Can I lend money to my SMSF to buy an investment property?
The short answer is: Yes, you could lend money to your SMSF to buy an investment property. If your superannuation fund can cover the deposit, you could lend your SMSF the money needed to purchase an investment property.
Your SMSF is allowed to borrow money from related parties if it meets certain conditions. Aside from the fund members, related parties of an SMSF include relatives and business partners of fund members, spouses or children of business partners, and company members or associates. Any trust the fund members or their associates control are also considered related parties.
Remember, all investments made using the SMSF must be on an arm’s length basis. Trustees of the SMSF or the investment manager must oversee the investment and ensure everything is above board. They need to confirm that investments are conducted on an arm’s length basis. And if it’s not in an arm’s length arrangement, they must ensure it’s as fair as if it were.
What is an Arm’s Length Arrangement?
An arm’s length arrangement ensures that fund assets are valued at a fair market price. Any fund assets sold or bought must be at market value. This includes income on assets. This is especially important when your SMSF is borrowing money from related parties.
The SMSF trustee or investment manager should prohibit related party lenders from charging interest rates that are above market rates. The SMSF trustee must show that the SMSF is not paying more than an arm’s length interest rate to the related party.
If an SMSF trustee pays a related party an interest rate that’s higher than market rates, they would be breaking the prohibition on SMSF trustees providing financial assistance to related parties using resources from the SMSF. This could mean serious legal consequences on your end.
Who else can lend money to my SMSF?
Aside from related parties, your SMSF can borrow money from financial institutions and lenders like loans.com.au. By taking out an SMSF loan, your budget is not limited to the funds you or your members have readily available. You could have access to better real estate options and have a more flexible investment strategy.
Parts of your pre-taxed salary will pay for the SMSF loan as your superannuation contributions will go towards your SMSF loan repayments.
If you want to maximise your investment opportunities, see if an SMSF loan is right for you. You can get a low rate SMSF investment loan with great features and flexible terms at loans.com.au. Get in touch with our friendly lending specialists today to discuss your SMSF property investment needs. We’re more than happy to help you navigate your SMSF property investment loan. Call 13 10 90 or schedule a call with us!
What is a Limited Recourse Borrowing Arrangement (LRBA)?
When you take out an SMSF loan to buy your investment property, you go into what’s called a Limited Recourse Borrowing Arrangement (LRBA). This is a non-recourse arrangement between the SMSF trustee and the lender.
Because lenders don’t have a recourse or rights on other assets in the SMSF, they could ask the fund members for a guarantee or security. The type of security will depend on the lender and the kind of SMSF loan you’ll be taking out.
In cases where the SMSF provides a large deposit, the lender could forgo the security from the SMSF trustees. If you default on the SMSF loan, the lender can only claim the investment property purchased through the loan. Other assets under the SMSF can’t be claimed by the lender.
If you're unsure about your next course of action, the wisest thing to do is get advice from qualified and licensed SMSF professionals.
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About the article
As Australia's leading online lender, loans.com.au has been helping people into their dream homes and cars for more than 10 years. Our content is written and reviewed by experienced financial experts. The information we provide is general in nature and does not take into account your personal objectives or needs. If you'd like to chat to one of our lending specialists about a home or car loan, contact us on Live Chat or by calling 13 10 90.
