Member loan to SMSF

Hi all,
I have a SMSF and I want to buy a property with it. I will need to borrow some money but instead of the SMSF borrowing from a bank I would like to borrow from myself.
I have a primary residence with no mortgage and would like to personally borrow against it and then loan that money to the SMSF. I know that the interest that the SMSF pays to me is a tax deduction for the smsf and that I have to pay tax on the interest paid to me by the smsf. My question is, is the interest that I pay on my loan tax deductable?

 

Yes if it is set up right. But you will earn interest on the loan from you to the SMSF so there will be no tax advantage. Seek legal advice.

 

Thanks Terry, that is what I was hoping. I'm not after a tax advantage, it's alot easier for me to borrow than the SMSF, I just didn't want to have to pay tax on the interest received.

 

Its referred to as a related party loan refer to PCG2016/5 for guidance.

The structure needs to be set up correctly seek specialist advice.

 

Thanks Redwood will do

 

May I ask why you are not keen on the SMSF trustee borrowing? Yes the options can be limited and terms not that great but borrowing outside super to fund something inside will reduce your servicing if you want to buy outside super later on.

 

You cant lend to yourself. You can on-lend to the SMSF trustee (perhaps). There are some limits to this and rigid compliance to the ATO practice guidelines is still required. Understanding the requirements of loan security is important too since if you seek to change homes later the SMSF loan will act not unlike a crossed loan. And as John says the fund debt may still affect servicing despite many thinking its a issue to ignore. Depending on age etc there can be strategies to switch the debt for concessional / non-concessional contributions over time too.

A Reg 13.22 ungeared unit trust strategy is also worth considering and may still give some neg gearing benefits to you and positive gearing to the fund. I would ensure you understand how that could work too. It can be efficient in some states for a gradual change in beneficial ownership over time without a duty impact.

 

Many other issues to consider for such arrangement. I have few such arrangements in place for quite few years now:
- Establish whether your SMSF Trust Deeds allow this
- Establish whether there will be liquidity in your SMSF (not all funds allocated to just that one IP you plan to purchase)
- Establish an exit plan if you you cannot make CC (Concessional Contributions) or NCC (Non Concessional Contributions) or if the governments will change them
- Check if you allow that in your SMSF Investment Strategy
- Have REAL SMSF specialists assist you or at least guide you in establishing this LRBA arrangement
- You need to understand Safe Harbour Rules set by government and check the interest rate yearly for any changes. Main criteria is that loan has to be maximum 70%, P&I, paid off in 10 years, current interest rate at 5.85%.
Personally, I have mixed and modified my LRBAs arrangement as this was permissible if you modeled on prior other commercial loan term arrangements (I had loans with St George IO so my specialist lawyer modeled on that).
So just some that come to mind....It is possible to set up but just educate yourself prior to understand as it will make it easier... then... to understand the specialists whom you will deal with.