Self-managed superannuation funds (SMSFs) can now borrow for residential and commercial property investments using products and borrowing arrangements that qualify as a ‘complying loan’ within an SMSF trust structure.
The new provisions open up a potentially large number of investment opportunities for SMSF trustees, however there are important rules that need to be met to satisfy the conditions contained in section 67(4A), 71(8) and 71(9) of the SIS Act.
Although there has been a long-standing prohibition on borrowing by super funds, the use of instalment warrants by super funds has been a legal grey area for many years. The Australian Taxation Office’s view is that instalment warrants are effectively credit products and therefore investing in them is technically a breach of this prohibition. The finance industry regards warrants as option-style financial products and therefore as a suitable SMSF investment.
After considering the issue for some, the Federal Government decided that the SIS Act should be amended to permit super funds to invest in instalment warrants to align the law with what was happening in practice anyway.
Features of SMSF loans
- SMSF Loans are relatively straightforward to arrange. They do not need to be structured as an instalment warrant to be a permitted borrowing.
- They must be non-recourse, which means that the lender only has rights against the secured property asset, not other assets of the super fund.
- The SMSF is the beneficial owner of the property until the loan is paid out.
- The trustee has effective operational control of the property in terms of setting rents, selecting tenants, paying for repairs, and so on.
- SMSF loans can only be used to fund the acquisition of eligible income producing real property. That means it cannot be used to buy vacant land or for construction purposes.
- Loan valuations vary but can be up to 75% of the independent valuation.
- There are no legal restrictions on:
- the loan term,
- whether the loan is principal-&-interest or interest-only,
- whether the interest rate is fixed or variable,
- making of additional payments, or
- when the loan can be paid out.
- Trustees do not necessarily need to provide personal guarantees, personal financial statements or credit records, although some lenders may impose their own conditions.