SMSF equity

Hi PC brains trust,

Medium-term lurker here. Plenty of great information which I thank you for.

I’m currently modelling some options for our super and looking at SMSF and have a few hopefully basic questions on SMSF rules:

1. Is it true that you cannot use equity from an existing property in your SMSF (even if fully paid off) to fund the deposit of your next property purchase?

2. Why is SMSF investing in residential property considered a bad choice?

3. If purchasing a premises for your business to rent from you SMSF, you cannot rent it to your business below market value. However, is there a limit to how much your SMSF can charge to lease the premises to your business? Eg can you lease it to your business for double the market rate?

many thanks!

 

Hi @Denyer

Yes lenders will not lend against equity of SMSF property. The only way you can use the equity is to sell. Even in a simple refinance, you can only refinance the amount owing. You can't borrow more than the current debt if that makes sense.

SMSF investing in residential property needs to give consideration to liquidity (how quickly you could sell the asset if needs be). On the flip side, the power of leverage is awesome.

@Peter_Tersteeg would be a good person to address your third question.

 

1 not really true. A smsf cannot borrow against property other than to acquire it or perhaps repair in some cases.

2. It’s not by all. Can be good as generally only way to get leverage




3. There are tax issues with that as it artificially inflates the amount you can get into super.

 

These question sare reasons why advice to consider a fund is important early in the journay to ensure it works

1. Is it true that you cannot use equity from an existing property in your SMSF (even if fully paid off) to fund the deposit of your next property purchase?
YES. The SMSF is stand alone. It will be assessed. YOU cant make up the SMSF loan and the lender expectsit is self supporting through rent and other investmnets and some contributions (although this isnt always wise)

2. Why is SMSF investing in residential property considered a bad choice?
High cost, preservation and low yield relative to loan rate are major reasons. Many dont consider it a BAD choice. The maths must be different to personal onwrrship. For one, there is no negative gearing.

3. If purchasing a premises for your business to rent from you SMSF, you cannot rent it to your business below market value. However, is there a limit to how much your SMSF can charge to lease the premises to your business? Eg can you lease it to your business for double the market rate?
You can. It is in the laws you should know. This is then "non arms length income" and the fund is taxed at 45% AND may be non-complying. Most breaches of super laws are managed with tax penalties. We generally recommend that not more than each two years a reg valuer assess the property value and the market rate that should be charged. The auditor will ask for it.

 

Thanks all, I appreciate the solid insight. I find it a bit crazy that you can't use equity from an existing property within the SMSF to fund the purchase of the next one within the SMSF. Who made up this rule and why??

 

Treasury. It was the law that was passed. Until that time NO BORROWINGS was a feature of super law and the law was temporary for a review after 2-3 years. It was then modified to fix some issues. The borrowing rules were carefully made to limit risks.

Its intended that SMSF property equity and assets cannot be parlayed into higher risk etc. Equity is preserved. The idea is to limit member risk as it inst their super yet. Its a future retirement benefit. . Many lenders later also pulled out (all major banks!!) as the high capital costs v the higher risk for limited recourse wasnt worthwhile for their shareholders.