lend the deposit so the fund has borrowed 100% LVR for example as this would be uncommercial.

 

I have the deposit in super and would borrow as much as I could from a lending institution, I would only lend myself what I need to get the deal across the line.

Is there a limit on how much you can lend a SMSF? Assuming I always have the deposit, and the LVR’s and rates are within the tolerance. Is this something people with the financial means do?

 

why not just put the deposit in as a non concessional contribution ?

 

generally 70% LVR is the max. If this is what the trustee is borrowing from the bank it would not be able to borrow anymore from you.

 

That will NEVER work. The structure that is needed for a SMSF loan will prevent you also lending. Only when you are the SOLE property lender to the SMSF can a related party loan be used. A SMSF is prohibited from borrowing unless all strict conditions are met and that couldnt occur. Strange you have setup and got that far and not realised all the rule and limits to SMSF loans and their servicing.

 

I am only just setting up a SMSF now and trying to understand what I can and can't do. I am seeking proper legal, accounting and financial advice. I had a quote this morning that is 20 times what I am currently paying for accounting fees, for a SMSF and trust. I can't help but feel I am being ripped off quite frankly.

A SMSF seems extremely expensive to set up, expensive to service and maintain and difficult to borrow funds. I can't put all the money I currently have available into my super (because of the limits on contributions) so I am trying to understand how I can use the cash to make a SMSF a viable option, in the long term. 12 years to retirement age. At this point it seems easier and cheaper to just keep buying property in my own name.

 

What made you think about using smsf for property in the first place, with that level of super assets? And even then it sounds like you will be contributing those once smsf is set up?

what makes a better structure than own name, or family trust?

 

Suggest you start here.

What are the penalties for SMSF non-compliance?

And after digesting that, continue reading here.

Thinking about self-managed super

If still not deterred at least you have sone basic knowledge when you seek professional advice.

 

Setup incl bare trust allow $3500++ This includes two companies and two trusts and a fair bit of complexity.
Annual allow $2500 but it may be cheaper

A SMSF is expensive to operate and maintain and low balances may mean its not a viable strategy. If you are just setting it up and didnt know about costs etc then slow it down and find out. Its not a race. If you are ina rush it will burn you later. That the first thing to consider. Many people think of 80% LVRs when reality may mean its somewhere between 50% and 70% with the fund having all the cash for the gap and a large buffer. . There are two sorts of contributions a member can add...concessional which may cap out at $27500pa incl of employer and then non-concessional of $110k pa. However its all a one way route abut you can bring forward another two years if $100K is a problem. But you cant lend to a smsf (ie why I said its a one way route).

You need to think of the annual costs as a % of the current member funds. eg $300K would be .8333% or just under 1% which is on par with some industry funds. BUT for $500K the cost benefit could be far less. Ignore the borrowing. The cashflows from the property and purchase decision are important too. Unlike buying in your own name you want to MINIMISE borrowing not maximise it. If nobody has been honest and explained that then you may be doing it for the wrong reasons. If the fund is consuming money to retain a property its a insane choice to invest. not unlike throwing $100 notes ina fire to keep warm. All contributions will be consumed and the only money that can be made is a future gain. While owning it it will be a problem investment.

The rate for smsf loans is not competitive and refinancing is problematic. Fewer lenders now exist and none are mainstream banks. And they expect the fund cashflows to be good with a suitable buffer as without a tenant you could be snookered. Selling is then a forced option.

 

Have you already considered the bring forward 3 year non concessional contributions to get more money into your SMSF?

There is also sometimes some catch up concessional contributions you can do if you haven't maxed out some previous years

Contribution caps

 

Thank you

 

Yes I would be maxing out contributions to get it up as much as I can and then the intention was borrow to buy a property.

 

I am 60 in 12 years. So in 12 years everything in the SMSF is tax free, music to my ears!

I don't know that it is a better structure, I am trying to work out if it is better in the long run. I have been advised both SMSF and/or discretionary trust.

 

I was quoted way way more than that.

Thank you that was all excellent info. Especially looking at it as a percentage. Based on that I would be looking at 2.7% for the first year inc set up.

 

Typo on my part $3500++

 

Thats very high. You may be chasing a tax free result for a property that might not even appreciate. You could burn 12 years of contributions and walk way with a lot less than you expect. To become tax free a SMSF must be 100% pension....And it cant do that for a property that is geared. You may misunderstand how the system works. The final tax rate may be 10-15% which will be low anyway.

This is common to people who see super $$$ and think they can invest it the same way as other property by heavily borrowing. That isn t the case with super.
If I were you I would spend some money now and seek licensed financial advice on the SMSF idea. That is likely to give you a shake and bring some reality into the picture.